Forex trading tips

Trading Currency Tips

W D Adkins

W D Adkins has been writing professionally for two years. His writing interests include education, business and finance. Adkins is a doctoral student with Masters Degrees in history and sociology from Georgia State University. He is also a member of the Society of Professional Journalists.

If you are interested in trading currency, you're not alone. Each business day, governments and businesses routinely swaps hundreds of billions of dollars worth of currencies. However, most of the volume on the foreign currency exchange market (also known as Forex) is generated by traders large and small looking for profits from fluctuations in exchange rates. Successful currency traders have a solid grasp of the way the Forex market operates, appreciate the financial risks of currency trading, and learn how to manage and limit those risks.

1. How Forex Works

   • The essence of trading currency is simple. Traders buy one currency with another at the current exchange rate. Currencies are traded in pairs. For example, a quote of EUR/USD = 1.3250 tells you that the euro and U.S. dollar exchange rate was $1.3250 per euro at the time of the quote. When wholesalers state an asking price or bid for currency, the bid/ask spread is usually only 1/100 or 2/100 of a cent (1/100 cent is the smallest possible price change on the Forex market and is called a pip). Retail broker/dealers mark up the spread to 3 to 20 pips and keep it as their fee, instead of charging commissions.
     Almost all Forex trading is carried out online and continues around the clock. Traders use trading software to get real-time market information and execute trades. Good  brokers  supply the software if you don't have your own. The Forex market is mostly unregulated, so the SEC recommends you choose a broker who is a member of the self-regulating organization National Futures Association. You can open an account online and arrange for electronic funds transfer through a service like PayPal. Minimum deposits vary, but many brokers will let you open an account with as little as $100.

   Margin and Risk

   • Trading currency is routinely done with very low margin requirements. For example, a trader may put up as little as $250 to $1,000 to buy a standard lot of currency worth $100,000. This is the source of the large risks and potential profits of Forex trading. Very small changes in exchange rates determine whether a trader makes a handsome profit or loses most of the money put up on margin.
     Currency traders use various methods to manage risk. Many rely on specific trading strategies. For example, a trader may use grid trading, which uses simultaneous transactions to buy both currencies in a pair at slightly above and below the exchange rate. As the market fluctuates, one (and hopefully both) will make a profit. Other traders use alternative types of transactions like Forex options. The option gives the trader the right (but not an obligation) to buy or sell the currency at a "strike price" until the option expires. This limits the money at risk to the premium (the cost of the option itself).

   Trading Currency

   • Besides using a range of strategies and transaction types like those mentioned above, successful currency traders keep up with market conditions of two kinds. First are the fundamentals, including news concerning central bank policies or trade deficits and changes in a country's inflation or interest rates. Because Forex trading is fast-paced and turns on small changes, technical indicators like measures of the current demand for a currency are critical. Many traders rely on firms that provide real-time "Forex signals" to keep abreast of the current indicators. Experienced currency traders and brokers suggest newcomers to the currency markets start with a "demo account" to practice trading for a time before risking your money. Many broker/dealers provide free demo accounts.

source: ehow