Risk Warning

Forex Trading on margin carries a high level of risk, and may not be suitable for all traders. The high degree of leverage can work against you as well as for you. Before deciding to trade forex you should carefully consider your trading objectives, level of experience, and risk appetite. It is possible that you could lose some or all of your initial capital and therefore you should not trade money that you cannot afford to lose. You should be aware of all the risks associated with forex trading, and seek advice from an independent financial advisor if you have any doubts. Having said that, anyone with a sound mind can trade Forex but he must be aware of the risks involved as highlighted above.

Monday, December 22, 2008

Top Ten Forex terms you must know

Before I move on to discuss the local Forex seminar market, I think I should give you the Top Ten Forex terms that a Forex trader must know. Once you understand these terms, you can start trading Forex but whether you win or lose is another matter. You can trade but you'll probably lose and that's where you'll need to learn the finer points of trading in order to be a winner.

Among the terms here, the most important is the Stop Loss Level (SLL). Every trade must have a Stop Loss Level set and this is the insurance for the Forex trader. It doesn't mean that you will not lose by having the SLL but it will allow you to stay in the game longer and you will not be wipe out in a single trade, which can easily happen if the SLL is not set. You can still be wiped out but it will at least be a slow death after many trades and you will gain experience in the process, that's the pessimistic view. On the optimistic side, you will conserve your capital so that you can have more trades and some of them can turn into winners.

So here goes, the Top Ten Forex terms.

1. Currency Pair – Whenever you trade currencies, you always trade in pairs and the pair of currencies is called the Currency Pair, e.g. EURUSD. (Euro/US Dollar) Note that the order of the currencies is fixed and in this example, you’ll never see it as USDEUR or otherwise there will be utter confusion. Other popular pairs are GBPUSD (British Pound/US Dollar), USDJPY (US Dollar/Japanese Yen) and USDCHF (US Dollar/Swiss Frank). When you see the value of EURUSD given as 1.3856, it means that 1 Euro is equal to 1.3856 US Dollar. The value of all major currency pairs are given to 4 decimal places, except for those involving the Japanese Yen where it is given to 2 decimal places e.g. the value of USDJPY is 92.83 which means 1 US Dollar is equal to 92.83 Japanese Yen.

2. Pip – the smallest unit of price for a currency. In the example above for the EURUSD, one pip will be 0.0001 while for USDJPY, it will be 0.01 since it is the smallest unit for this pair. If the value of EURUSD moves up from 1.3856 to 1.3859, it would have gone up by 3 pips. If the value of USDJPY moved from 92.83 to 92.81, it would have gone down by 2 pips. (Not to be confused with PIPS, the Plug In Profit Site that is my website for internet marketing.)

3. Trend – the general direction in which a currency pair is moving in relation to time, it can be moving up (value increasing with time), moving down (value decreasing with time) or moving sideways (value moving within a range with time).

4. Long – when you long a currency pair you buy it with a view that in will increase in price, usually when it is moving in an uptrend. You’ll sell it when it reaches a certain higher value and you profit from the difference measured in number of pips.

5. Short – when you short a currency pair, you sell a currency pair with a view that it will decrease in price, usually when it is moving in a down trend. You’ll buy it back when it reaches a certain lower value and again you profit from the difference measured in number of pips. This is equivalent to short selling in the stock market.

6. Spread – When you change your local currency to a foreign currency, the money changer will sell the foreign currency to you at a higher rate than when he buys it back from you, that’s how he make his profit. It’s the same in the Forex market and the difference between the buy and the sell price of a currency pair is called the spread and is measured in pips. The spread will vary from pair to pair and from broker to broker. The more popular pairs will have a smaller spread as compare to less popular pairs. Typically, the EURUSD will have a spread of 2 pips while the GBPJPY will have a spread of 9 pips.

7. Lots – Traders buy and sell shares in the stock market while in the future market, they buy and sell contracts. In the Forex market, they buy and sell lots. If you have a mini-account, you can trade any number of lots from 0.01 upwards depending on the capital that you have.

8. Stop Loss (level) – The preset level that you set for the trade to close automatically when the market is moving against your favour, i.e. the trade is not moving in the direction that you wanted. Once this level is reached, the trade will close and this will limit you loss to a predetermined number of pips.

9. Take Profit (level) – The preset level that you can set for the trade to close automatically when the market is moving in your favour, i.e. the trade is moving in the direction that you wanted. Once this level is reached, the trade will close and this allows you to take profit in a predetermined number of pips.

10. Instant Order – an order that is executed the moment you click the buy (a long trade) or sell (a short trade) button at the current price level.

11. Pending Order – an order that will be executed sometime in the future when the price reaches the pre-determined level in your set-up. It can either be a buy or a sell order.

Oops, there are more than 10; can't help it as some of them occur in pairs; consider it a bonus.

Ronald Kwok

Wednesday, December 17, 2008

Forex Trading - Advantages

Have you been frightened by my last statement in my previous post that 80-90% of traders lose money? Don't worry, this refers to all traders and not only to Forex, meaning it applies equally to those trading stocks, options, futures, etc. so if you intend to trade in the financial market, you'll face similar kind of odds everywhere. But there are many advantages of trading Forex as oppose to trading stocks (or options). What are they? I've mentioned a few in my last post but I think I'll list all the major advantages here for easy reference.

Top 10 advantages for trading Forex (not in any particular order)

1. Very low start-up capital. You can open a micro-account for USD100.
2. No commissions, no transaction fees, no brokerage, etc.
3. No fixed lot size, you can trade anything from 0.01 lot upwards, depending on your fund and margin availability.
4. High leverage, 200:1 is typical. This increases the potential for higher profits. (In the same time, it also increases the potential for higher losses, you don't get something for nothing!)
5. Very high liquidity so you get instant execution. With an average volume of over USD3 trillion per day, Forex is the most liquid market in the world. (Because of this liquidity, the market moves very rapidly during period of high activity, too fast even for the order processing and you may experience re-quotes at times. But there are ways to overcome this.)
6. A 24-hour market. You don't have to change your lifestyle in order to trade and can choose the hours most suitable for you. (Of course, the trading opportunity differs at different time of the day but you decide when you want to trade. There are also rest days, i.e. Saturdays and Sundays and thank goodness for that or some traders will become zombies without this break.)
7. No single body or institution can control the market. Governments may try to influence the market, but the market decides how it wants to react.
8. No insider trading. Because of the sheer size and non-regulated nature of the market, fraud is next to impossible.
9. It is easier to pick what to trade as there are only a handful of major Forex currency pairs while there are thousands of stocks available.
10. No slippage, minimal or no gaps during weekdays (gaps do appear over the weekend) and stop loss is guaranteed.

You can trade Forex in the comfort of your own home with just an Internet connection and a laptop (you can also trade in your office but don't let you boss know!) but since you can do the same for stocks, options, etc, this is not listed as an advantage. One professional Forex trader does all his trading in Starbucks.

Convinced? In my next post, I'll talk about the local market (the Forex seminar market, not the Forex market) so you can see if there's one coming near you. I always wonder why people are still considering trading options, judging from the availability of such seminars. I hope those well versed with options trading can give their comments so that we are not missing out on something.

Ronald Kwok

Tuesday, December 16, 2008

Forex Trading defined

Since this is my first post on Forex Trading, I must draw the reader's attention to the Risk Warning at the top of the Blog. Forex Trading is a serious business and as in any business, there is risk involved so tread and trade at your own peril!

So what is Forex Trading? It is simply the buying and selling or currencies in the FOReigh EXchange market. Before this, I thought that trading Forex is buying say, some US dollars, hold it and sell when the value increases. I though that's very risky and you need a big capital that will be tied down for some time since you don't know when it will increase or if it will increase at all. I was partly right - yes, trading Forex is risky but not more so than trading stocks or options (the other current popular trading vehicle). In fact, with the current economic state, trading stocks or options is definitely more risky since a particular stock can be wiped out overnight; it won't happen in Forex unless you trade in Zimbabwe dollars!

When you trade Forex, you do not buy a single currency, you always buy in pairs and trade the relative movement in value of the two currencies, e.g. in Euro and the US dollar which in Forex term, the pair is called the EURUSD. Not only can you make money when the value goes up, you can also make money when the value goes down if you trade in the right direction. You do not need a big capital to get started, you can open an account for as little as USD100 for a micro-account because of the high leverage offered. Your capital will not be tied down for months unless you choose to do so (in that case it would be investment and not trading) as you can close your position in matter of hours or even minutes. In fact, there are many advantages of trading forex as oppose to options and other trading vehicles. Unlike options, there is no expiry date and this alone makes it much simpler. (Options enthusiasts are welcomed to comment and give their opinion here.) In Forex, you just Buy or Sell, no Put or Call and no ifs or buts. I will list out more advantages of trading Forex in a later post, this first post is just to get you interested.

There are many terms used that may sound foreign to you and I do not intend to explain everything here. There are few ways you can learn more about Forex trading. One is to google "forex trading" and you can get tons of free material online. Next is to get hold of a book and read all about it. I will give reviews of some books that I have in my later post. The best way I think, is to attend those previews or introductory seminars that are being advertised quite often in the daily newspaper to get a taste of what Forex trading is all about. And if you find one that's good for you and intend to proceed further, sign up for their workshop/seminar. I have attended quite a number of these free previews and I will give my opinion on them in my later post.

I must add one other point, trading Forex is not some effortless get rich quick scheme, or something that can be guaranteed. You need to put in some effort but after you have mastered the basics and follow all the rules, you can make money. However, I read somewhere that 80-90% of traders lose money. Where do you thing the winners get their money?

Ronald Kwok