WHAT AM I DOING WHEN I TRADE FOREX?
This is my first post, and the overall concept of Forex and Commodity trading will become clearer in other posts. I will use the example of trading the Philippine Peso although the broker that I recommend doesn’t have the Philippine Peso available for trading on its platform. The Philippine Peso or PHP as it’s commonly shortened to is considered an exotic currency. We tend to stay away from exotic currencies due to volatility risk, illiquidity of the market and trade currencies that are considered major’s and minors.
Major currencies are currencies like the Euro, Japanese Yen, US Dollar and Australian Dollar.
Forex is just a commonly used abbreviation for “foreign exchange,” and it is typically used to explain trading in the foreign exchange market by investors and speculators.
Like, imagine a scenario where in actuality the U.S. dollar is expected to weaken in value in about the Philippine Peso. A forex trader in this example will sell dollars and buy Philippine Peso. If the Philippine Peso strengthens, the purchasing power to purchase dollars has now increased. The trader is now able to buy back more dollars than they’d to start with, making a profit.
This is similar to stock trading. An investment dealer will buy an inventory if they believe its price will rise later on and sell an investment if they think its price will fall in the future. Similarly, a forex trader will buy a currency pair when they expect its exchange rate will rise later on and sell a currency pair when they expect its exchange rate will fall in the future.
WHAT IS AN EXCHANGE RATE?
The foreign exchange market is a decentralised international marketplace that determines the relative values of different currencies. Unlike other markets, there’s no centralised depository or exchange where transactions are conducted. Instead, these operations are performed by several operators in many locations. It is rare that any two currencies will be identical together in value, and it is also rare that two currency pairs will maintain the same value for any period. In forex, the exchange rate between two currencies always changes.
For example, in early, 2011, one euro was worth about $1.33. Nearing mid-2011, one euro was worth circa $1.48. The value of the euro rose by about 10% following the U.S. dollar at this time.
WHY DO EXCHANGE RATES CHANGE?
Currencies trade in an open market, just like shares, bond instruments, pcs, vehicles, other goods and services. Currencies fluctuate in value as its supply and demand fluctuate, exactly like anything else.
An increase in supply or a decrease in demand for a currency could cause the worth of that currency to fall.
A reduction in the supply or an increase of the application for a currency may cause the value of this currency to rise.
A huge benefit to forex trading is that you should buy or sell any currency pair, whenever you want susceptible to available liquidity. When you think the Eurozone is going to break apart, you can sell the euro and purchase the dollar (sell EUR/USD). If you think the price tag on gold goes to increase, centred on historical correlation patterns you can buy the Australian dollar and sell the U.S. dollar (buy AUD/USD).
The above implies that there isn’t any such thing as a “bear market,” in the traditional sense. You possibly can make (or lose) money when the marketplace is trending up or down.
You can buy and sell Philippine Pesos but this is done largely by cash or in a Peso vs US Dollar bank account. Various local banks offer “dollar accounts” but this is hard work to make any money out of the account as you are trading unleveraged and need to have a large balance to buy and sell Philippine pesos versus the US dollar or Dollars against each other.
Forget trading cash at 1:1 leverage (more on this in my blog). You need to get the power of leverage behind you but not get carried away with leverage where you can trade liquid, trending markets for 1:50 leverage. This means for $1 that you have to trade you will be trading with $50. You can even trade for 1:100 leverage eg. $10 gets you $1,000 in notional value to place trades but with small accounts anything over 1:30 or 1:50 leverage is starting to get risky. Don’t be dazzled by brokers offering 1:200, 1:400 or even 1:1000. Stay away from these type of accounts as i am guessing you have a small amount of funds to risk, and I mean risk (as in completely losing that money – lets get real here if you don’t trade correctly).
Follow the program and strategies here in this blog and you should see positive results from your trading.