What is the Forex market?
The Forex market is where a nation’s currency is exchanged for that of another. When you trade on the Forex, you buy or sell currency pairs such as GBP/USD (the pound sterling versus the U.S. dollar). This is because with each trade you enter into, you are buying one currency and selling another.
How would you make money on the Forex?
For example, on the GBP/USD market, you buy or sell the pound against the dollar. The currency to the left of the slash (‘/’) is known as the base currency and the number to the right is known as the quote currency. Whenever you trade, you are buying or selling the base currency against the quote currency. If the exchange rate for the GBP/USD is 1.6500, then, when you buy’ the market, this means you need to pay 1.6500 dollars to receive one pound sterling. When you sell’ the market, it means you will receive 1.6500 dollars for selling one pound sterling.
You would buy the market if you think the base currency will go up compared to the quote currency and you would sell the market if you think the base currency will go down compared to the quote currency. It is possible to make (or lose) money by either buying or selling. The market moves in units called pips’ or points’ and this is how you measure your profit or loss.
When is it possible to trade?
The Forex market can be traded virtually 24 hours a day as you have access to other currency pairs around the world, not just GBP/USD. There is also USD/JPY, USD/CHF to name just two. As well as the London session (8am – 5pm GMT) there is Tokyo (12am – 9am GMT) and New York (1pm – 10pm GMT).
How do you physically place a trade?
Placing a trade is done from a spread betting company. However, although trading the financial markets online works the same way as online spread betting, trading in this way is not gambling. The risk involved is reduced by a detailed knowledge of the signals in the market that need to be evident before a trade is placed. The courses available explain this and it must be remembered that trading without recognising these signals will lead to failure and loss of your capital.
You place a trade depending on the confirming signals’ of the market. These signals provide an indication (though not a guarantee) of which direction the market will go. The idea is to look for as many confirming signals as possible before you place the trade. The more basic signals are support and resistance lines, Fibonacci levels, flag patterns, Moving Averages and Pivot Points. You have to invest time and effort to be able to learn and apply these techniques and there are courses available. There are more advanced techniques but it is worth mastering the ones mentioned above before focusing on these.
What do you need to get started?
In order to get started, you will need an up to date PC with internet access. A broadband connection is recommended in order to view the data as it can change within seconds. Then you will need to register with a spread betting company. Examples include IG Index and Capital Spreads and registration with both is free. Finally, you will need to download chart viewing software in order to view the activity of the market and look for those important confirming signals. I have found Metatrader 4, to be the best option for this which is also free at the time of writing (January 2008).
How do spread betting companies make their money?
Before you are able to trade, you need to deposit funds in your trading bank. This is done from your bank account via electronic transfer which works the same way as Paypal. It costs nothing to do this, there is no commission from the trading platform. They make their money based on the spread. The spread is the distance between the two prices the spread betting company quotes us. If the company has a 10 pip spread, and the current market value stands at 1.6550, then you are quoted two prices – 1.6545 and 1.6555 – a 10 pip spread. The latter price is the price you buy at and the latter is the price you sell at. Therefore, as soon as you enter a trade, you are five points down before the market has moved. It is therefore beneficial to research the company with the lowest spread.
The transfer of money from your bank account to your trading bank is done instantly. The amount you initially place in your trading bank is up to you. If you place a very small amount however, you risk being wiped out and losing all your money.
The way you place trades will vary slightly according to the spread betting platform you use. When you make money on a trade, the money is instantly deposited into your trading bank. You can transfer as much from your trading bank to your bank account as you want. This process usually takes a few working days.
How can you minimise the risk involved?
It is a bad idea to have more than a few per cent of your bank on one trade. So, if you have 100 in our bank, you shouldn’t be risking more than a few pounds on one trade. Risk management is a huge part of trading and should be covered in depth before you trade for real. The idea is to start small until you find your feet. It is recommended to demo trade to start with, so the risk is minimised, but even when you do take the plunge it’s best not to trade more than 1 per point (so if the market moves 10 points in your favour, you make 10 – excluding the spread as already explained). Even if you have a huge trading bank. Huge losses early in the game can seriously affect your confidence and even 1 per point can add up to decent profits over time, as your trading bank gets bigger. After a time you can build up gradually the amount per point you put on.
How long until you can do this full time?
Trading in this way is not designed as a get rich quick’ scheme. It is a system that when applied over time can bring in slow and steady profits. Some learn quicker than others and there have been many success stories of people able to make a living trading from home over the internet within several months of rigorously studying one of the many courses available.
My own progress has been more gradual but I’ve had enough success to see the potential of these techniques, and that is after about nine months of starting from scratch with these techniques. The aim is to build up your trading bank, so don’t be tempted to pocket all your profits at the end of the week’s trading. Leave half in your trading bank and allow it to grow. As with any worthwhile endeavour it may take months or even years to master these techniques, but if you do eventually achieve your aim of making a living independently it is surely worth the time and effort.