FOREX TRADING

Now that you know how forex is traded, it’s time to learn how to calculate your profits and losses. When you close out a trade, take the price (exchange rate) when selling the base currency and subtract the price when buying the base currency, then multiply the difference by the transaction size. That will give you your profit or loss.

Price (exchange rate) when selling the base currency – price when buying the base currency X transaction size = profit or loss

Let’s look at an example.

Assume you buy Euros at $1.2178 per Euro and sell Euros at $1.2188 per Euro. The transaction size is 100,000 Euros. To calculate your profit or loss, you take the selling price of $1.2188, subtract the buying price of $1.2178 and multiply the difference by the transaction size of 100,000.

($1.2188 – 1.2178) X 100,000 = $100

In this example, you would have a $100 profit from this transaction.

Let’s try it again using a different currency.

Assume you buy British pounds at $1.8384 and sell them at $1.8389. The transaction size is 10,000. What is your profit or loss?

By following the formula we discussed earlier, you should be able to determine that you would see a $5.00 gain from this transaction.

($1.8389 – $1.8384) X 10,000 = $5.00

If you sell 100,000 Euros at $1.2170 per Euro and buy 100,000 Euros at 1.2180 per Euro, would you have a profit or loss on the transaction and how much would it be?
Take the selling price of $1.2170 and subtract the buying price of $1.2180 and then multiply the difference by 100,000.

($1.2170 – $1.2180) X 100,000 = –$100

If you calculated a loss of $100, you calculated correctly.

You can also calculate your unrealized profits and losses on open positions. Just substitute the current bid or ask rate for the action you will take when closing out the position. For example, if you bought 100,000 Euros at 1.2178 and the current bid rate is 1.2173, you have an unrealized loss of $50.

($1.2173 – $1.2178) X 100,000 = –$50

Similarly, if you sold 100,000 Euros at 1.2170 and the current ask rate is 1.2165, you have an unrealized profit of $50.

($1.2170 – $1.2165) X 100,000 = $50

If the quote currency is not in US dollars, you will have to convert the profit or loss to US dollars at the dealer’s rate.

Let’s look at an example using a USD/JPY spread. If you lost 50,000 Japanese yen on the transaction and the dealer’s rate is $.0091 for each yen, what is your loss in dollars?
By multiplying the transaction size (50,000) by the dealer's rate ($.0091), you will find that your loss is $455.

50,000 X $.0091 = $455
Remember that you must also subtract any dealer commissions or other fees from your profits or add them to your losses to determine your true profits and losses. Also, remember that the dealer makes money from the spread. If you immediately liquidate your position using the same spread, you will automatically lose money.

Now let’s take a look at how foreign currencies are quoted and priced. Currencies are designated by three-letter symbols. The standard symbols for some of the most commonly traded currencies are shown below.


EUR
Euro
USD
United States dollar
CAD
Canadian dollar
GBP
British pound
JPY
Japanese yen
AUD
Australian dollar
CHF
Swiss franc

Currency pairs are often quoted as bid-ask spreads. The first part of the quote is the amount of the quote currency you will receive in exchange for one unit of the base currency (the bid price). The second part of the quote is the amount of the quote currency you must spend for one unit of the base currency (the ask or offer price). For example, a EUR/USD spread of 1.2170/1.2178 means that you can sell one Euro for $1.2170 and buy one Euro for $1.2178. This spread could also be quoted as 1.2170/78.
Let’s look at another example.

If the USD/CHF spread is listed as 1.2440/1.2443, you can sell one US dollar for 1.2440 Swiss francs and buy one US dollar for 1.2443 Swiss francs.

Remember that the forex market has no central marketplace. The forex dealer determines the execution price, so you are relying on the dealer’s integrity for a fair price.
In this currency pair, which is the base currency?

CAD/USD

The correct answer is the Canadian dollar, or CAD. Remember, the first currency in a currency pair is the base currency and the second currency is the quote currency.

Using this USD/JPY spread (110.45/55), how many Japanese yen would it take to buy one US dollar?
It would take 110.55 yen to purchase one US dollar.

Who determines the execution price—the trader, the dealer or the exchange?

The correct answer is the dealer. Remember that the forex markets we are discussing have no central exchange on which the contracts are traded, and you as the trader have no control over the execution price.

Simply put, foreign currency exchange rates are what it costs to exchange one country’s currency for another country’s currency. For example, if you go to England on vacation, you will have to pay for your hotel, meals, admissions fees, souvenirs and other expenses in British pounds. Since your money is all in US dollars, you will have to sell some of your dollars to buy British pounds.
Let’s assume that you have decided to take a trip to England. Before you leave, you go to your bank and buy $1,000 worth of British pounds. If you get 565.83 British pounds (£565.83) for your $1,000, each dollar is worth .56583 British pounds. This is the exchange rate for converting dollars to pounds.
After spending a few days in England, you realize that £565.83 won’t be enough to cover all of your expenses. So you go to a bank in England and buy another $1,000 worth of British pounds. This time, however, you get only £557.02 for your $1,000. The exchange rate for converting dollars to pounds has dropped from .56583 to .55702. This means that US dollars are worth less compared to the British pound than they were before you left on vacation.
When you arrive home, you still have some British pounds left. So you go to your bank and use your remaining £100 to buy US dollars. If the bank gives you $179.31, each British pound is worth 1.7931 dollars. This is the exchange rate for converting pounds to dollars.
But what if you were traveling to France? The currency used in France is the Euro. If you go to your bank and buy $1,000 worth of Euros with an exchange rate of 0.8064, how many Euros will you get?
Exchanging $1,000 for Euros with an exchange rate of 0.8064 means you will receive 806.40 Euros. Conversely, if you were living in France and planned a vacation in the United States, you would go to your bank to buy US dollars with Euros.

If the exchange rate was 1.2403, how many U.S. dollars would you get for your 1,000 Euros?
You would receive $1,240.30 for your 1,000 Euros.

Theoretically, you can convert the exchange rate for buying a currency to the exchange rate for selling a currency, and vice versa, by dividing 1 by the known rate. For example, if the exchange rate for buying British pounds with US dollars is .56011, the exchange rate for buying US dollars with British pounds is 1.78536. In other words, one divided by .56011 equals 1.78536. Similarly, if the exchange rate for buying US dollars with British pounds is 1.78536, the exchange rate for buying British pounds with US dollars is .56011 (or one divided by 1.78536 equals .56011). This is how newspapers often report currency exchange rates.
You should know, however, that you will not receive the price quoted in the newspaper if you trade forex. That’s because banks and other market participants make money by selling the currency to customers for more than they paid to buy it and by buying the currency from customers for less than they will receive when they sell it. This difference is called a spread and we’ll talk more about spreads later in this program.

As you can see, currency exchange rates fluctuate. Retail customers who trade in the forex market hope to profit from those fluctuations.

American-style option – An option contract that may be exercised at any time before it expires.

Ask – The quoted price at which a customer can buy a currency pair. Also referred to as the ‘offer,’ ‘ask price,’ or ‘ask rate.’

Base Currency – For foreign exchange trading, currencies are quoted in terms of a currency pair. The first currency in the pair is the base currency. For example, in a USD/JPY currency pair, the US dollar is the base currency. Also may be referred to as the primary currency.

Bid – The quoted price where a customer can sell a currency pair. Also known as the 'bid price' or 'bid rate.'

Bid/Ask Spread – The point difference between the bid and ask (offer) price.

Currency pair – The two currencies that make up a foreign exchange rate. For example, USD/YEN is a currency pair.

Dealer – A firm in the business of acting as a counterparty to foreign currency transactions.

European-style option – An option contract that can be exercised only on or near its expiration date.

Expiration – This is the last day on which an option may either be exercised or offset.

Interbank market – A loose network of currency transactions negotiated between financial institutions and other large companies.

Leverage – The ability to control large dollar amount of a commodity with a comparatively small amount of capital. Also known as ‘gearing.’

Margin – See Security Deposit.

Offer – See Ask.

Open position – Any transaction that has not been closed out by a corresponding opposite transaction.

Quote currency – The second currency in a currency pair is referred to as the quote currency. For example, in a USD/JPY currency pair, the Japanese yen is the quote currency. Also referred to as the secondary currency or the counter currency.

Rollover – The process of extending the settlement date on an open position by rolling it over to the next settlement date.

Security deposit – The amount of money needed to open or maintain a position. Also known as ‘margin.’

Settlement – The actual delivery of currencies made on the maturity date of a trade.

Spread – The point difference between the ask and bid price of a currency pair.

Trader – An individual who is on the other side of the trade with the dealer and whose objective is to profit from price movements.

Forex trading, as one of the leading markets worldwide, is a very lucrative opportunity and it can bring huge profits to traders. Forex trading can also be very risky, especially to the new inexperienced traders. That is why every trader should trade smart and develop his/her own trading strategy that works and follow it consistently.

First, learn as much as you can about forex before you even consider actual trading. Knowledge and experience cannot be substituted when it comes to trading forex. You can find a lot of forex trading resources and e-books online that can help you get started.

A very good way to understand forex trading better is to start trading with demo accounts. These demo accounts represent simulation of real trading where you trade with “virtual” money instead of real money. Demo accounts are completely risk free and excellent way to see if you are capable of making money with forex, or not. They are also very good for practicing forex trading and sharpening your skills as a forex trader.

Once you feel you are ready, choose forex broker and start real trading. Be also careful with broker selection. Brokers should be regulated by globally recognized institution and must be able to provide registration or license number. Also avoid trading with brokers that offer higher leverage than 300:1. Most brokers should offer help and training to their traders. Forex brokers should also offer ability to open demo accounts and trade with virtual money.

Keep in mind that trading with virtual money can be different from trading with real money and some traders that trade successfully with demo accounts don’t experience same success with real accounts.
One of the explanations why this happens lies in human psychology and emotions. When you trade with virtual money, you can’t really lose anything while in real accounts you can and this fear of loss emotion usually leads to bad decisions.

Emotions in forex are your enemy and you have to always stay cool. Develop your trading strategy and follow it no matter if some trades may feel right or wrong. Also trade with money you can afford to lose so you won’t have to bump your head against the wall if some trades go wrong. Remember, forex is not a way to get out of a debt and stay out of it if you are in desperate need for money. Forex trading requires patience and lack of emotions. In time, when you become experienced trader, you will know more what you can and what you can’t do and how much money you can earn.

More and more people are waking up and realizing that there are better ways to earn money online by trading currency. These days the internet offers us all much opportunity when it comes trading currency over the net in a real time environment. There are now software applications like Forex Trading Software that make online trading a secure breeze and walk in the park. If you are still not convinced these three reasons will surely convince you otherwise.

1. Forex Trading Software is totally free you can download it safely from a number of sites and it is really easy to use. They even include a help menu and they have answers to just about any of the questions that you may have.

2. Forex Trading Software offers a free trial period where you can learn to trade online using play money on a real market. This trial and error period is awesome and allows people to learn the ins and the outs of trading online using Forex Trading Software.

3. Finally, you can take a few short investment classes online and learn how to easily master Forex Trading Software to work for you. Many people have found that they are making great money by using Forex Trading Software to up their bank accounts.

The following is a list of useful Internet links to economic and financial data and information from around the world.

CENTRAL BANKS

European Central Bank www.ecb.int
Bank of Japan www.boj.or.jp/en/index.htm
US Federal Reserve www.federalreserve.gov
US Federal Reserve Bank of NY www.ny.frb.org
Bank of England www.bankofengland.co.uk
Swiss National Bank www.snb.ch/e/index3.html
Reserve Bank of Australia www.rba.gov.au/
Bank of Canada www.bankofcanada.ca/en/

INTERNATIONAL

Bank of International Settlements www.bis.org
International Monetary Fund www.imf.org
The World Bank www.worldbank.org
International Finance Corporation www.ifc.org
Organization for Economic Co-operation and Development www.oecd.org
The Institute for International Economics www.iie.com
Organization of Petroleum Exporting Countries www.opec.org
International Energy Agency www.iea.org/
Yahoo Finance biz.yahoo.com/ifc
Nouriel Roubini's Global Macroeconomic & Financial Policy Site www.stern.nyu.edu/globalmacro/
Giancarlo Corsetti's Euro Homepage www.econ.yale.edu/~corsetti/euro/Euroit.htm

REGION-SPECIFIC RESOURCES

US
US Treasury www.treas.gov
Bureau of Economic Analysis www.bea.doc.gov/bea/rels.htm
National Bureau of Economic Research www.nber.org
The National Association for Business Economists www.nabe.com
Financial Markets Center www.fmcenter.org
USA Fedstates A to Z www.fedstats.gov
American Stock Exchange www.amex.com
New York Stock Exchange www.nyse.com
NASDAQ www.nasdaq.com
New York Mercantile Exchange www.nymex.com
Chicago Board of Trade www.cbot.com
Chicago Board Options Exchange www.cboe.com
Chicago Board of Trade www.cbot.com
Chicago Mercantile Exchange www.cme.com
Coffee, Sugar and Cocoa Exchange www.nybot.com
Kansas City Board of Trade www.kcbt.com
Mid-America Commodity Exchange www.midam.com
Minneapolis Grain Exchange www.mgex.com
New York Cotton Exchange www.nybot.com
Philadelphia Exchange www.philex.com

EUROPE

EUROSTAT europa.eu.int/comm/eurostat
Institute for Economic Research (Germany) www.ifo.de/orcl/dbssi/main_e.htm
German Institute of Economic Research www.diw-berlin.de
Confederation of British Industry www.cbi.org.uk
National Institute of Economic and Social Research (UK) www.niesr.ac.uk
Italy National Institute of Statistics www.istat.it
National Institution of Statistics and Economic Studies (France) www.insee.fr
Spain National Institute of Statistics www.ine.es
London Stock Exchange www.londonstockexchange.com
London Futures Exchange www.liffe.com
London Metal Exchange www.lme.co.uk
London Stock Exchange www.stockex.co.uk
Deutsche Bourse www.xetra.de/INTERNET/XETRA/index.htm
International Petroleum Exchange www.ipe.uk.com

ASIA

Japan's Ministry of Finance www.mof.go.jp/english/index.htm
Economic Planning Agency www.epa.go.jp/e-e/menu.html
Ministry of International Trade and Industry www.miti.go.jp/english/index.html
Japanese Statistics Bureau www.stat.go.jp/english/1.htm
Singapore Department of Statistics www.singstat.gov.sg
Hong Kong Futures Exchange www.hkfe.com
Singapore Exchange www.simex.com
Sydney Futures Exchange, Ltd. www.sfe.com.au
Tokyo Stock Exchange www.tse.or.jp/eindex.html

If you’ve been involved in the investment world for any length of time, I’m sure you’ve heard the term Forex thrown around, but what exactly is Forex?

Forex stands for FOReign EXchange. In the simplest of definitions, it is the simultaneous buying and selling of a currency pair (e.g. EUR/USD), hence the term currency trading. It is a continuous physical occurrence taking place in the global economic system.

For example, when a tourist travels from Europe to the USA and exchanges euros for dollars, he becomes a potential trader of Forex.

Similarly, when a US company needs to exchange dollars before exporting goods to Europe or Japan, it too takes an active role in the foreign exchange market.

With this in mind, every currency pair has a price which is determined by the law of supply and demand, globally. If the demand for a particular currency is high then it gains value. Conversely, if a currency is in abundant supply, its value declines.

Currently, Forex is the most liquid of all markets with trading volumes surpassing the 3 trillion dollar mark, every single day. To put things in perspective, this is more than the NYSE and the NASDAQ combined!

Until recently, currency trading was confined to banks and large financial institutions. However, since the advent of the internet, many OTC brokerage firms have sprung up allowing the everyday trader, or speculator, to actively participate in this market.

Due to its large trading volumes, Forex has become a very popular investing opportunity. The potential for profit is enormous, but as with anything involving large gains, the risks are equally amplified. This is what makes this type of investment so attractive to some, whereas others clearly shy away from it.

A thorough evaluation of the system’s inner workings must be undertaken by anyone who’s hoping to profit from Forex. This involves sound education, discipline, and most of all practice.

With these three things combined, and the right mentor, anyone can learn to consistently make money from the frequent and often “wild” swings, of our global economy.

To learn more about how you can start profiting from Forex trading, be sure to read the rest of the articles in this section.

These are some forex basic forex terms that cause a lot of confusion to amateur forex traders. We will try to give simple and practical definitions.

Margin practically is the money you have deposited in order to trade. If your money is depleted then you may have not sufficient margin in order to trade.

Leverage is called the factor that mupltiplies your margin in order to realize more profits from your trade. When a broker offers a leverage e.g. 400:1 this means that for every dollar in your trading account you can trade 400 dollars due to temporary borrowing of money from the broker for as long as your trade lasts. For example if you deposit 1000 dollars in a trading account with leverage 100:1 this means that you can practically trade as if you had 100,000 dollars. This is very important in Forex because you trade the last decimal change in the currency pair value so you need a large amount of money in order to realize a decent profit.

When you buy you are “long” in Forex language. When you are long you want the currency pair to appreciate in order to make profit. Long positions are profitable when the market is bullish that is the direction of the trend is upwards. When you sell you are “short”. When you are short you want the currency pair to depreciate in order to make profit. Short positions are profitable when market is bearish that is the direction of the trend is downwards.

The last digit of the price in a currency pair is called pip. In EUR/USD 1.2640 the 0 digit is called pip. More specifically the change of the last digit in one unit is called one pip change. The pip numbers in Forex is the indicator of your profit or loss. In Forex you trade the last decimal change in the price of currency pair.

A limit order is an order to trade a currency at a specific value either short or long. This order remains valid for as long as you want until the currency reaches the value that you have specified. Stop loss is an order to exit a trade at a specific currency value according to risk appetite. With stop loss you can minimize you losses. Limit and stop orders can automate your trading without the need to be in front of the screen all the time.

Forex trading online is a fast way to use your investment capital to
it’s fullest. The Forex markets offer distinct advantages to the
small and large traders alike, making Forex currency trading in many
ways preferable to other markets such as stocks, options or
traditional futures. Here are many reasons why you’ll want to look
into Forex Trading online.
1 - Forex is the largest market.Forex trading volume of more than 1.9 billion, more than 3 times
larger than the equities market and more than 5 times bigger than
futures, give Forex traders nearly unlimited liquidity and
flexibility.
2 - Forex never sleeps!You can execute forex trading online 24/7, from 7AM New Zealand time
on Monday morning, to 5PM New York time on Friday evening. No waiting
for markets to open: they’re open all night! This makes Forex trading
online a very attractive component that fits easily into your day (or
night!)
3 - No Bulls or Bears!Because Forex trading online involves the buying of one currency
while simultaneously selling another, you have an equal opportunity
for profit no matter which direction the currency is headed. Another
advantage is that there are only around 14 pairs of currencies to
trade, as opposed to many thousands of stocks, options and futures.
4 - Forex trading online is commission free!That’s right! No commissions, no exchange fees or any other hidden
fees. This is a very transparent market, and you’ll find it very easy
to research the currencies and the countries involved. Forex brokers
make a small percentage of the bid/ask spread, and that’s it. No
longer any need to compute commissions and fees when executing a
trade.
5 - Forex trading online is instant!The FX market is astoundingly fast! Your orders are executed, filled
and confirmed usually within 1-2 seconds. Since this is all done
electronically with no humans involved, there is little to slow it
down!
Forex trading online can get you where you want to go quicker and
more profitably than any other form of trading. Check it out and see
what Forex trading online can do for you!

what exactly is forex ..?
The currency trading or foreign exchange, Forex, FX market is the biggest and one of the fastest growing market in the world. with daily turnover of almost 3 trillion dollars the participants in the market are central and commercial banks, institutional investors, corporates and private individuals like you.

How currencies are traded..?
In forex market, currencies of various countries are traded. for example you might buy euro with us dollar, or you might sell canadian dollars for japanese yen. its as basic as trading one currency for another. here you dont have to purchase or sell actual, physical currency, you trade and work with your own base currency and deal with any currency pair you wish to.