There is an element of glamour attached to Forex that attracts people like moths to a flame, and if we are not careful we can get carried away into a world of make believe and delusion. If you haven’t mastered the basics of Forex, you could find yourself chewing off more than you expected. Here are the basic features that you need to know about Forex that will protect your interests.
Get The Big Picture Sorted Out
You might already be aware that in a stock market it is wiser to buy when prices are scrapping the bottom so that eventually you can sell when prices touch a crest, and that simple philosophy is called the buy low sell high that helps you maximize your gains from individual stocks. Well, you’ll be glad to know that much the same applies to Forex because you will be trying to buy a currency which in all probability is expected to breach higher values compared to your home currency, the dollar.
Let’s assume for the sake of illustration that the dollar is the home currency (native to where you are staying) and you are extremely interested in trading the Japanese Yen (currency). Your attempt would be to buy Yen when that currency is on the cheaper side and ultimately off load (sell) Yen when it becomes dearer. If one Dollar is the equivalent of say, 77 Yen when you traded Yen, then you will hold your Yen till the Dollar equivalent rises above one dollar, and this quotation will be 1/77, in a one dollar buys 77 Yen situation. The Dollar-Yen matching in this trade will be referred to as a pair normally written as “USD/JPY”. You will notice considerable trading taking place in this pairing, and also the fact that trading will not be restricted to this pairing, like for example British Pounds to Dollars (GBP/USD) or the Euro/Australian Dollar pairing (EUR/USD).
In Forex Data Is King And You Need To Aggregate Information
In Forex you can’t aim for success unless you your data sources are perfected in such a way that you are always aware of movements in the currency you are focusing on. The highs and lows of any currency will be linked to multiple factors just like an elaborate railway commuting system – delay in one section affects every other systems. There is a direct correlation between trade fluctuations, interest rates and currency prices and these factors mutually exert considerable influence on volumes and profits.
You have to strive to perfect your knowledge in an all-round manner that encompasses such events as elections, prospects of war, escalating inflation, impact of foreign trade policies of nations besides many other economic factors that are likely to impact foreign exchange. Also, you need to become an expert at Forex jargon that is commonly used like spreads and pips to name just two or the meaning of counter currency or base currency, and you need a high degree of proficiency reading charts and graphical presentations.
You need to cultivate a thick skin for Forex uncertainties
The element of risk is very high in Forex transactions, and it is not a job that can be restricted to a nine to five routine; it demands constant appraisal and review, 24/7 and you will be handling huge volumes of data even at odd hours.
View Forex trading as a roller-coaster ride that will inevitably create huge dips and massive upswings, and if the ride gifts you a giddy or vomiting sensation, perhaps Forex is not your baby. If you look up broker’s websites you will notice demos that give you a decent idea about the nitty-gritty of Forex trading; try one to get the hang of what the process entails. The demo is the perfect vehicle that gives you the real feel of transacting money and what constitutes a proper Forex deal, and even if you make mistakes you don’t lose your own money.
And remember that the Forex market never sleeps even if you need your forty winks, so even as you wake up the heavens may have moved begging you to take corrective action. While you are transacting business during the day remember that the other half of the globe is in pitch darkness, and you will be acutely conscious of closing hours of various markets and the need to speed up transactions to cover risks. The margin for error is great and there will be zero tolerance for negligence. More than learning what to do in Forex it is how you execute the trade which is important. Timing will be crucial and if you and your broker are caught napping and unable to react to sudden developments, you can kiss your fortunes goodbye.
Commissions and taxes will have to be studied and factored into every trade if only to keep a very close watch on expenses, otherwise you would be wondering where all your profit disappeared.
If you feel you are being overwhelmed by the responsibility of direct trading you can opt for safer avenues like ETFs that will do the dirty work without your having to get involved in each and every single detail. Of course the ETF will be just as good as the portfolio manager it has on board and if he sleeps over his work, your profits will take a hit, so go for the reputed funds that mean business and have a reputation to protect.
The Last Word
The Forex business is best suited for long term players that are serious about trading and want to stick around for the thrills and spills and profits, but it is equally important you develop a philosophical attitude to losses and gains, keeping yourself in a Zen like detached state regardless of highs and lows. That way you keep your batteries charged and ready for the daily action.