What is FOREX and How Can I Make a Six Figure Income From It?
Trading in FOREX can be a very rewarding experience and also very risky. In order to trade it profitably one must understand what it is and the risks involved.
FOREX is the foreign exchange market. When you go on holiday abroad and you change currencies then of course you are switching US$ (or your local currency) into something else. At the time of the change you are quoted an exchange rate between the US$ and the currency you want to buy. When you come back from holiday you may want to change back any left over holiday currency to US$ and you will be quoted another exchange rate.
Every day trillions of US$ are passed across different currencies and individuals, companies, funds and governments all buy and sell for their own reasons. For investors like us it is of course to make a profit. For governments it provides an element of control over their economies. The big manipulators of currencies are the pension funds, hedge funds and sovereign wealth funds that take huge positions in order make profits.
Currencies are always traded in pairs so for example you have GBPUSD which is the British Pound versus the US Dollar. This pair has another name which is Cable. Other important pairs are:
EURUSD - Euro versus the Dollar
USDCHF - Dollar versus the Swiss Frank
GBPEUR - British Pound versus the Euro
USDJPY - Dollar versus the Japanese Yen
and so on....
So what determines the price of the US$ against another currency? Simply supply and demand as with any other market based economy. If you go to the supermarket the price of an apple is determined by the demand for that apple and the supply. If there is more demand for the apple and less supply then the price will rise, and if there is little demand and plenty of supply, then the price will drop.
The same can be said for currencies. If a currency is believed to be more attractive i.e. worth more than another then an investor will buy that currency with the intention of selling it at a later date for a profit. If a currency is perceived to be less attractive the it can be sold now and bought back later at a profit.
With currencies everything works in pairs and when you buy a currency someone else has to sell it to you. There are always two sides to the trade which is important when you look more closely at the brokers you will be dealing with.
So what makes one currency more attractive than the other? Well that's the million dollar question and involves many factors. People, companies, funds etc move their money into different currencies when they feel they can get a better return. The level of return is generated by the interest rate that the country whose currency you are trading is willing to offer. Interest rates are set by the central governments and depend upon the current economic state of that country.
Another powerful force in FOREX is market perception. Sometimes the masses can perceive that a currency is very strong or very weak even if the fundamental data shows something quite different. Once the herd is convinced about something then the markets will move.
The market is also subject to manipulation from governments who will go to major lengths to defend their currencies if they feel the need too. However such manipulation normally fails in the long term.
You could of course trade in other types of investments such as shares, bonds, indices but the FOREX market has some distinct advantages:
Trading 24 hours a day from Monday to Friday
Huge Liquidity: you will never have to worry about executing the deal
Huge choice of brokers which gives you plenty of scope to shop around for the best deal
Access to masses of information on the internet on how to trade FOREX
With the latest technology you now have the ability to execute FOREX trades automatically using robot software that sits on a computer.
Currencies tend to move in strong trends more than other financial instruments. That is very useful to a trader.
Use of margin: the ability to control a larger amount of currency indirectly
So how do you trade FOREX and what does it all mean?
Well to trade FOREX you will need a broker and the good news is there are thousands. Search for FOREX broker in Google and you will get millions of responses. Selecting a broker is an important step so please do your research. There are plenty of reviews of brokers on the internet so spend some time looking for the right one.
When you wish to buy or sell a currency you are quoted a buy/sell price. The difference between the two prices is called the spread. Spreads will vary between brokers and currency pairs; the more popular the pair generally the smaller the spread. The cost of your trade increases as the spread gets bigger. This is one of the key parameters in selecting a broker. The spread is the cost that that the broker charges for each transaction.
So how do you make money in FOREX?
Essentially there are two core ways to help you decide on what's going to happen next in the markets; these are called Fundamental and Technical Analysis. With Fundamental analysis you look at the economic data around the world like interest rates, the performance of different economies measure by things like GDP, unemployment, inflation, consumer spending and confidence measures. Changes in the price of a particular currency are dependent upon combinations of these factors and will tend to drive a particular currency into one trend or another.
Currencies are also subject to economic news. Large movements in the market will happen around major news announcements such as interest rate decisions or unemployment figures. Many FOREX traders base their strategy on such news releases.
The second way that traders determine the state of the market is through technical analysis. Here traders look at the historical charts and search for patterns that repeat themselves. They use various technical indicators to show them the future direction and momentum in the market.
Automated Trading
With today's powerful computers and internet connections we can trade FOREX online 24 hours a day for 5 days a week. That gives us a lot of control and power.
Today it is also possible to created automated software programmes that sit on a computer and trade the FOREX markets without any intervention. These are powerful tools that allow us to trade the markets with minimum knowledge of the FOREX markets.
If you use such a tool then it is very important to make sure that it works and that you are happy that you understand it. Fortunately such tools normally allow you to trade with pretend money first so that you can check its performance before committing real money.
Trading in FOREX can be an excellent way to make extra money or even a full time job. In particular automated trading is very powerful as it means you do not have to sit in front of your computer in order to trade, and you can enjoy your life such as being with family and friends.
Over the coming weeks I will be posting a series of articles on different aspects of the forex market, evaluating such tools for automated trading and looking at different manual strategies.
