Everything you need to know about Pips and Spreads

by admin on February 21, 2010
in Forex Trading Online

Forex trading is exciting, it’s challenging and it has the potential to earn you large sums of revenue.  Now, if you are fairly new to Forex trading, it will not be long before you began to hear the terms ‘Pips’ and ‘Spreads’ thrown around in Forex circles.  For example, when looking for a Forex broker, you will be advised to find a broker with a low spread.   You might also learn that a currency has risen or fallen by a certain number of pips.  These two words are basically used to make it easier to accurately calculate and indicate how much a currency is worth.  Pips and spreads are of importance to both traders and brokers, so it is a good idea to get to grips with what they are as early on as possible in your trading career.
You have probably heard that Forex currency rates fluctuate on a constant basis.  Day and night currencies go up and down, quite quickly sometimes.  This is all part of Forex and it is the characteristic that makes trading Forex a 24 hour a day, 7 day a week endeavor… potentially anyway.  Very often the changes that are seen in currencies are small and subtle.  In fact, rate changes are often so small that they are measured in units that are even smaller than the number one.  Currencies are measured using decimals.  Notice how you usually see currency rates written with a decimal point and then two to four numbers after the decimal point.
Currency rate changes are often so small that they are measured in Pips.  A Pip is an extremely small unit of measurement.  1 Pip basically pans out to be the equivalent of 0.0001.  The smallest possible rate change that can be seen or measured in currencies is the Pip.   Here is an example of pips in a standard currency pair:  USD/EUR is 1.232/1.239.  This figures used in this example have what is known in Forex as a 7-pip spread – they have a spread of 7 pips; the difference between the two figures.
What is a Spread?
The spread is the difference in value between the buy and the sell rate of a currency.  The buy price is at times also called the ‘bid’ and the sell price is also known as the ‘ask’.  The spread is an amount that is set by the market maker.  When you understand Forex at a deeper level, you will learn that it is the market maker that takes the biggest risk in a Forex trade. They make the trade possible and they place that they make their profit is in the spread.   The larger the spread, the more money they make.
There is always a spread or a difference between the buy and sell rates.  New Forex traders often fail to realize that if you purchase a currency and hold it for as little as 5 minutes, and even if it there is no change in the currency rate, that you will still lose money if you sell it.  This is because currencies are never bought and sold at the same price.  Currencies always sell at a lower rate than they are purchased at.

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First Steps in Forex Trading

by admin on February 11, 2010
in Forex Trading Online

The Foreign Exchange market or Forex is an opportunity for people to earn money by buying and selling currency. The currency you buy can be US Dollars, Great British Pounds, Euros or any other currency from any country around the world. The goal of a Forex trader is to earn money by selling a currency for more (or at a higher rate) than what you bought it for.

If you are interested in getting involved in Forex trading you must familiarize yourself with the industry, at least on a basic level. It is important to understand both the positives and the negatives of trading Forex; both the benefits and the risks of trading Forex. When you trade Forex the currency that you buy is your investment. It is the thing that will either make you money or lose you money. Therefore, it is important for you to find out what causes the fluctuations in rates that prevails in Forex trading. It is based on this information that you will be able to predict the direction that a currency might be headed.
To begin trading you must first find a broker before you can begin to trade on the Forex. If you are new to Forex, finding a Forex broker can be extremely difficult and a bit overwhelming if you don’t have someone to help you. After all, the job of finding a broker involves understanding who to trust and who to run from. Not every broker will be the best broker for you. Even if you don’t know the intricacies of Forex trading, at least you can be armed with the right questions and have the right information to make an informed decision.
It is important to know that small details in the agreement between you and your broker could affect the amount that you make from your trades or the amount that your broker makes from your trades. Granted, your broker has to earn an income but it shouldn’t all be made from you! Right off the bat, you should look for a broker that can give you a low spread and that requires the smallest possible deposit. In today’s market, the best deals that you are likely to find on an initial deposit will fall somewhere between $300 and $500.
For your protection, you should look for a broker that is registered with the Commodities Futures Trading Commission (CFTC). Brokers themselves should be registered as Futures Commission Merchant (FCM). Brokers are not required to register with the CFTC, they do this voluntarily. In my view, this is just one indicator of a broker’s credibility and their respect for accountability. In addition to this, it is important to check the references of brokers. Ask for a list of references and be sure to call and talk with each of the references about the experience they have had with the broker. Better yet, if at all possible, try to get a broker referred to you by a friend, family member or associate. This is definitely one of your best chances of getting honest, accurate information on a Forex broker.
Once you have found a Forex broker, the job of trading Forex will be much easier. Your broker should at minimum set you up with all of the systems necessary to begin to buy and sell currencies. These systems should include their policies on buying and selling currencies, providing you with any software that their brokerage uses, advice and training on successful trading as well as a willingness to set you up with any software and trading platforms that their brokerage uses. You will be able to buy and sell currencies at will once you have an account and an online trading tool.

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The Rise and Fall of Currencies

by admin on February 7, 2010
in Forex Basics

Forex trading is an exciting way to invest. Traders earn money through buying and selling currency. The aim to sell for more than you bought it for. This simple principle is seen throughout the world of business and investing.

Why Do Currencies Fluctuate?
The Foreign Exchange (Forex) is in operation 24 hours a day, 7 days a week. People are trading in Forex all of the time. The Foreign Exchange is the largest trading market in the world. Trillions of dollars in currency are literally traded every single day on the Foreign Exchange. Each day, as currencies are traded; bought and sold, you will see the rates of currencies continually rising and falling. Currencies from around the world are in a constant state of fluctuation.

How Do Currencies Fluctuate?
Although if you were to go back in the history of currencies, you would find that previously the value of a currency was based on the amount of gold that the country held. The USA and other developed countries made a decision to change this system and to base the value of currency on the gross domestic product of each individual country. This is the system that we still find in use today.

When it comes down to the complex task of deciding the rate for each currencies, demand for that currency is the major deciding factor. Currencies are subject to two types of demand, Transactional Demand and Speculative Demand. Transactional Demand is calculated by the country’s economic growth, the employment rate in the country as well as how quickly money moves through that country’s economy. Speculative Demand is calculated by forecasts related to whether the currency is expected keep the value that It is at. This is assessed by projected, future economic activity, any inflation that might be anticipated and more.

The Foreign Exchange market trades continually and operates non-stop. It is a worldwide market and therefore an hour that might be nighttime in your home country could be the middle of the day somewhere else. Activity is happening all of the time in the world of Forex and rates are rising and falling continually.

Currencies Affect One Another
Currencies all relate to one another at the end of the day. They are compared against one another and they are bought and sold against one another, in what is known as currency pairs, and they are constantly measured against one another. Currency rates are affected by a whole host of factors.

One significant factor that has not yet been mentioned yet that has a large impact on currency rates is interest rates. Every country has their version of a central bank. It is the central bank in each country that sets the interest rates for lending and borrowing. These interest rates also affect the rate at which their currency sells for. It is measured against other currencies using rather complex formulas. Determining currency rates is not an exact science because speculation is involved. Therefore there is risk involved in this process. Carry traders, which can almost be described as middle men, bear the brunt of this risk. There is a chance that they will lose money because of this. At the same time, there is a chance that they will speculate correctly and earn extremely large sums of money because of it.

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Forex Brokers – Who They Are?

by admin on January 18, 2010
in Forex Brokers

Forex trading involves the buying and selling of foreign currencies.  Forex investors benefit through Forex only when they manage to sell a currency at a rate higher than what they bought it at.  The fact is, the value of currencies can fluctuate tremendously even within as little space of time as a 24 hour period.  By the same token, they can rise or fall suddenly and for long periods of time too resulting either in a significant loss or a substantial profit. 

What is a Forex Broker?
A Forex broker is an individual that is trained to assist you in the process of buying and selling currencies.  A Forex broker receives your order to buy or sell a currency and they execute it.  It is highly likely that if you make a decision to get involved in Forex trading, you will come to know your Forex Broker fairly well.  Ideally, your Forex broker will be a person that will provide you with support, advice and knowledge on the Forex market.  Also, it is quite important to find a Forex broker that offers a low spread.  A broker’s spread basically determines how much commission you will be charged on each of your trades.  The lower the spread, the better off you will be as a trader.

As you go through the process of finding a Forex Broker, there are a few things that you should look out for.  First of all, your broker should be associated with a major financial institution or association.  This should provide you with security and reliability.  Secondly, the Forex broker should be registered with the Commodity Futures Trading Commission (CFTC).  This is a must!  Once those two things have been established, you can begin to discuss other specifics.  

When you meet with brokers, ask questions to find out what level of support the Broker is willing to provide you as a new trader.  They should be able to provide you with software samples of their trading platform and they should be able to guide you towards good resources and research material that will help you to make informed trading decisions.  

Finding the right broker will take some homework on your part.  If you have friends or associates that trade in Forex, getting some advice from them is ideal.  They may or may not like the broker that they work with.  At minimum, they could give you pointers as to what to look for in a broker and on what has worked for them.

Who Pays the Forex Broker?
Forex brokers make money on every trade that they broker.  It is not a percentage-based commission but rather a built in commission that is derived from the difference between what the seller accepts for the currency and what the buyer pays.  These two prices rarely equal the same amount.  The broker makes his money from the difference.  By choosing a broker with a low spread, you can minimize the amount of commission you pay for the lifetime of that relationship. 

As a newbie in Forex trading, it is important for you to use an established institution for Forex trading.  As you gain experience you may choose to work with other brokerages.  Since almost all Forex trading is done online, you will need to ask your broker for trading platform software.  A good broker will guide you through using their Trading Platform software to ensure that you know how to use it.  If you are to find success with Forex, it is important that you are comfortable with your broker, with the software and that you know exactly how to use it.

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Major Forex Currencies & Currency Pairs

by admin on January 17, 2010
in Forex Basics

As you familiarize yourself with Forex trading and the trading platform, there are some basic Forex principles that you will need to understand as well as some common Forex terminology. In fact, even before you make your first trade, you will need to understand what base currencies and counter currencies are. Your first trade and every other trade you ever make will involve these two variables.

Main Forex Currencies

Although Forex trading involves every currency imaginable, there are certain currencies that tend to be the bedrock of the trading that happens in Forex. These in many ways can be considered the major (or the main) Forex currencies. I will begin by saying that the US Dollar is generally involved in most of the Forex trade that takes place. While this is generally true there are other currencies that at times are used in the same way. The most commonly used currencies used in Forex trade are the Japanese Yen (JPN), the Great British Pound (GBP), the Swiss Franc (CHF) and the Euro (EUR).

Whenever an investor buys or sells currency on the Foreign Exchange, they must first choose the currency that they are making the purchase in. It does not have to be bought in the currency of their particular home country. This means that someone living in the United Kingdom can choose to buy Euros using US Dollars rather than their native Great British Pound (GBP). The currency that is used to make the purchase is known as the Base Currency or the Primary Currency, while the currency that is purchased is called the Counter Currency. The Counter Currency together with the Base Currency is considered a currency pair.

What is a Currency Pair?

Currency pairs describe the combination of the purchased currency paired with the base currency. A currency pair usually looks something like the following: EUR/USD. The three lettered symbols in a typical currency pair represent a particular currency. EUR/USD stands in place of the words Euro / US Dollar. The top symbol in the fraction is what is known as the Numerator while the lower number is called the Denominator. Therefore in the example above, EUR would be the Numerator. If you placed a “BUY” in the instance of the example above, you would be selling the US dollar and buying the Euro. In the world of Forex, going “LONG” describes the act of buying currency.

Forex trades non-stop, 24 hours a day. Currencies are in a constant state of fluctuation and paired currencies potentially shuffle up and down against one another constantly, 24 hours a day. Throughout any given 24 hour period both the base and the counter currency can be expected to fluctuate; going up and down against one another non-stop. This movement is how the Forex investor makes money. The goal is to make money by selling currency that they have bought at a much higher rate than they bought it. Investors watch the market and strategically aim to sell currency for profit.

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