Starting in Currency Trading

As a new currency trader, one of the questions you might have when you start looking at this market is what am I actually buying or selling?' The short answer to this question is nothing! The retail FX (FX =Forex= foreign exchange=currency) market is a purely speculative one and no physical exchange of currencies ever takes place. All trades exist simply as computer entries and are netted out depending on market prices. The reason the market is in existence is to allow large companies and financial institutions to trade huge amounts of currency easily. These constitute approximately 20% of transactions. The remainder is speculators like you and I simply trading on rate movements! You must also appreciate that the market is unregulated - it regulates itself!

The leverage that is offered in the currency markets is extremely high for the simple reason that if you traded with real money, most traders would not have enough cash to allow sensible trades to be made. The smallest movement is a 'pip' and on an amount of 1000 US dollars, a 1 pip movement would yield 10cents profit (or loss). Now bear in mind that a 100 pip movement in a day is a reasonable size move, so you could stand to make 10$ on the day. This hardly sets the pulses racing!

In order to overcome this problem the currency brokers offer leverage to allow you to trade at meaningful levels. These vary from 1:50 up to a suicidal 1:400 which means that for 1000 USD in your account you could trade 400,000 USD in the market (this is equivalent to $40 per pip movement) so for a 100 pip movement in the wrong direction, you would have lost 4,000 USD. With only 1000 USD in your account you would have received a margin call or been closed out by the broker - not bad for one day's trading!! This is why currency trading is such high risk and only for experienced traders.

One of the unique aspects of the currency market, is that we do not have any volume to assist us in our chart reading, so your candlestick analysis has to be excellent, as you will need to forecast price movement purely from the candles themselves.

Now - a quick lesson in currencies. All major currencies are traded as a pair such as GBP/USD or EUR/GBP. Each currency pair has its own chart and as you would expect there is a spread between the two currencies. This varies from broker to broker, as does the leverage. Another unique aspect of currency trading is there is no commission! Suppose you think the GBP/USD pair is moving up in price (the dollar is weakening against the pound), then you might decide to go long the UK pound. In buying the pound you are automatically selling the dollar. Every pair has a 'pip' quoted price - this is normally 2, 3 or four decimal places depending on the currency. For each pip movement you would gain or lose 1USD. If you wanted to sell(or short ) the GBP/USD you would sell one contract instead. It really is this simple. Naturally there are other aspects to consider such as fundamental data, etc. but in essence that is really it.

Unfortunately, this simplicity belies the risks and dangers involved thanks to the leverage required to make a meaningful trade size. Just as in online poker, it is very easy to open an account and to start. The typical cycle goes something like this - new trader rushes in full of confidence and optimism with small amount of money - opens large position with huge leverage and is wiped out very quickly. Having learnt lesson one, they then return some time later, with a larger fund and trade much smaller size lots ( contract sizes ) until they have built up experience. They may or may not succeed. I did much the same myself, but was lucky. I rushed in and opened six positions all of 10 contract size. I was therefore trading 600,000 USD in a world market running to trillions, with no previous experience and no plan. In a few hours I was 2,500 dollars negative. I sat up all night and watched the positions move ever lower through Asian trading. Quite why I sat up all night I have no idea - I probably thought I could influence the direction by the power of positive thought! To cut a long story short I managed to close out at a profit of a few hundred dollars the following day. I was lucky - you will probably not be so fortunate. If and when you come to this market, please learn from the above. The main reason most people fail at currency trading is from under-funding. Because you can start with a very small amount of money( and trade large quantities) this is what most people do - they quickly lose their money. The only reason I survived was because I had over 10,000 dollars in my account. In my opinion the minimum you should start with is $5,000 dollars and preferably $10,000

All brokers offer a demo account for you to practice your trading skills. However, I do not believe they add any value whatsoever. It is only when you start trading with real money, no matter how small, that you start to learn and develop your trading style.