What are the advantages of trading FOREX?

With the advancement of technology and Internet, FOREX trading is becoming an increasing popular investment.

The advantages of trading FOREX are listed: -

1. High Liquidity
2. Efficiency (a 24 hour market)
3. Low Transaction Cost
4. Very Volatile - lots of profit opportunities
5. Low transaction costs
6. Low Investment - start with a minimal amount (as low as US$25)
7. Execute Trades Instantly in Real Time - no broker intervention
8. Leverage (use borrowed money) with ease
9. It is always a BULL market for FOREX - profit potential in both rising and falling markets
10. No one can corner the Market - the market is too vast

Therefore as you can see trading FOREX is so easy. FOREX market is so large and has so many players (banks, big corporations, small investors, little individuals like you and me etc.) that no single one player, not even a influential country like the US, can completely control the long-term direction of currency in the FOREX market. That's why so many FOREX experts/traders have been calling FOREX trading the "most level playing field" on earth.

What are the trading hours for FOREX?

The Tokyo market is the first market in the world to open at 2300GMT on Sunday, but this is Monday morning at the Asia-Pacific region. Trading will start and continue non-stop moving into the London market, which opens at 0700 GMT, followed by the New York market at 1200 GMT. The market will only closed on Friday at 2200GMT, when the New York market closed.

There is something that you have to take note. Most retail forex transactions will have a settlement date on when the currencies are due to be delivered. You would have to rollover your position to the next settlement day if you would like to keep your position open. Some brokers carried out these rollovers automatically when the settlement day end, while some may require you to initiate the rollover.

When a position is rollover, there will be some charges involved, which is the rollover fee. This rollover fee is calculated based on the differential interest rate of the pair of currency that you trading in. This rollover fee can be a positive (interest gain) or negative (interest paid).

What currencies are traded, and What are the most common pairs?

The most popular currencies along with their symbols are shown below:
EUR — Euros
USD — US Dollar
CAD — Canadian Dollar
GBP — British Pound
JPY — Japanese Yen
AUD — Australian Dollar
CHF — Swiss Franc
NZD — New Zealand Dollar

FOREX currency symbols are always three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency.

I have listed below some of the most common currencies pairs with their symbol listed first, followed by their name and then subsequently their trading terminology.

GBPUSD - British Pound/US Dollar - Cable
EURUSD - Euro/US Dollar - Euro
USDJPY - US Dollar/Japanese Yen - Dollar Yen
USDCHF - Dollar/Swiss Franc - Dollar Swiss, or Swissy
USDCAD - US Dollar/Canadian Dollar - Dollar Canada
AUDUSD - Australian Dollar/US Dollar - Aussie Dollar
EURBGP - Euro/British Pound - Euro/Sterling
EURJPY - Euro/Japanese Yen - Euro Yen
EURCHF - Euro/Swiss Franc - Euro Swiss
GBPJPY - British Pound/Japanese Yen - Sterling Yen
GBPCHF - British Pound/Swiss Franc - Sterling Swiss
CHFJPY - Swiss Franc/Japanese Yen - Swiss Yen
NZDUSD - New Zealand Dollar/US Dollar - New Zealand Dollar, or Kiwi

Where can FOREX be traded?

FOREX can basically be traded from anywhere in the world.

If you like moving around the world, from United States to Africa to Australia to Singapore to China, then FOREX trading is your dream business. You can trade FOREX anywhere in the world as long as you have a Notebook and a connection to the Internet. You could be anywhere in the world, on the beaches of Hawaii taking a well deserved break, you could also be making $$$ from FOREX.

You have total freedom your trading environment. As long as you have a Notebook and a connection to the outside world through the Internet, you can trade FOREX. FOREX trading is a huge open market and is not tied to any one trading floors and it is also not centralised on any exchange, as compared to shares and futures.

FOREX market can be considered as Over-the-Counter (OTC) trading, as the the entire FOREX market is run electronically, within a large network of banks, FOREX trading can be carried continuously over a 24-hour period.

Well to end the post, the most important piece equipment that you need is a Noteboook and high speed Internet connection.

What is traded at the Foreign Exchange?

Of course, Money.

Forex trading is the buying of one currency and the selling of another. Currencies are traded in pairs, for example EUR/USD, USD/JPY, EUR/GBP etc. Currencies can be traded through a broker or dealer. So if a trader believes that Euro will gain against the Dollar, he will sell Dollars and buy Euros.

As you're not buying anything physical, this kind of trade can be confusing to you. You could just imagine that buying currency as buying a share in that country. When you buy the Dollar, you can think of it as you are buying a share in the US economy and if the US economy is doing well, the Dollar will rise and you will gain when you sell the Dollar later. The value of curriencies are direct reflection of the state of economy of the respective countries.

What is FOREX?

The Foreign Exchange Market, better known as FOREX, was established in 1971 when fixed currency exchanges were abolished. Currencies became valued at ‘floating’ rates determined by supply and demand. The FOREX grew steadily throughout the 1970’s, but with the technological advances of the 80’s FOREX expanded from trading levels of $70 billion a day to the current level of $2.6 trillion.
The Foreign Exchange Market, is a worldwide market for buying and selling currencies. It handles a huge volume of transactions 24 hours a day, 5 days a week. Daily exchanges are worth approximately $2.6 trillion (US dollars). In comparison, the United States Treasury Bond market averages $300 billion a day, and American stock markets exchange about $25 billion a day, you can see how enormous the Foreign Exchange really is. It actually equates to more than eight times the total amount of the stock, futures and bonds markets combined.
Different countries use different currencies, however cross-border trading has to take place. The FOREX is therefore a vehicle driven by the need to move monetary payments across border and transfer funds and value from one currency to another. If the whole world used one currency there would be no need for the FOREX market. For example if a US restaurant needs to buy Italian cheese it needs Euros to pay the Italian cheese maker so it must be able to exchange US dollars for Euros. Likewise if the US restaurant makes the payment in US dollars the Italian cheese maker must be able to exchange the dollars into Euros. It's as simple as that.

What is Option?

Trading Options is far more complicated than trading shares. One great difference between shares and options is that shares gave you a small piece of ownership in the company, options are just contracts that give you the right to buy or sell the shares at a specific price by a specific date. It’s important to note that there are always two sides of every option transaction that is a buyer and a seller.

If you buy a share option, you get the right, to buy or sell the shares at a fixed price by an appointed time. If the market moves in your favor, you gain; but if you get it wrong, all you lose is the price you paid for the option.

One of the advantages of trading options is the leverage that options provide. You can gain greater trading advantage by using a small amount of your trading capital.

Advantages of Trading Options over Shares :-
1. Money can be made in both the bull or bear market.
2. Leverages can be used to trade without the need for high capitial to get started.
3. More complicated and sophisticated strategies can be used to protect your money and to make more money.
4. Hedging can be used as a form of insurance protect a position.

Disadvantages of Trading Options
1. In options, there is no long term trading (buy/sell and hold and earn interest).
2. You have to learn to pick shares and then you also have to learn option trading strategies.
3. Shares can move in the direction you predicted but you may still not make any money.
4. Options have a lifetime, it will expires.
5. In options trading, when you make money someone has to loose the same amount you made.

What are Shares/Equities/Stocks?

They all refer to the same thing. Let’s look at it this way, if you have a share in a role in a play, that’s to say that you have a part or share in the play. If you own the shares of a company, that you actually own something of that company. you are a shareholder of the company.

The overall company market value (or its market capitalization) can be calculated as the product of total number of issued shares and the current market value of the shares.

What do you get as a shareholder of the company? Oh well, it is simple, if the company does well for the year, you are entitled to a share of the amount of profits the company makes, and these are called the dividends.

To engage in share trading, you would need a stock broker to assist you in the Buy/Sell of your shares, and these brokers will typically charge a brokerage fees for their service.

The prices for shares are determined by number of people trading the shares at that moment. If the parties interested in that share is minimum, the Buy/Sell price of that share will widen significantly, precluding you from trading it.

When trading shares, you can only profit from shares trading only if the shares is in the Bull Market. You buy at $1.50 and we sell at $2.10. In order to be able to do this, You would need to have real capitial to stock the shares, which can in some circumstances be limiting due to the amount of funds that you may have and the amount of fund that you are willing to risk.

With share trading, it is more difficult to make money when the share price is in a Bear market. It is almost impossible for an average investor to profit, but it can be possible if you have the use of sophisticated tools that are beyond the reach of most average investors.

There are instances when the share market hits a valley or is in a decline. At these times it is important to be able to take advantage of the market conditions. Some of the biggest, fastest moves happen as panic sets in. Unless you are experienced investor, you’re not going to be able to take advantage of these moves and your only option is to cash in your shares and sit on the sidelines waiting for the right time to re-enter the market.

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Dated 26th July 2009