FOREX TRADING CONCEPT

Forex Trading Concept
Foreign Exchange is the simultaneous buying of one currency and selling of another. The foreign exchange market ( FOREX ) is the largest financial market in the world, with a volume of over $1.3 trillion daily; more than three times the aggregate amount of the US Equity and Treasury markets combined. Unlike other financial markets, the Forex market has no physical location, no central exchange. It operates through an electronic network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another across the major financial centers.

Traditionally, investors' only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971.

Forex Trading Advantages
A 24-hour market - A trader may take advantage of all profitable market conditions at any time. There is no waiting for the opening bell.

High liquidity - The Forex market with an average trading volume of over $1.3 trillion per day. It is the most liquid market in the world. It means that a trader can enter or exit the market at will in almost any market condition minimal execution marries or risk and no daily limit.

Low transaction cost - The retail transaction cost (the bid/ask spread) is typically less than 0.1% (10 pips or points) under normal market conditions. At larger dealers, the spread could be smaller.

Uncorrelated to the stock market - A trader in the Forex market involves selling or buying one currency against another. Thus, there is no correlation between the foreign currency market and the stock market. Bull market or a bear market for a currency is defined in terms of the outlook for its relative value against other currencies. If the outlook is positive, we have a bull market in which a trader profits by buying the currency against other currencies. Conversely, if the outlook is pessimistic, we have a bull market for other currencies and traders take profits by selling the currency against other currencies. In either case, there is always a good market trading opportunity for a trader.

Inter-bank market - The backbone of the Forex market consists of a global network of dealers. They are mainly major commercial banks that communicate and trade with one another and with their clients through electronic networks and telephones. There are no organized exchanges to serves a central location to facilitate transactions the way the New York Stock Exchange serves the equity markets. The Forex market operates in a manner similar to the way the NASDAQ market in the United States operates, thus it is also referred to as an over the counter ( OTC ) market.

No one can corner the market - The Forex market is so vast and has so many participants that no single entity, not even a central bank, can control the market price for an extended period of time. Even interventions by mighty central banks are becoming increasingly ineffectual and short lived. Thus central banks are becoming less and less inclined to intervene to manipulate market prices.

Posted by Pierre Wee at 3:55 PM 0 comments Links to this post



Monday, January 29, 2007
Ten Basic Errors of a Newcomer
1. Trading when market has just opened
Within the first several minutes after opening, the market usually moves about or jumps somewhere abruptly. Experienced traders sometimes try to use their knowledge to forecast by the first market movements what trend is possible. But emotions will certainly play tricks with a newcomer.

2. Undue hurry in taking profit
Well, you opened a long position. Then, after a couple of days, you saw how much money you had earned and closed the position with joy. But this movement, as you would have gathered later, was just the beginning of a powerful up-trend. So, if you would not haste, you could earn 10 times more money. Use TakeProfit orders only on extraordinary occasions, when the resistance level is clearly seen. Normally, it is better to exit the market using StopLoss and trailing stop.

3. Adding lots in a losing position
This is a reverse example: you opened a long position, but price decreased. You doggedly insist on that "it would still grow, I just opened the position too early" and add by buying more lots. But the price goes on dropping and twices your losses. Remember: You should only add lots to a profitable position.

4. Closing positions starting with the best one
If you have some long positions and the price starts to decrease, you often instinctively try to fix your profit first and only then close losing positions (or let it work until the StopLoss triggers). This is a wrong tactics: If the whole market decreases, those positions will most probably lose that have already been unprofitable. But you have already had losses on them. This means you should close them first of all. Better positions will not fall so rapidly and, in case of a reversal, they will go up again. So do not haste to close a profitable position.

5. Revenge
A typical situation for a newcomer: A losing position has just been closed - and he or she starts opening new positions enthusiastically to requite the wrongs. This will result in new losses, so do not return to trading immediately after having lost. Rest a little.

6. The most preferable positions
Approach reasonably to your positions: Do not care especially for some of them, for example, for those where you bought at the lowest price - every trader is usually especially proud of such trades. It is clear that you are puffed up with self-admiration, but be careful and do not carry such a brilliant position to zero or even to minus.

7. Trading by the principle of 'bought for ever'
You were working on a relatively short period of time, opened up, and prices went up tremendously. And you say to yourself: "Aha, I've caught the start of a many years' up-trend", and hang this position "for ever". But things do not just happen: you either change essentially for much longer estimation periods or keep standard rules on your standard short period. Rules that will make you enter and quit the market even if there is a really powerful trend. Do not "marry" your position!

8. Closing of a profitable strategic position on the first day
Vice versa, if you trade not within a day, do not close a profitable position on the first day under no conditions. If even the price has been grown to a very high level, be patient: it can be higher tomorrow.

9. Closing a position when alerted to open an opposite position
Many trade with systems of continuous entering the market. These systems are always "inside of a position". This means, closing of a long position means for them opening of a short one. One can use such positions, but they must be closed earlier: the signal to close must be of higher priority than the signal to open an opposite position.

10. Doubts
You should not trade if you are not sure of your previous situation assessment. Having said to yourself "I'm sick with vague doubts", you should better close all your positions and reanalyze the situation. Or go for a walk. The latter recommendation is actual in all difficult cases, by the way. It helps for all diseases - try it yourself!