FX Tutorials and Experiences

How can forex trading make you poor or rich

If you have ever traded on the stock market, one of the things you should be looking for should be a company with a strong and profitable history. Indeed Warren Buffet, investor extraordinaire and the man that reputedly pocketed over 2 billion dollars trading forex for his company Berkshire hathaway, has said It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. You should make sure that the company that you put your money in has been around long enough and is stable enough that its not going anywhere.

Now imagine if a company had over 300 million employees, was over 200 years old. Not big enough, how about if it had over 700 million employees.

Thats exactly what you get when you invest in Forex since the company that you are buying into is the national economy of a country. When you purchase USD you are essentially buying shares in the United States of America. When you buy Euro, you are buying into the European economy. This is why trading in forex can be one of the safest investments you can make.

Over the last 10 years the price of USD vs GBP has ranged from around 1.35 to 2.0. That is a range of just over 30%. The difference between the best times and worst times of the last 10 years was only 30%. From the highs and lows dot com boom and bust through the highs and lows of the real estate boom and bust the price was affected by only 30%. lf we were talking about a company who had 10 years as rocky as the ones we just experienced you would be forgiven for thinking the company would have gone bust.

What does this mean for you?

Well you now you have a handful of very stable, very large companies (read currencies) to invest in. Not only that, there is a wealth of regular, freely available information published to help you trade. You’d be crazy not to

So why is it so risky?

In a word, Leverage. Also known as trading on margin. Leverage allows you to invest more money that you actually have. So instead of investing 10k USD you can invest 10 times that (or more). This means that your profits are also increased by 10 times but it also means your losses are increased by 10 times which is how you can lose all your money invested (and more if your broker doesn’t have an automatic margin call policy).

If youre wondering why the broker would let you do this its because the way brokers make money is everytime you buy or sell something, whether it be shares or currency, they take a tiny fraction of a percent. So if you buy or sell 10,000 dollars the broker probably takes around 10 dollars. So the broker wants you to trade higher amounts and as frequently as possible. Now if you buy shares in a normal company and that company takes a huge hit, it might go bust however since the market is so stable even in the extremely unlikely event, that over the last 10 years you invested at the highest price of the dollar and the watched the price of USD just fall and fall to the lowest point it had been you would have only lost 30% of your investment so the brokers know you only need enough money in your account to cover your losses, which without leverage are always much smaller than your invested amount.

So how can the forex market make you rich? Slowly, thats how. Dont get greedy and dont over leverage. Despite the fact that brokers let you invest more up 200 times what you have deposited, its generally a very bad idea to invest more than 3-4 times what you have in your account. The amount you leverage will decide whether you get very rich slowly or get very poor very quickly. But even going very slowly it is possible to increase your investment by 30-50% over the course of a year.

Try it out for yourself by signing up to a free demo account here

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

A quick word about leverage (aka gearing)

Leverage is what makes forex trading so profitable and so dangerous at the same time. Since you only need to cover your losses and the market fluctuations are small relative to each other, most brokers allow you to trade upto 200 times the amount of money you actually deposit with them. So with a deposit of $50 you can trade upto $10,000 and with a deposit of $50,000 can trade $10,000,000.
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Account types and Spreads

A simple table detailing the different account types and spreads that these accounts provide. Demo accounts are available for each account type. Simply sign up here to try it out
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Started learning how to trade Forex

You may have noticed that despite this being the 4^th article ive posted on the subject Ive titled this article “started learning how to trade forex”. The reason for that is that even though ive opened a demo account (and you probably have by now as well, heres a link to acm broker if you haven’t) and learnt the lingo and how to use my FX trading platform, the trades ive been doing have been a little random…. ok totally random (im still doing suspiciously well though). Trading randomly is a very good way to become very poor, very quickly. As a result the people that do this for a living use a lot of different factors to try and predict the future movement of the currency rate.

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Ask
The price at which a trader will buy a currency. Also known as the offer, it’s the price a seller is willing to sell at.

Base Currency
The currency used as the base to quote a pair. For instance in the EURUSD pair, the EUR is the base currency, in the USDJPY, the USD is the base.
Bear
Someone who believes the prices/market will decline.
Bear Market
A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).
Bid
The price at which a trader will sell a currency.
Bid/Ask Spread
See spread
BOC
Bank of Canada, Canadian central bank.
BOE
Bank of England, UK’s central bank.
BOJ
Bank of Japan, Japanese central bank.
Bull
Someone who believes the prices/market will rise.
Bull Market
A market characterised by rising prices.
Broker
An agent who handles investors' orders to buy and sell currency. In the FX business, no commission is charged as the broker makes money through the spread.

Cable
Dealers slang for the Sterling/US Dollar exchange rate.
Call Rate
The overnight interbank interest rate.
Cash Market
The market for the purchase and sale of physical currencies.
Central Bank
The institution that manages a country’s monetary policy.
Convertible Currency
Currency which can be freely exchanged for other currencies or gold without special authorisation from the appropriate central bank.
Counter party
The customer or bank with whom a foreign deal is made. The term is also used in interest and currency swaps markets to refer to a participant in a swap exchange.
Cross Rate
An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, measured against the United States dollar.
Currency Risk
The risk of incurring losses resulting from an adverse change in exchange rates.
Currency Swap
Contract which commits two counter-parties to exchange streams of interest payments in different currencies for an agreed period of time and to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity.
Currency Option
Option contract which gives the right to buy or sell a currency with another currency at a specified exchange rate during a specified period.
Currency Swaption
OTC Option to enter into a currency swap contract.
Currency Warrant
OTC Option; long-dated (more than one year) currency option.

Day Trading
Refers to opening and closing the same position or positions within one day's trading.
Dollar Rate
When a variable amount of a foreign currency is quoted against one US Dollar, regardless of where the dealer is located or in what currency he is requesting a quote. The exception is the Sterling/US Dollar rate (cable) which is quoted as variable amount of US Dollars to one Sterling.

ECB
European Central Bank.
Exchange Rate Risk
See Currency Risk.

Federal Reserve (Fed)
The Central Bank of the United States.
Fixed Exchange Rate
Official rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates are allowed to fluctuate between definite upper and lower bands, leading to intervention.
Flat / Square
To be neither long nor short is the same as to be flat or square. One would have a flat book if he has no positions or if all the positions cancel each other out.
Floating Rate Interest
As opposed to a fixed rate, the interest rate on this type of deal will fluctuate with market rates or benchmark rates. One example of a floating rate interest is a standard mortgage.
Foreign Exchange Swap
Transaction which involves the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract (short leg), at a date further in the future at a rate agreed at the time of the contract (the long leg).
Foreign Exchange (or Forex or FX)
The simultaneous buying of one currency and selling of another in an over-the-counter market.
Forward
A deal that will commence at an agreed date in the future. Forward trades in FX are usually expressed as a margin above (premium) or below (discount) the spot rate. To obtain the actual forward FX price, one adds the margin to the spot rate. The rate will reflect what the FX rate has to be at the forward date so that if funds were re-exchanged at that rate there would be no profit or loss (i.e. a neutral trade). The rate is calculated from the relevant deposit rates in the 2 underlying currencies and the spot FX rate. Unlike in the futures market, forward trading can be customized according to the needs of the two parties and involves more flexibility. Also, there is no centralized exchange.
Fundamental Analysis
Thorough analysis of economic and political data with the goal of determining future movements in a financial market.

GTC
"Good Till Cancelled". An order left with a Dealer to buy or sell at a fixed price. The order remains in place until it is cancelled by the client.

Hedging
The practice of undertaking one investment activity in order to protect against loss in another, e.g. selling short to nullify a previous purchase, or buying long to offset a previous short sale. While hedges reduce potential losses, they also tend to reduce potential profits.
High/Low
Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day.

Initial Margin
The required initial deposit of collateral to enter into a position as a guarantee on future performance.
Interbank Rates
The Foreign Exchange rates at which large international banks quote other large international banks.

Limit Order
An order to buy at or below a specified price or to sell at or above a specified price.
Long Position
A market position where the Client has bought a currency he previously did not hold own. Normally expressed in base currency terms, e.g., long Dollars (short D.Marks).

Margin
Customers must deposit funds as collateral to cover any potential losses from adverse movements in prices.
Margin Call
A demand for additional funds. A requirement by a clearing house that a clearing member (or by a brokerage firm that a client) brings margin deposits up to a required minimu m level to cover an adverse movement in price in the market.
Market Maker
A dealer who supplies prices and is prepared to buy or sell at those stated bid and ask prices. A market maker runs a trading book.
Maturity
Date for settlement.

Offer
The price, or rate, that a willing seller is prepared to sell at.
One Cancels Other Order (O.C.O. Order)
A contingent order where the execution of one part of the order automatically cancels the other part.
Open Position
Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date.
Over The Counter (OTC)
Used to describe any transaction that is not conducted over an exchange.
Overnight Trading
Refers to a purchase or sale between the hours of 9.00 pm and 8.00 am. on the following day.

Pip (or Points)
The term used in currency market to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point (0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY).
Political Risk
The uncertainty in return on an investment due to the possibility that a government might take actions which are detrimental to the investor's interests.

Resistance
A price level at which you would expect selling to take place.
Risk Capital
The amount of money that an individual can afford to invest, which, if lost would not affect their lifestyle.
Rollover
Where the settlement of a deal is rolled forward to another value date based on the interest rate differential of the two currencies.

Settlement
Actual physical exchange of one currency for another.
Short
To go `short` is to have sold an instrument without actually owning it, and to hold a short position with expectations that the price will decline so it can be bought back in the future at a profit.
Spot
A transaction that occurs immediately, but the funds will usually change hands within two days after deal is struck.
Spread
The difference between the bid and offer (ask) prices; used to measure market liquidity. Narrower spreads usually signify high liquidity.
Stop Loss Order
An order to buy or sell at the market when a particular price is reached, either above or below the price that prevailed when the order was given.
Support Levels
A price level at which you would expect buying to take place.

Technical Analysis
An effort to forecast future market activity by analyzing market data such as charts, price trends, and volume.
Tomorrow to Next (Tom Next)
Simultaneous buying and selling of a currency for delivery the following day and selling for the next day or vice versa.
Two-Way Price
Rates for which both a bid and offer are quoted.

US Prime Rate
The rate at which US banks will lend to their prime corporate customers.

Value Date
Settlement date of a spot or forward deal.
Variation Margin
An additional margin requirement that a broker will need from a client due to market fluctuation.
Volatility
A statistical measure of a market or a security's price movements over time and is calculated by using standard deviation. Associated with high volatility is a high degree of risk.

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