intro – forex trading:
Forex Trading is short for Foreign Exchange trading. It is the most liquid global financial market and forms the backbone of international trade and commerce. Despite of this, there is no central exchange or marketplace for forex trading. Instead, forex trading is done electronically, over-the-counter (OTC) via computer networks between traders around the world.
There are a number of variations of products under forex trading umbrella. Such as, forex SPOT, Forwards, Futures, CFD’s and Options. There is also trading in swaps on forex. Namely FX swaps and Currency swaps. Though they sound similar, these two forex swap products are slightly different. Regardless, forex trading in the spot market has always been the largest market because it is the “underlying” asset that the derivative markets are based on.
Forex trading was very difficult for individual investors prior to the internet. Most forex traders were large multinational corporations, hedge funds or high-net-worth individuals. This was because, forex trading required a lot of initial capital outlay, particularly on infrastructure. Following availability of high speed internet and brokers making a secondary market, forex trading is much more accessible. Forex trading is now open to anyone, anywhere in the world, 24 hours a day on weekdays.
Forex trading also benefits from high liquidity. This makes it easy to enter and exit a position in any of the major currencies within a fraction of a second for a small spread in most market conditions. Also, generally speaking, forex trading brokers allow a higher leverage than stock brokers. So, a trader can make (or lose) a lot of money even with a very small decimal point movement in forex prices.
history of forex trading
Forex trading has it’s roots in barter-system, where people used to exchange goods or a service that they could offer, for goods or a service that they required. However, problems arose with this system, when people did not want what the other person had to offer. Imagine buying a hammer from a blacksmith and offering him a leg of lamb, only to find that he is a vegetarian. So, to solve this problem metal coins representing value in gold were introduced.
Around 500 B.C. coins were first manufactured in China, India and Lydia (Turkey). Other western empires (Greek, Persian, Macedonian and Roman) were soon minting their own series of coins with specific values. Metal was the obvious choice. It was readily available, easy to work with and could be recycled. Soon there was global trade between various civilisations, and a method was required to convert coins of one civilisation to another.
This was not a problem, when trading within an empire (like Eastern & Western Roman empire) as everyone used more or less the same coinage minted by the Roman standard. Where different sovereigns were involved, gold or silver standard was used, since all civilisations valued gold and silver. In fact, this continued to be the case up until 20th century.
Once the Gold standard was abandoned in 1971, by the US and then followed by other countries, paper currency became fiat currency(backed by the govt.). And forex trading became free float. Then came electronic computerised networks in the 1980s and 1990’s. This offered real time prices and order execution to institutional traders. And in the 2000’s, high speed internet democratised forex trading. Forex trading can now be done from a mobile phone.
forex trading products
FX SPOT product in forex trading is the simplest and easiest to understand. In this transaction, you buy one currency and sell another currency. The amount exchanged is based on the exchange rate between those two currencies(also called SPOT Rate). The settlement is two days after the execution date, except some currencies like USD/CAD, USD/TRY that settle on T+1.
FX FORWARD product in forex trading is a contract that creates an obligation for the buyer to purchase a currency in the future. This contract also specifies the amount, the currency pair, the forward (exchange) rate and the expiry date. In contrast to an FX Future, this is a bespoke product. Hence it is traded over-the-counter(OTC). It is generally used to hedge future date fx risk by the buyer.
FX FUTURE product in forex trading, is very similar to FX Forward, i.e. a contract that creates an obligation for the buyer to purchase a currency in the future at a pre-agreed rate. However, the key difference is that the quantity and expiry period is standardised. Hence this is an exchange traded product. It is generally used by speculators to profit from future fx rate movements.
FX OPTION product in forex trading, is a contract that gives the buyer the right, but not the obligation, to buy or sell a certain currency at a specified exchange rate on or before a specified expiry date. Options are used for hedging fx risk and also for speculation.
how to start
zero sum game
Many people begin forex trading without fully understanding the fundamentals of the contract. For each trade there is a winner and a loser. It is a good idea to hedge your short term day trading position. For instance, say your focus is long opportunities in GBP. Then, use FTSE 100 index as a hedge. While hedge protects against the downside of price changes, they also limit potential upsides as well.
Long-term success in forex trading comes from mastering three disciplines. If you are a successful forex trader, you are probably familiar with these rules. Firstly, you need a proven process that works. Secondly, sound money management can go a long way to helping you win the forex trading game. Finally, any day your emotions control your trading, you are likely to lose.
As an individual in the forex trading arena, you are up against the biggest and the best in the world. So, it is important to get access to tools that experienced traders use. Otherwise, you are playing with a handicap. Experienced traders have models to calculate the fair rate of a forex pair. And to decide whether to play short term or long term market correction game. For instance, STOKAI is one such tool. You can read more in FAQs on how to achieve this.
Go through books and papers on forex trading written by well known authors. Generally, thrill seekers tend to dive in straight into the markets. But, there is no skipping ahead when it comes to financial markets. Each successful trader has had their elbows in the mud. Read and learn the basics or lose money.
Do you have a lot of capital for trading? Capital availability affects many choices. The first is whether you should open a retail brokerage account or a proprietary day trading account. Generally, $25,000 is the cutoff point. With $25,000, and four times leverage you can trade like a high capital trader with $100,000.
With a low-capital account, we need to find strategies that can utilize the maximum leverage available. Of course, getting a higher leverage is beneficial only if you have a consistently profitable forex trading strategy. With a low capital, you will always be chasing high risk trades to make a reasonable profit.
An experienced trader has strong risk management practices and emotional stability. Hence, doesn’t need the guidance given by a proprietary firm. But, less experienced traders may benefit from the imposed restraints.
best price execution
Generally speaking markets with higher trading volume guarantee better prices than less liquid markets. This also means that brokers spreads are smaller. The top 5 traded currency pairs are EUR/USD, GBP/USD, USD/JPY, AUD/USD and USD/CHF.
Finally, the soft skill needed in trading. Fear, anxiety, and greed are common traits in everyone. Keeping them under control is an ongoing effort. When they take over, your trading results will suffer. Instead of fear, some of you are planning to trade because of the love of thrill and danger. Or an incredible self-confidence that instant wealth is imminent. This is also a dangerous emotion to bring to trading. And, this is why almost 70%-80% of retail traders lose money. Instant wealth is not the objective of trading. Therefore, the ideal trader is someone whose emotions have found the right balance between fear and greed.
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
so what next?
STOKAI provides daily prediction using algorithms based on all factors that impact forex trading. Then, it evolves the forecast over 10 days in the future. Tutorial and brief user guide is available here – Tutorial. If there are any issues, please contact our customer services team.
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.