Trading currencies online

The FOREX market

The foreign exchange market is the largest market in the world, its liquidity is provided by multinational industries, large banks and qualified investors.

In simple terms with each foreign exchange transaction, you are buying one currency and selling another. So if you were looking for a currency to outperform, you would buy that against one that is underperforming.

Exchange rates fluctuate due to monetary flows caused by changes in interest rates, inflation and growth. Anyone can enter this market and its main advantages are the low dealing costs, high leverage, ample market liquidity and 24 hour trading.

There are many way to trade currencies:

1. Day trading: Positions are open and close on the same day and some only last for a few minutes.

2. Long trading
Trade occurs over several days, weeks and even months according to market conditions.

Forex trading is always done in pairs, since any trade involves the simultaneous buying of a currency and selling of another currency. There are a vast number of currency pairs which are freely tradable in the FX market, giving the speculator many investment opportunities. These range from the Majors currency pairs (EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD and USD/CAD), to the Cross Rates (any currency pair not including the USD such as EUR/GBP), to the Emerging Market currencies (such as the ZAR, MXN, and TRY) and each pair has its own Bid/Ask rate, for example:

Pair	Bid	Ask
EUR/USD	1.5767	1.5769
GBP/USD	1.9780	1.9782

When a trend is taking place in a Forex pair, the price movements start to form peaks and valleys in the chart of that pair, which are easily identified. During an upward trend, the price movements form a series of ascending peaks and valleys. It's important to note that during some trading days the trend is hard to spot, some trading days show no trend (the price movements form a Range), and of course you're bound to run into the occasional reversal, so this is not a perfectly accurate or 100% reliable indicator for trading.

It is easier to make money with a trend than with a trading range. While you can still make money in trading ranges, you have to be more nimble on your feet, and ready to jump in and out of the markets at all times. Needless to say, this makes the trader's life a lot tougher. Trading ranges can be really messy and unpredictable, which is why you should always look for trading trends. It's a good idea to stay out all together during a range, and get back in only when the markets start to trend again. As a general strategy, it is best to trade with the trend rather than against it, meaning that if the general trend of the market is headed up, you should be very cautious about taking any positions that rely on the trend going in the opposite direction.

Margin trading
As foreign exchange is a leveraged product, you will only be required to place a 3% margin deposit for overnight positions, or 1% intraday. A good risk management strategy is therefore essential, as potential profits or losses can be large.

Money Management

There are significant opportunities and risks in foreign exchange markets. An efficient risk management system must therefore be adhered to with the use of protective stop-loss orders. As the market is open 24 hours a day, there will always be an opportunity to react to a price movement, with a low risk of not being able to exit a trade close to your stop-loss level. The only risk to this scenario would be a weekend event such as an election result, or a G7 meeting, but we would be aware of such events beforehand.

Leverage

Leverage is a very important part of Forex trading, and it's critical that you know exactly how it works and how to use it. It is the term Forex traders use to refer to the ratio of invested amount related to the trade's actual value.

Online brokers usually provide their customers with the option to trade on borrowed capital, so that traders don't have to invest tens of thousands of dollars to make any real profit. When you trade at a leverage of 1:100, or X100, it means that for every $1 that you invest in the market, the broker invests additional $99. As a result, you can control an amount of $10,000 by investing $100. eToro provides traders with the opportunity of trading at up to 1:400 leverage.

It probably won't surprise you when we say that with greater opportunity for profit comes greater risk. Just like slight fluctuations in currency rates can make you significant amounts of money, it can also cause you to lose your money very quickly. The higher the leverage, the larger the profit that you stand to make and the quicker you might lose your investment. A leverage of 1:400 can make you more money than a leverage of 1:100, but it also puts your initial investment at more risk.

Spread

As you may have noticed, a currency pair quote comes with two displayed rates for instance, GBP/USD 2.025/2.028. Those refer respectively to the bid price (the rate at which you may short sell the pair) and the ask price (the rate at which you may buy the pair). The spread is the difference between those two rates. The tighter the spread, the more advantageous it is for you. Finotec offers spreads as low as 3 pips on the main currency pairs.

Trading example
Imagine that you sold $100 worth of EUR/USD with a leverage of 1:100 at the exchange rate of 1.5558.
The details of your trade are:

EUR/USD	1.5558
Investment	$100
Leverage	x100

So what you've just done is sold (100X100=) 10,000 USD worth of EUR. Now, less than an hour later, the EUR/USD rate has decreased to 1.5533. (A minor change of -0.15%).

The difference between the open and close rates is 25 points. (1.5558-1.5533=0.0025) In the EUR/USD each point represent 1 USD which bring us to a profit of 25$ over this short-term small-size trade.

EUR/USD (Sell)	1.5558
EUR/USD (Buy)	1.5533
Difference	0.0025
Points	25
Profit	$25

This means that this seemingly insignificant fluctuation in the rate allows you to cash in $25 from an initial investment of $100. In other words you just made 25% profit on your investment, thanks to 0.15% movement in the pair's rate.

Trading risk

As a mostly speculative activity, forex trading involves many risks. In two words, forex trading risks are mainly about losing money. That's why Forex Money Management is so crucial when it comes to forex. Traders must have a plan and stick to it no matter what, or else they might lose their shirt in a matter of hours – that’s why you must never trade money that you need to survive. In fact, one of the ways to approach forex trading is through risk management. Much of how you trade is actually defined by your risk profile: are you someone who likes taking risks, hates taking risks or someone who is generally apathetic to risk?

Depending on your answer to this question, you will build your own customized trading strategy. Having a trading plan and sticking to it is the only way to make forex trading profitable and to avoid the main forex trading risks. When trading forex, risk management makes up a big part of your plan. To define a clear trading plan, traders must define several points:

* When to trade: what timeframes are best suited to your trading routine? Are you more of a day-trader – someone who trades over a couple of days, usually aiming for 10 to 50 pip profits; an intra-day trader – this category of traders is also known as “scalpers”: they trade on time frames of a few minutes and make a large number of deals for profits usually ranging from 5 to 10 pips; a swing trader – these are professional traders who open positions over several days for profits ranging from 50 to 100 pips; or a position trader – meaning that you make less transactions over a longer period of time for profits ranging from 500 to 1000 pips.

* What tools do you base your trading strategy on? Whereas intra-day traders and day traders will generally make their trading decisions according to technical analysis, position traders usually trade according to fundamental analysis. As for swing traders, they usually use both.

* Which products do you trade? Some products such as options are more complex than others and will therefore be traded by more seasoned traders. Choosing the right product is also essential when it comes to trading strategy.

* And last but not least: what risk are you willing to take? According to your money management system, you will define a certain percentage of your capital you are ready to loose, and set margin, leverage and stop-losses accordingly.

The extent of forex trading risks is equal to its potential profitability. Indeed, since forex is a leveraged market, it allows for huge profits but can also lead to huge losses. That’s why we recommend traders new to the field to use a relatively low leverage level at the beginning. That way, you can test your overall strategy without risking too much. If you lose, you can readjust your strategy and still have enough money to get back into the game.

In brief, the main forex trading risk is losing money. However, with a sound trading strategy, solid money and risk management plan and a cool head, you may limit and minimize your losses while maximizing your profits. It is also to be noted that with Finotec, in order to prevent over-ambitious traders to lose what they can’t afford, you cannot lose more than your initial deposit. If a trader reaches that point, part or all of his positions will be closed to avoid.