The great thing about volatility in Forex trading is it means there’s money to be made. Forex traders could count on the stability of the US dollar, but with a weakening dollar, emerging market currencies are predicted to go up and even down with predictable volatility, and that means money.
It also means more risk, but we can’t have big rewards without risk, can we? That is unless we run a bank, but that’s another story. This article is about understanding the complexities of Forex trading.
With the Obama Administration breathing down everyone’s neck, it is expected that tighter regulation will shadow the domestic Forex trading community in the near future. For now, Forex trading is partially regulated by the Commodities Futures Modernization Act of 2000, a little piece of legislation which is directly responsible for the liquidity crisis of the fall and the fall of 2008.
In fact, Obama’s hired gun, Tim Gheitner declared on May 13, 2009 that the CFMA would be amended so that regulatory agencies such as the Commodities Futures Trading Commission and the Securities Exchange Commission will govern previously unregulated derivatives and other speculation investing mechanisms. The regulation they propose will mean that a government clearing house such as the government’s Depository Trust Clearing Corp. will monitor each and every Forex investment transaction you make to insure that you’re not doing anything illegal, or that you won’t break the whole system.
Stocks vs Forex
Everyone can wrap their mind around stocks. But trading foreign currencies is a different thing. Forex trading brokers such as FXCM who we featured in another article, now make it easier than ever for novice investors to get their feet wet with Forex trading. Through its website, FXCM.com, the company manages a Forex trading platform that includes a test account feature that allows newbies to learn about Forex trading by trading instead of reading. It’s a great way to learn.
Understanding the nuances of foreign currency trading still requires a heightened understanding of supply and demand. However, where a company’s introduction of winning products or estimate shortfalls could influence a company’s stock, so does a country’s successes, calamities and embarrassments influence the price of its currency. It’s still unclear how those two Japanese men carrying almost $200 billion in US Treasury bonds will affect the US dollar, but rest assured, the incident certainly will. Forex traders should watch world events and trade appropriately.
Like all investing, Forex trading requires a trading account with a registered Forex brokerage. When choosing a Forex trading broker, select the firm that doesn’t charge you your arm and leg for support. As mentioned in the article on FXCM, the company is more than a broker and instead is a dynamic trading platform. FXCM has spent millions developing its software that can be used right through a Web browser in the comfort of your own home. Take your laptop with you to that boring play and you can be making money in no time.
Forex traders can make money through pips, or amassing bid-ask spreads. Bid-ask spreads are the amount the ask price (on a currency) exceeds the bid. This is the difference in price between the highest price that an investor is willing to pay for a currency and the lowest price for which the seller is willing to sell. Understanding this basic principle is key.
Here’s an example. If a bid price is $50 and the ask price is $51, then the “bid-ask spread” is $1. The depth of the spread from one currency to another will obviously be different because of many factors such as GDP, etcetera. Liquidity and financial health of a nation’s currency both play big roles in the spread from one currency to another. Currencies are considered the most liquid assets on the planet because they are, themselves, liquid. However, stocks are far less liquid than currencies, thus they possess larger spreads.
Please don’t choose FXCM just because we featured them in an article. Instead, do your own research. Check them out, and their competitors. Call the company itself. Talk to their people. Get to know them first.
Strategies to Success
There are several proven Forex trading strategies that if perfected could put some nice coin in your pocket. Strategies don’t grow on trees. The best Forex trading strategies come from successful traders who have risked their own money to make money. It turns out that profitable Forex trading is an art form and you’re the artist. In future articles we’ll begin to unfold the mysteries of proven Forex trading strategies.
Understanding strategies is synonymous with understanding the risk, and at the top of that list is leverage. Leverage is an important trading strategy that works like a magnifying glass for increasing your reward for currency price movements. We’ll look at leverage in the future too.
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