The Complete Guide To Forex Trading And How It All Works

The Complete Guide To Forex Trading And How It All Works

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FOREX TRADING

Every single days, banks that are internationally recognized, work together in tandem to set the current market price of the value of one currency as demanded against another currency. And that is what is called forex trading. It is the largest market in the world even the stock markets plays second fiddle to it.

How It Works

Trading floor

It mostly uses financial institutions that are authorized to trade currencies. The banks are referred to as the dealers. Their main job is to exchange the large amounts of currency that pass through each day. They rely on economic levels to determine the value of currency in relation to another.

Basically, here is how it works. One group or entity purchases a certain quantity of one currency by paying with some other currency which is equivalent in accordance to the economy and interest rates.

It always comes in handy when trading between two different currencies because one can be paid in foreign currency without any mishaps or misunderstanding.

Trading floor

What Makes It So Unique? 

  • Its trading represents the largest asset class in the entire planet. It helps with the issue of liquidity which makes trade between countries with vastly different currencies work faster and better.
  • It is not geographically fixed in one place. It is a vast network that encompasses the entire world as long a there is a financial institution that can change money.
  • It trades for the entire day never going off except on weekends.
  • There is the use of leverage to enhance profit and loss margins; all of this is directly related to the account size.
  • In the world of money exchange across different currencies, there are a lot of factors which affect exchange rates and they are all considered a big deal in economies worldwide.

Fun Fact: because of its unique nature, it has been considered the closest thing to the business ideal of perfect competition that we’ll have, despite the difference in currencies that go through this market daily. 

Where It All Began

We’ve heard the story where Jesus walks into the temple in Jerusalem and canes a bunch of money changers who were trading in the holy place. There have been moneychangers in history from ancient biblical times.

Since civilization started, there have been forex traders to help with the exchange of currencies and develop trade across ancient kingdoms. From there it has developed and is now integrated inextricably linked to banks.

Most Unique Market 

The foreign exchange market is the most liquid market in the whole world. Traders in this market include:

  • Governments and their central banks
  • Currency spectators
  • Commercial banks
  • Finance institution investors
  • Corporations and companies
  • Lone individuals

Businessman

All these people can agree that the forex market is probably the most favorable kind of market in the world.

FOREX SOFTWARE

Mostly referred to as the automated forex trading software, this is the method of forex trading that has replaced forex traders who used to handle the grueling work on behalf of the clients.

It was needed as it would eliminate the factors that led to errors and losses or mistakes. Every single person who wants top exchange money safely, needs a trader who is smart, emotionally balanced, logical like a Vulcan, alert to the changes in exchange that maximize profit and who makes the exchange as soon as the opportunity presents itself.

That was why this software was developed. It does everything from scanning the market, identifying the most profitable trades and using the commands programmed into it, makes the trade on behalf of you.

Is It Complex?

Well, whether you began trading yesterday or an hour ago, this software is basically made to help you make that easy trade. It is simple to understand with a user interface that is interactive and simple. One does not need to be a geek to use this software.

There are different types of this software, all with different levels of sophistication and they all perform the same function. The only difference between them is the level of performance and the features available in it.

They are not entirely flaw free but they’ll do a better job than a human, generally speaking. In product reviews of this software, you will find the virtues and flaws of the aforementioned programs outlined and in this way you can be able to determine what is best for you.

Don’t Forget: these programs are far from flawless and owning them doesn’t mean you will have a streak of endless victory in the forex market. 

What Is So Good About It?

Millions of money in the room

I’ll tell you what’s so good about it. You would not want an emotional trader subjected to the daily barrage of forex trading complexities trading for you. This line of work is highly stressful and no human can keep track of all the changes that take place at all times.

That’s why it is so cool to let the programs do it for you. Just REMEMBER, it is not perfect but it is better than an emotion induced human making the trade for you. Just don’t think it will do it all for you. You’ll have to monitor it for any glitches and keep track of its performance.

Here Is How It Works

It is a program run in a computer to analyze the current currency price tables in relation to market activity. These programs will then identify signs and fluctuations in the trading, which include all unusual occurrences, and make the decision to trade on behalf of the user.

It will locate profitable trades and point them out. All you have to do is allow it to go ahead and do the trading for you.

Woman feels excited

Before You Start Using It

 Take it for a test drive to see if it indeed delivers as promised by the people who sold it to you. There are also the user specific needs that include speed, performance, the ease of use and the flexibility of how you can program it to do specific functions for you.

When electing these programs, consult the people who have had success with it and get to know what the best one to get for you is. Some may be good but hard to use and others may be simple but not that effective. That’s why you have to know what you want before you get it.

Fun Fact: it is also known as robot trading, algorithmic trading, black-box trading and automated forex trading program.

Why Foreign Markets Are So Much Better Than Domestic Ones

Dollar in a grass

Well, this is mostly the case because of the scale involved, the amount of trading done and the need for intensive methods to do it better.

Domestic Markets– this is the marketing or trading done within the borders of a single nation. It is in layman’s terms, home trading.

Foreign/International Markets– it refers to the activities of trade that are done over a large geographical area, mostly between several states that more often than not have different countries. As the name suggests, it is between different nations.

The Differences between the Two 

Domestic markets and foreign markets operate on different levels with different amounts of capital and the differences are vast.

  • The domestic markets serve a smaller are geographically than international markets obviously.
  • In domestic marketing, there is few interferences from the government while outside trading which has higher takes is totally riddled by governments influence to ensure no mistakes are made.
  • The risk factor is lower in domestic than in foreign
  • Domestic markets are for single nations and foreign markets include more than one country
  • The technology levels are higher in foreign markets. This is because of the sophistication required in larger markets.
  • The capital required is obviously bigger in foreign markets than in domestic markets
  • The variations in taste and preferences of the customers, is different between the two markets.

The Why? 

From the differences outlined above, it is clear why the foreign markets are better. They operate on a larger scale and they have more resources at their disposal. They need more technology, more money and basically more of everything.

In large markets, it is important that the ease of business be present due to the factors that are involved. They are too many and keeping in track with them would be tedious. The people who trade are more and it is important that they all maximize on their profits.

Don’t be subject to lapses of human judgment that could wipe you out clean. However, it is IMPORTANT that you remember, human judgment has been I use longer than a lot of these new methods. Sometimes, the automated programs fail to detect an ambience in the atmosphere that could be signs of a fallout or bad day.

Sometimes, not everything reflects on the charts, at this time, you will have to depend on human expertise to guide you through the process.

The Most Successful Forex Traders Alive Today

Dollars in a bowl

One thing about the ‘players’ as they are called is that they both have some really good qualities that make them the biggest and the most powerful.

Here, I will not give you a list in the Forbes magazine formats (richest in descending order). I’ll just mention the biggest five names and tell you what they are famous for.

  1. George Soros

This giant player was born in 1930. He fled from Hungary which was under Nazi occupation in the year 1954 during the Second World War. After a career with several firms in the finance business, he established the Soros Fund Management in 1970.

Since then, he has generated an approximated $40 billion in profits in the just the last fifty years. His claim to fame was the short-selling of $10 billion that he did of the British Pound Sterling in 1992. He ended up breaking The Bank of England and netting a profit of $1 billion in just that one day.

Right now he is one of the wealthiest individuals in the world due to that highlight in his career. He has written books on investing and has donated over $7 billion in charities.

  1. Stanley Druckenmiller

This hugely successful man worked with George Soros in the Bank of England trade that also saw him rise to stardom. He was born in Philadelphia and grew up in a modestly well to do family. He formed his company, Duquesne Capital Management after he left the Pittsburg bank.

He managed money for George Soros for several years and when he was the portfolio manager at Quantum Fund, he had a pretty good streak that saw him enjoy success. His fame was increased by the feature in the best-selling book The New Market Wizards which was released in 1994.

He quit and closed his hedge fund in 2010 after he survived being crushed by the 2008 economic collapse.

  1. Andrew Krieger

On October 19, 1987, the markets crashed and it was at this time that Krieger was working for Banker’s Trust. He joined this company after leaving the Solomon Brothers. Because of his success, he was given a capital limit of $700 million, much more than the limit of most of his co-workers.

When the crash (black Monday) of 87’ hit, he was in the perfect position to benefit greatly. He focused on the New Zealand Dollar, where he applied a very unusual leverage of 400:1 which in the forex markets is a big deal, a big risk and he netted $300 million. He walked away from the company with $3 million after that trade.

  1. Bill Lipschutz

He started trading while he was a college student in the 1970s. He had his first real success when he turned $12,000 into $250,000. He made a poor decision with that money and he lost it all at once.

He worked for the Solomon Brothers in 1982 while pursuing and MBA degree. It was at this time that forex markets were becoming a big deal and he joined this division in the Solomon Brothers Company. His success was big as he earned $300 million every year for the company by 1985.

He stayed at the company until 1990 and went on to join Heathersage Capital Management where he is a director of portfolio management.

  1. Bruce Kovner

As a man who has always excelled in mathematics, it is inevitable that he could make the big decisions that matter and has made over $300 million a year from forex trading only.

He was born in 1945 in Brooklyn, New York and started trading in 1977. He bought soybean futures contracts and made a profit of $20,000. He went on to join Commodities Corporation as a trader. He gained fame and a solid reputation as he was making millions in profits.

In 1982, he formed Caxton Alternative Management, which he turned into one of the best hedge funds company in the world. He was a big player for a long time until when he decided to hang up his boots in 2011.

He is mostly reclusive and few people know him except for those who dabble in the forex market and a few others.

The above are the biggest names in the forex market and they have either left a mark or made so much money it becomes a bit challenging to wrap your head around it. It’s all about the confidence and risk taking nature while exercising cautions that got them where they are. 

Are Forex Markets Safer Than And More Diversified Than US Markets In 2017?

The forex market is unique in its own operations and the differences between its operations and that of the US markets is also high.

The way it operates is diversified because of the currencies used and all the details that go into making the trades. To get to see the differences, we have to take a look at what sets it apart from other markets.

  1. Size 

The forex market is huge. It covers a lot of countries and vast amounts of money that flows around daily. At $4 trillion a day, it is the biggest market making all the other markets look miniscule in comparison. Not even the stock markets can compete with the forex business.

The added volume has an advantage to the traders, in that they receive execution of a higher amount and profits in the millions per day. While other markets have gaps and bottlenecks curbing operations, the forex markets are free and with few restrictions.

Due to the clarity in money changing, the forex trading markets move around vast amounts of money a day ensuring liquidity and entering the markets or leaving them is easy. Also, the liquidity makes it easier to trade an instrument; it means lower transaction costs and a tighter spread.

  1. Cost of operation

Most forex accounts trade without being charged commission and there is none of the expensive fees levied on license to trade. The cost of trading is usually clearly displayed when you are making a transaction and this is different from other markets.

You can always calculate the amount you’ll be charged to make the exchange and this is usually clearly displayed when you want to change.

In other markets, you will find obscure and unknown fees deducted to cover expenses you didn’t even know were there.

So, yes, forex is safer and easier to trade with than the US markets. The transparency and ease of understanding what you are doing make it more desirable.

  1. The details

There are 8 major currencies in the world and this makes it easy for one to know what is trading at what amount and how they can change and trade easily. In the New York Stock Exchange, there are 1867 companies listed.

It is safe to say that even if you are a prodigy with a remarkable memory, it would be very hard for you to choose one where you can invest in their stock. This makes it very difficult to work with the US markets than with the Forex trading.

It is conclusive that the diversification of the forex trading markets and their safety is indisputable. They have a clear way of trading that does not include any of the mind boggling details in the other markets.

Bottom Line

Entrepeneur

From the topics so clearly illustrated above, we can deduce that, forex trading is the pinnacle of trades and the mother of currency trading. Exchange of trillions of dollars and easy rules make it all happen smoothly without any scandals whatsoever.

However, it is fraught with risk and people will often lose everything in one single bad decision. These markets are as close to the ideal perfect market as you can get. We have outlined the technology, the differences and the advantages of being a trader in the forex market.

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