Forex trading involves a decentralized form of global exchange of currencies by different countries against each other. The different countries have their own unique form of currency. In the US for instance we have the dollar. The currency that is in circulation in UK on the other hand is the pound. Forex trading therefore in this case could be a situation whereby the UK buys the dollar while at the same time selling the pound.
The foreign exchange trade, or in other words forex trading, is normally conducted by a broker or a market maker. There are financial centers featured in various places worldwide, which anchor the processes of buying and selling of the different currencies. This task is conducted on a 24-hour period almost on a daily basis, with the exception of the weekends. The value of currencies keeps on changing from time to time, but the forex trader is in a position to choose the value of the currency pair that he/she wishes to trade. For instance 500 USD may cost a trader 1500 Japanese yen at the beginning of the year. Towards the end of the year we may witness a rise whereby the same 500 USD may be worth 2000 Japanese yen. If the trader chooses to end the trade towards the end of the year, he/she would encounter more profits.
When you choose to engage in forex trading, you first of all have to place your order through a broker. The broker would then transfer the order to a partner in the Interbank Market where your position would be filled. As soon as you decide to close the trade, the broker would immediately close your position in the Interbank Market. Depending on the value of the currencies you are exchanging, your account would be credited with either a profit or a loss once the position is closed. This process is so fast that it can occur only in a few seconds.
Range or Trend
Irrespective of how the trading is conducted, with futures, options, stocks or forex, there is always some sort of controversy on whether to trade on range or trade. Trade and range are very distinct pricing properties that required different money-management properties as well as mind-sets. However, the choice between the two can easily be made by assessing the pricing environment, although trend trading remains the most popular choice.
There are basically higher lows in uptrends and lower highs in downtrends. One should join a trend in good time and hold on to the same position until the trend reverses. Trend traders normally make tight stops and always hope the prices would continue moving in the right direction. If the prices change course by any chance there is very little reason to hold on to the trade, otherwise the trader would make losses. More often than not, trend trading normally yields losses more than than profits, thus the desperate need for risk management. Trend traders usually work with a risk allowance of about 1.5-2.5%. Trend traders always strive to make the correct choices since this is very likely to yield enormous profits. Forex traders should be disciplined enough to take continuous stop losses as difficult as this may be. The same process likely to draw massive profits can also result in unbearable losses.
Some of the trends that are beginning to stand out in 2013 include a decline in the pound, a watch on the dollar/yen as well as strengthening of the euro. 2013 is most definitely characterized by some very strong themes, right from around the weekend of January 27th. This period has also been characterized by less resistance and low inflation rates in Japan. Economic data however is quite poor in Japan, yet the forex market is rising in spite of this. The massive rise in the dollar/yen is mainly attributed to political influence from Japan. There have also been some positive signs from the US side, starting from an increase in the job market. The predictive aspect of the current situation portrays a slight drawback before a very high rise in the dollar/yen. Levels as high as those that have not been witnesses since around 2006-2007 are expected to be spotted with the current forex trends.
Diana Wicks is a Canadian MBA graduate in Business administration from the London School of Economics. In addition to contributing to education website DegreeJungle, she works with as a Writer at Demand Studios.