Time To Make Some Money in Trading Forex

Trading Forex – Time to Make Some Dough

Time To Make Some Money

We are going to use some fundamental analysis in the following examples to help us decide whether to buy or sell a certain currency pair.

Fundamental analysis has been taught during your economic class, but if you were asleep during that time, then don’t worry. We will cover the basics of analysis in a later lesson pretty soon.

As of this moment, you need to pretend that you know what’s happening in trading forex.

Trading EUR/USD

In this kind of example in trading, the Euro is considered to be the base currency, thus the basis for the buy/sell when trading.

In this case, if you think that the U.S economy will continue to weaken & deteriorate, which is certainly bad for the U.S. dollar, then you would perform a BUY EUR/USD order. By doing so, you have purchased euros in the expectation that they will increase versus the U.S dollar.

In different scenario, if you think that the U.S economy is getting stronger and will continue to get stronger while the euro is weakening  against the U.S dollar, then you would perform a SELL EUR/USD order. By doing so, you have sold euros in the expectation that they will depreciate versus the U.S. dollar.

Trading USD/JPY

In this kind of example in trading, the USD is considered to be the base currency, thus the basis for the buy/sell when trading.

In this case, if you think that the Japanese government will continue to weaken & deteriorate the yen in order to help its export industry, then you would perform a BUY USD/JPY order. By doing so, you have purchased US dollars in the expectation that they will increase versus the yen of Japan.

In different scenario, if you think that the Japanese investors are pulling moolah out of US financial markets and converting all their US dollars back to yen which will certainly hurt the US dollar, then you would perform a SELL USD/JPY order. By doing so, you have sold US dollars in the expectation that they will depreciate versus the yen of Japan.

Trading USD/CHF

In this kind of example in trading, the USD is considered to be the base currency, thus the basis for the buy/sell when trading.

In this case, if you think that the Swiss franc is overrated, you would perform a BUY USD/CHF order. By doing so, you have purchased U.S. dollars in the expectation that they will appreciate against the Swiss Franc.

In different scenario,  if you believe that the U.S. housing market weakness will hurt economic growth in the future, which will certainly weaken the dollar, you would perform a SELL USD/CHF order. By doing so you have sold U.S. dollars in the expectation that they will depreciate against the Swiss franc.

Margin Trading

When you want to buy an egg in a grocery store, it is uncommon to just buy a single egg. You can’t just buy one egg at a time. You need to purchase a dozen or “lots” of 12. Right?

In forex trading, it would be a silly situation to buy or sell 1 euro, so they usually come in “lots” of 1,000 units of currency (Micro), 10,000 units (Mini), or 100,000 units (Standard) depending on your broker and the type of account you have. We  will discuss “lots”  later.

“I’m not rich! I don’t have enough moolah to buy 10,000 Euros! Can I still join forex trading?”

The answer is a big, YES!

You can certainly join forex trading through margin trading.

Margin trading is simply the term used for trading with borrowed capital. This is how you’re able to open $1,250 or $50,000 positions with as little as $25 or $1,000. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital.

Let’s discuss it.

Okay. Take note of this explanation as this is very essential when trading forex using Margin trading process.

1. You believer that the market signals are suggesting that the British pound will rise versus the USD.

2. You open 1 standard lot, that is 100, 000 units GBP/USD, purchasing with the with the British pound at 2% margin and wait for the exchange rate to increase. When you buy one lot of 100,000 units of GBP/USD at a price of 1.50000, you are purchasing 100,000 pounds, which is worth US$150,000 (100,000 units of GBP * 1.50000).

If the margin requirement was 2%, then US$3,000 would be set aside in your account to open up the trade (US$150,000 * 2%). With this kind of situation, with just US$3, 000, you now manipulate and control 100,000 pounds.

Margin topic will be discussed more in-depth in a while, but I hope that you’re able to understand the basic idea of how it works.

3. Your predictions and conjectures come try and you decide to sell. You close the position at 1.50500. That earns you $500.

Trading

When deciding to close a position, it is expected for the deposit that you originally made to be returned to you and a computation of your profits or losses will be done.

The profit or loss is then credited to your account.

Some brokers allow market players to have custom lots in forex trading. This is due to the development of of retail forex trading. This process allows you not to trade in micro, mini, or standard lots! If 1,542 is your favourite number and that’s how many units you want to trade, then you absolutely can.

Rollover

Wait a minute! This is not the same thing from your cellphone operators! For positions open at your broker’s “cut-off time” which is usually 5:00 PM EST, there is an everyday to day rollover interest rate that a trader either pays or earns, depending on your established margin and position in the market.

The established end of the market day is at 5:00 PM EST, thus if you don’t want to earn or pay an interest on your current positions, make sure they are closed before the market day ends.

You have to remember that currency trade involved borrowing one currency to buy another, thus interest rollover charges are part of the forex trading. Interest is paid on the currency that is being owed, and earned on the one that is purchased.

Also, it is important for you to remember that if you are purchasing a currency with a much higher interest rate than the one you are owing, then the net interest rate differential will be positive, that is USD/JPY, and you will gain funds as results.

On the other hand, if the interest rate differential is negative that you will have to pay.

For more information about rollover, it is a good idea and practice to ask your broker or dealer.

Also note that many retail brokers do adjust their rollover rates based on different factors (e.g., account leverage, interbank lending rates). Please check with your broker for more information on rollover rates and crediting/debiting procedures.

Below is a chart to help you find out the interest rate differentials of the major currenry pairs. The data below is accurate as of 10/4/2010.

Trading Forex

In our next lesson, you will learn and understand all about how you can use interest rate differentials to your reward. Trading forex is getting exciting, isn’t it?

Proceed to the Next Lesson: Pips & Pippetes

Go Back to the Previous Lesson: How You Make Money in Trading Forex

Comments

comments

Powered by Facebook Comments