How Forex Works And Why You Should Start Trading Now

This article is not going to teach you strategies on how to make money on Forex. My main reason for writing this is to share the excitement and experience in getting my hands dirty, as it were, and hope you too might as well consider delving into it and see if it’s something you can eventually do for a living or, at the very least, use it as an alternate source of income to help get rid of financial woes.

You need to know that in Forex, it’s not always a winning trade. I win and lose some. It’s a learning process. The important thing is that you establish a strategy for yourself that minimizes your loses and maximizes your winnings. Forex is a real money generating machine and it will continue to make money for those in the know. Why not become one of those who rake in boatloads of money from the comfort of their homes? All you need is a little knowledge, which incidentally, in life, is one major key to success. If you’re the slightest bit interested at this point, let’s us take a look on how Forex works.

The Basic Concept of Forex Trading

[quote]Forex plays a vital role in the world economy and there will always be a tremendous need for the foreign exchange (Brian Campbell, Insider Secrets of Online Currency Trading). 1[/quote]

In essence, the foreign exchange has to exist so that a country like Japan can sell products to another country, say, the US, and be able to receive Japanese Yen in exchange for US Dollars.

For those who do not know it, Forex does stand for something: Foreign Exchange. Believe me, I didn’t know this too until after I read the book mentioned above.

On a side note, trading currency is different from trading stocks.

[quote]Unlike stocks, futures or options, currency trading does not take place on a regulated exchange. It is not controlled by any central governing body, there are no clearing houses to guarantee the trades and there is no arbitration panel to adjudicate disputes. However, this arrangement works exceedingly well in practice; because participants in FX must both compete and cooperate with each other, self regulation provides very effective control over the market. Furthermore, reputable retail FX dealers in the United States become members of the National Futures Association, and by doing so they agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies do so only through an NFA member firm. 2[/quote]

So how do you make money in Forex?

There are two basic ideas of making money in Forex:

Going Long – buy currency pair at one price and then sell it later at a higher price. For example if you buy USD/JPY, you are basically buying the USD and hopes to sell it later on a much higher price. The difference will become your profit.

Going Short – sell currency pair first at one price and then buy back later at a much lower price. This is known as short-selling.

In traditional stock investing, you basically do the “buy low and sell high” approach. In Stock market, short selling is highly discouraged because short selling has a much larger risk. Fortunately, Forex is different. You can make money in both directions. And the biggest excitement about Forex is that, it changes not in months, days, or hours and not even in minutes. Currency trading changes every second to every fraction of a second and therefore opportunities to make money goes on continuously 24 hours a day.

chart showing a winning trade

An example of a winning trade where you buy a currency pair at one price then exit by selling it at a higher price.

The Price Of Not Acting On Opportunity

It took me many years before I got myself into Forex. My half-brother has an uncle who was purported then to be making big money in Forex trading. The way he told me about the story did not incite any enthusiasm enough in me to go and venture into the same thing. In retrospect, it was mainly his lack of pertinent information about the biggest financial market in the world. I also knew that his uncle operated a money exchange shop, which, I always assumed, is how he makes money from Forex. Only recently did I learn that Forex trading can also be done in a local bank. You really do not need to run a money exchange shop to be involved in trading.

That was 23 years ago. I was at the age where technical terminology like stock exchange, conversion rates or running a money exchange shop was like trying to understand the Martian language (if that even exists). The idea of even trading in a financial market became virtually impossible for me to consider. Everything was simply daunting and overwhelming. Hence, whenever I heard “Forex”, I merely shrug my shoulders and move on. This was what I was doing until I came across Brian Campbell’s book about four years ago and truly understood how Forex works. I got excited with the new information gleaned from the book but almost instantly deflated as concerns and doubts started coming in. I live in the Philippines and I wasn’t sure if there’s a platform that can work here or if one even exists here for that matter. Those questions were enough to douse off whatever was left of the excitement I initially had. What I should have done back then is check the information.

I started in Forex only a year ago but I”m very happy with what I’ve achieved to date. If only I did this the first time I heard about it, I would have profited big time and be trading on a better margin by now. As it is, I’m still trading on the lower prices to keep my trade within a usable margin but that is slowly changing as I progress.

Brian Campbell ebook - Insider Secrets Of Online Currency Trading

The book of Brian Campbell that taught me how to trade in Forex

Why You Should Start Trading Now

I guess the most compelling reason for getting into Forex is that you’re losing money if you are not doing it now.

People are making money with it and there’s no reason you shouldn’t do too.

I have to say that, contrary to common belief, being in the foreign exchange scenario is also fun and exciting. In the society I live in, people go WOW when they hear I’m in foreign exchange or Forex. Some of my friends even regard me as an economy expert or someone that studies and weighs one country’s economy against another. Well, I have to admit that this is what you have to do when you venture into fundamental analysis. You need to snoop around, check for economic indicators, and figure out if these indicators will have an effect on currency price movements. In reality, it’s pure common sense. You really do not need a degree in economics to understand what the trend is or where its going to go.

When you trade currency, you exercise virtually all your brain cells as you go about utilizing all your resources to research and study different indicators that may have effect on currency price movements. You will definitely be using your time more productively as, at the very least, you get more knowledge as a result of these researches and analysis. Furthermore, you will also learn to develop and improve your patience as well as learn how to control your emotions. If you trade emotionally, you lose. You need to trade smart and plan ahead. Think of currency trading like one of those strategic games in your computer. Unlike those games though, you make real money with currency trading.

Did I mention convenience? Well, here it is. You can trade anywhere. When I found out about this, I was ecstatic. I’m not the kind of guy that stays stuck in the house the whole day and facing the monitor. I enjoy the outdoors a lot and take every opportunity I can spare to indulge in it. I do not worry about losing track of the currency exchange since I can check it at will through my smartphone. Wherever you are, in or out of town or country, out for vacation somewhere, in a hotel room or your own bedroom, in your kitchen (or your neighbor’s kitchen), you can manage your trade and keep on top of the game. You really don’t need an actual office at all. You can manage your trading at your favorite coffee shop or fast food chain outlet or practically anywhere where you can find Wi-Fi. How’s that for an economy expert?

Managing Forex trading using a mobile app

Here’s how it looks as I manage my Forex trading and check up on my progress almost everyday using my cellphone. The mobile app can be downloaded from FXCM.com for free.
Some details are covered for security reasons.

Forex-related news straight from my smartphone

Up-to-date currency-related news is also available straight from the FXCM app in my phone.

Trading In Forex Is High Risk

As with all other ventures that involves money, currency trading also involves a certain degree of risk. You have the opportunity to make huge scores but there’s also the possibility that you lose big too. Believe me that it happens to many as it happened to me as well. It will also happen to you. Forex may not be for everyone. Although a certain degree of smartness is needed in trading, what really hits most of the new traders is when they base their actions on impulses or emotions instead of a calculated decision based on a little study and research. I cannot stress that point enough: when the emotions take over, you’ve already lost. It truly is essential that you study the trend/s carefully and act according to your analysis – free from any emotional influences. Take it from me, this is a first hand experience I won’t ever forget.

Patience is definitely a virtue when you’re into currency trading. Timing is crucial as you have to decide when to enter or exit. Price movements are constantly going up and down so when you are making money, exit the soonest possible time and place a new winning trade. Control your greed if it arises since the temptation to “make the most of it” is very strong. If you let greed hold you, it will kill you.

I really am not an expert in the art of trading currency and yet I have already amassed a humble fortune since I started. I strongly suggest that if you dive into Forex trading after reading my article, first take the time to study what’s involved. If ever possible, consult an expert that can guide you better. Read strategies from articles written by real experts. You might also want to beef up your knowledge by checking out books about Forex. There’s no such thing as too much information as long as you know what to do with it.

losing trade in Forex

An example of a losing trade as shown from my mobile device.
Some details are covered for security reasons.

As a disclaimer, I don’t take responsibility for any losses or damages you might incur as a result of reading my article. This article is intended for informational purposes only. If you wish to be guided in Forex, you should seek professional advice. As I’ve mentioned earlier, I win some and I lose some. It’s not always a winning trade, which is part of the learning process. That is why it is very important to build your own winning strategy that maximizes winnings and minimizes losses. I said “build your own” because it is important not to listen to others. You will see people or groups of people in forums, emails, chat rooms, and membership sites saying something like the EURO will win against the US Dollar or vice versa. This kind of talk is a form of disinformation. It is usually and attempt to manipulate the game and definitely does not work in your favor. You can only count on yourself. Do your own analysis and homework and don’t be pulled into the falsehood.

You should also take your age and the amount of money you’re willing to use in Forex into consideration. As a general rule of the thumb, you should only trade money that you are willing to lose. If you are young, say, around mid-twenties, you could probably be a bit more aggressive or bolder and trade big amounts if you can. In the event of a loss, you have a lot of years to recover from it and gain tons of experiences. If you’re in your 40’s or 50’s, its probably not a god idea to trade in all the money you get from selling off your house and lot, right?

Generally, start with an amount that you’re willing to lose. That way, it won’t hurt that much. If you win, see if you can get rid of that grin on your face on your way to the bank.

Conclusion

Now that you have an idea of how foreign currency exchange works, go ahead an get your hands dirty. I recommend you start with FXCM.com where I have an account with. FXCM is a member of National Futures Association. I don’t earn any commissions for recommending FXCM. Its just that I trust them already as I have been using them to trade Forex and I’m happy with the service they provide. They offer two types of accounts. One is a real account and the other is a demo account. The latter is used for practice trading without the need for real money, hence, no risk whatsoever. What you get from the demo account is the priceless gift of building your own strategy that you can use to trade in Forex once you’re ready to use real money. Do not apply for a real account unless you are sure you are ready.

Apply for a demo account and play around trading currency. There’s no need to worry about damaging anything in any way since its designed for you to learn how currency trading works by actually placing a trade as if it were a live account. The prices and charts are derived from live trading so you get the whole idea of how things go in live mode.  Experience is definitely the best teacher in life and what you learn from here is definitely going to stay.

Now, just like you, I’ve got myself excited all over again and can’t wait to get back to my charts. Good luck!

References

  1. Insider Secrets of Online Currency Trading by Brian Campbell
  2. http://www.investopedia.com/articles/forex/06/sevenfxfaqs.asp

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