Forex Trading Strategy

The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinationals, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets currently is over US$ 3 trillion. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks, and are subject to forex scams.

The foreign exchange market is unique because of:

ª its trading volumes,

ª the extreme liquidity of the market,

ª the large number of, and variety of, traders in the market,

ª its geographical dispersion,

ª its long trading hours: 24 hours a day (except on weekends),

ª the variety of factors that affect exchange rates.

ª the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)

While forex has been traded since the beginning of financial markets, on-line retail trading has only been active since about 1996 . From the 1970s, larger retail traders could trade FX contracts at the Chicago Mercantile Exchange.

By 1996 on-line retail forex trading became practical. Internet-based market makers would take the opposite side of retail trader's trades. These companies also created online trading platforms that provided a quick way for individuals to buy and sell on the forex spot market.

In online currency exchange, few or no transactions actually lead to physical delivery to the client; all positions will eventually be closed. The market makers offer high amounts of leverage. While up to 4:1 leverage is available in equities and 20:1 in Futures, it is common to have 100:1 leverage in currencies.]. In the typical 100:1 scenario, the client absorbs all risks associated with controlling a position worth 100 times his capital.

Currencies are quoted in pairs i.e. EUR/USD (euro vs. United States dollar). Currency prices can only fluctuate relative to another currency, so they are traded in pairs. Take two of the most common currency pairs, the EUR/USD (the price for euros in US dollars) and the GBP/USD (the price for the British pound in US dollars).

The idea of margin (leverage) and floating loss is another important trading concept and is perhaps best understood using an example. Most retail Forex market makers permit 100:1 leverage, but also, crucially, require you to have a certain amount of money in your account to protect against a critical loss point.

For example, if a $100,000 position is held in Eur/USD on 100:1 leverage, the trader has to put up $1,000 to control the position. However, in the event of a declining value of your positions, Forex market makers, mindful of the fast nature of forex price swings and the amplifying effect of leverage, typically do not allow their traders to go negative and make up the difference at a later date. In order to make sure the trader does not lose more money than is held in the account, forex market makers typically employ automatic systems to close out positions when clients run out of margin (the amount of money in their account not tied to a position). If the trader has $2,000 in his account, and he is buying a $100,000 lot of EUR/USD, he has $1,000 of his $2,000 tied up in margin, with $1,000 left to allow his position to fluctuate downward without being closed out. A good Forex Trading Strategy is useful if one want to succeed in the market.

To review one strategy, see my blog http://www.forex-trading-strategy-ronald.blogspot.com

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