By Kathy Lien, Director of Currency Research, GFT
When it comes to investing or trading forex, there is generally no need to seek out a financial institution for funds. Most forex and CFD brokers offer spot trading on a leveraged basis. Some brokers offer as much as 400-to-1 leverage, which means that you only need to put up $1 to control $400. Trading on leverage can magnify gains but at the same time it can magnify losses. If you require a loan to trade forex, which already is a leveraged product, then you probably want to reconsider trading at all because speculation should only be done on risk capital.
There are generally two types of accounts in the forex market known as the mini account and the standard account. Mini accounts trade in lot sizes of 10,000 while standard accounts trade in lot sizes of 100,000. On 400-to-1 leverage, this means that $25 is needed to control $10,000 and $250 is needed to control $100,000. With this type of compounding, why would you need to borrow more money?
Trading on such high leverage comes with the risk of substantial losses, especially if there are insufficient funds to cover regular fluctuations, which is why it is important to have sufficient capital and avoid overleveraging. Most foreign exchange providers have computerized margin watchers that will monitor your account so that if it falls below the margin requirements, the position will be closed out.
One of the unique aspects of the foreign exchange market is that you can trade around the clock. In most situations this is a great advantage because you now have the flexibility to fit your trading to your lifestyle and not the other around. However, it also requires an extra sense of attention because, if left unattended, a trade could be forgotten into overnight trading and wreck havoc on your position while you are asleep. Currencies may also trade differently during different times of the day. For instance, trading is most active between 8:00am to 12:30pm NY time when both the U.K. and U.S. markets overlap. However, trading can become quite thin into the late afternoon when ranges dominate.
Currencies are also traded in pairs which make it important to keep abreast of more than one country and more than one market. The value of the Australian dollar for example is based upon another currency like the U.S. dollar or the New Zealand dollar. So an AUD/USD exchange rate of 0.8500 for example means that one Australian dollar is the equivalent of 0.85 U.S. dollar. If the AUD/USD exchange rate rises to 0.8600, it means that it requires more U.S. dollars to buy one Australian dollar.
Although foreign exchange trading may appear daunting to new traders, many forex brokers provide services and support that would otherwise be very expensive. In addition to the trading platform, this includes charting packages and real time news. These tools are provided so you have the same edge that any other trader has, whether experienced or inexperienced, and come standard as a part of your decision to join a forex broker. The charting package will be key in stgeloping your strategies. Charts provided usually include a myriad of trading indicators and overlays as well as the ability to customize the interface to your heart’s content.
Forex markets are a dynamic trading mechanism which pulls market influence from the world’s financial markets as well as economic indicators for countries across the globe. This is what makes access to news a pivotal service. Just because you might have the tools necessary to trade, it does not mean that you have the knowledge to trade. This is where the Forex broker’s educational programs come into play. As another free service to their clients, brokers often have dedicated research and training departments that scour the market in an effort to bring you the most pertinent news and analysis on potential market swings. Other than receiving commentary on several occasions throughout the day, some services take your education to the next step. Many providers offer regular seminars or webinars to provide a face-to-face trading experience. Furthermore, brokers are ready and willing to give comprehensive walk-through and training about how to get the most out of the company’s trading platform. It is critical that any trader takes advantage of these services, and takes the time to thoroughly learn the ins and outs of not only the trading platform, but trading mechanics.
Other articles in this week’s newsletter