Want your share of the $4 trillion traded daily in Forex market?

PenWay.org

Want your share of the $4 trillion traded daily in Forex market?

by Wayne Wargo (PenWay.org)

So how can you get a piece of this big pie? Since the Forex market does not operate from one central exchange there are no official volume figures. Commonly quoted daily figures range from 2-4 trillion US Dollars, depending on the source. The amount of money you are able to make depends on your ratio of winning trades to losing ones and your risk-reward parameters, not the amount of business done in foreign exchange. The true benefit of high daily volume is liquidity. The Forex market is liquid 24/5, which provides trading opportunities for traders in all world time zones. This liquidity does not account for slippage, especially immediately before and after economic data releases.

Furthermore, the vast majority of this daily volume is generated by extremely large investment banks and multinational corporations. A large proportion of their business does not have anything to do with technical or fundamental analysis and is conducted to meet general business needs. This means that there is a strong argument against the reliability of short-term technical levels because general business is conducted when needed, not when a chart level suggests it would be a good idea.

It is possible in the Forex market to command a $100 000 position with just $1 000 down.

Retail brokers are quick to advertise the massive leverage they offer. It is typically 100:1 (for every $100 dollars of currency you buy/ sell you need just $1 in margin) and can be as high as 500:1. However, what this statement does not acknowledge is the need to cover your risk. If you open a $100 000 position (the size of one standard lot) with a stop loss of 20 pips it will cost you $1 000 in margin. However you will need an additional $200 (20 pips multiplied by $10 a pip incurred when trading 1 standard lot) to cover your stop loss and prevent your position from being liquidated early which takes the total to $1 200. This is an additional 20% requirement on top of the original statement. Of course if your stop loss is larger, or smaller, than the one used in this example this figure will change. However the point is that much more than $1,000 will be required in real terms to trade $100 000, especially if you want to make more than one trade!

Understanding “Lots”

A lot is the minimal traded amount for each currency transaction. For the Regular Accounts one lot equals 100,000 units of the base currency. You can also open a Mini Account and trade in mini lot sizes that are 10,000 units of the base currency.

Understanding the Pip Spread

The spread is closely associated with the pip and has a major importance for you as a trader. It is the difference between the selling and the buying price of a currency pair. It is the difference in the bid and ask price. The ask is the price at which you buy and the bid is the price at which you sell. Suppose the EUR/USD is quoted at 1.4502 bid and 1.4505 ask. In this case the spread is 3 pips. The pip spread is your cost of doing business. In the case above it means you sustain a paper loss equal to 3 pips at the moment you enter the trade. Your contract has to appreciate by 3 pips before you break even. The lower the pip spread the easier is it for you to profit.

So, if you do want your share of this huge pie, you will need to read and learn and get educated about how the Forex market works. Your education will not take just a matter of days. Not only will you have to read the sources you find, either on the Internet or in books, you should open a demo account with a reputable broker. The demo account is usually a free 30-day trial and it is recommended that you check your progress every day the market is open.