What is Online Currency Trading?

Online currency trading or forex trading can be a lucrative source of income for those who can do it successfully. It is a speculative form of investment a little like stock trading. As with most speculative investment, it is risky and you can lose money, but there is the potential to make a lot of money if things go your way. The skill, of course, is in knowing how to trade so that things go your way more often than not.

The word Forex is simply made up of the first letters from the words Foreign Exchange so it is a short way of saying foreign exchange trading. It may also be written as FX, and it is often called currency trading. It involves buying and selling different world currencies according to whether you think they will rise or fall in value.

This may sound like it would be a difficult thing to do, but there are many systems available that can help you to identify signals and trends indicating that the price of a currency pair is likely to move in one direction or another. There are even automated forex trading systems, otherwise known as forex robots, that will identify the signals for you and even open and close your trades automatically so that you are trading the forex market on autopilot.

Unlike most financial markets, the forex market is active 24 hours a day during the business week. This is because of its global nature. The major financial centers of the world operate in different time zones and you can trade whenever any one of them is open. Between them they cover the whole 24 hours.

It is a very high liquidity market with an average daily turnover that is now estimated to be close to $4 trillion a day. This is more than the combined turnover of all the stock markets in the world. This makes it a very attractive market to trade because if you pick a popular currency pair you can be almost sure of getting all of your trades matched.

Of course there are some businesses and individuals who are exchanging currencies for the purpose of trade or travel to foreign countries, but an estimated 70% to 90% of foreign exchange transactions are speculative. That means that the person ordering a currency purchase or sale will never take delivery of that currency, but will trade it back with the aim of making a profit.

There is no fixed exchange location although people talk about the dealing floors in the various financial capitals like New York and London. In reality the forex market is simply the communication between all of the large banks and institutions that have dealing desks. They deal directly with each other and the smaller investors get involved through a broker who can enter this market.

Trading can take place by phone but these days, more and more is done on the internet. This has allowed many private individuals to begin online forex trading and you do not even need a lot of capital to get started.

Forex Trading Hours: When are the Best Times to Trade?

Forex is a 24 hour market as you probably know, and forex trading hours are pretty much constant from Monday morning (Sunday evening in many time zones) through Friday afternoon. But if you are trading regularly, you need to know a little more than this.

What times exactly does the market open at the beginning of the week and close for the weekend? And what are the times of the different sessions in the major financial centers of the world? In this article we will explain exactly how this works.

The first thing to understand is that there is a date line running down the Pacific Ocean between Australia/Japan on one side and the Americas on the other.

Generally the time is earlier in the west than the east, but if you cross the date line you change to the next day. So when it is 5 pm Sunday in New York it is 2 pm in California and 8 am in Sydney, Australia – but because of the date line it is Monday morning in Sydney, not Sunday.

So the business week begins in Australasia. The financial centers open up for business in Australia and New Zealand at 8 am on Monday morning their time, although it is still Sunday afternoon or evening in America and Europe.

To be precise, when trading begins in Sydney (the first major market to open) it is 5 pm Sunday in New York and 10 pm Sunday in London. There can be some variations because of different daylight saving times around the world – but that’s the basic opening time of the forex market at the beginning of the week.

Then it stays open 24 hours a day because the business hours in the different time zones cover the full 24 hours. The last major market to close is New York, finishing at 4 pm EST on Friday. That’s 9 pm Friday in London and 7 am Saturday in Sydney.

So you can trade 24 hours a day during the business week. However, if you are involved in forex scalping or day trading which rely on high liquidity and a very fast moving market, you will probably want to be online at the busiest time of day.

The top forex trading time each day is the overlap in the business hours of the two busiest trading floors, i.e. London and New York. These two markets are open at the same time for three hours per day, which is the morning in New York (8 am to 11 am) and the afternoon in London (1 pm to 4 pm). That is when you
would want to be online for forex day trading.

If you are trading on longer term trends then the timing is not quite so important and you can check the markets at times that fit around your other activities. Of course if you have a forex robot trading for you on autopilot, your robot can be online through all of the forex trading hours and cover all 24 hours a day for you.

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When you know WHEN and WHERE the best times and places are to place your forex trades, there’s no need to waste your day (and your life) fumbling around with chart after chart.

Forex Pips Defined

If you are interested in the great money making opportunity that is forex trading, you need to understand forex pips. The word pip stands for percentage in point and so pips are also sometimes called points.

A pip is the measure of rise or fall of a currency pair. You may wonder why this is not measured in dollars and cents. The answer is that the dollar is not always the quote currency and sometimes is not involved in a trade at all. If you were trading the British pound against the Euro for example, it would make no sense to have your profits and losses expressed in US dollars.

A pip is the smallest increment of a quoted currency. Most currencies are usually quoted to four decimal places so one pip is 0.0001 units of the quote currency. What this means in practice is that if you see EUR/USD quoted at 1.4143 and a few minutes later it has moved to 1.4144, it has risen one pip.

In the case of currency pairs like EUR/USD where the dollar is the quote currency, one pip will be $0.0001 dollars or 0.01 of a cent. This does not sound like much but even in a mini forex trading account you will probably be trading in lots of $10,000 so that would be $10 on that position size.

If you want to work out your profits for a currency pair where the dollar is the base currency (the one that is given first), you need to divide 0.0001 by the exchange rate. So for example if the current exchange rate for USD/CAD is 1.1182, one pip will be CAD 0.0001. To convert to USD you divide by 1.1182 giving one pip a value of 0.0000894. This equates to US $8.94 on a $10,000 lot.

When the Japanese yen is the quote currency the position is a little different. There can be around one hundred yen to the dollar, so the quote is normally only given to two decimal places. For example you might see USD/JPY quoted at 93.72. In this case one pip is JPY 0.01. Dividing by the exchange rate gives us the value in USD of 0.0001067 per pip or $10.67 on a $10,000 lot. So having the quote to only two decimal places gives yen pairs a pip value that stays in the same ball park as the other currency pairs.

You will usually find that you do not need to do all of these calculations yourself because most brokers will provide a tool to convert your pips into profit and loss figures for the dollar (or whatever currency your funds are held in). However, sometimes you may want to work out a trade on paper and in that case you will find you need to know how to work it out for yourself. You can set up the formula in a spreadsheet so you do not have to pull out your calculator every time you want to know the value of forex pips.

Efficient Market Hypothesis: True “Villain” of the Financial Crisis?

Editor’s Note: The following article discusses Robert Prechter’s view of the Efficient Market Hypothesis. For more information, download this free 10-page issue of Prechter’s Elliott Wave Theorist.

When a maverick idea becomes vindicated, there’s a good story to tell. It usually involves a person (or small group of people) who courageously challenge the orthodoxy of the day — and, over time, the unorthodox yet better idea prevails.

A “good story” of this sort has surfaced during the current financial crisis. A chapter of the story appeared in a recent New York Times article, “Poking Holes in a Theory on Markets.” The theory in question is the efficient market hypothesis (EMH), which the article suggested is so hazardous that it “is more or less responsible for the financial crisis.” This quote tells you most of what you need to know:

“In the last decade, the efficient market hypothesis, which had been near dogma since the early 1970s, has taken some serious body blows. First came the rise of the behavioral economists, like Richard H. Thaler at the University of Chicago and Robert J. Shiller at Yale, who convincingly showed that mass psychology, herd behavior and the like can have an enormous effect on stock prices — meaning that perhaps the market isn’t quite so efficient after all. Then came a bit more tangible proof: the dot-com bubble, quickly followed by the housing bubble. Quod erat demonstrandum.”

In case your Latin is rusty, Quod erat demonstrandum means “which was to be demonstrated.” Its abbreviation (QED) appears at the conclusion of a mathematical proof. In this case, the massive financial bubbles of recent years are the proof that refutes the efficient market hypothesis, which argues that markets move in a “random walk” and are not patterned.

Similar articles in the financial press have reported the demise of the EMH. Just this week an Economist magazine blog included this bold declaration:

“No one has yet produced a version of the EMH which can be tested and fits the evidence. Thus, the EMH must logically be discarded, as a valid hypothesis must be testable.”

QED, indeed — I agreed years ago that the random walk was implausible. But I didn’t come to this view because of behavioral economists, although their work over the past decade has certainly been valuable. Instead, I was persuaded by the work of someone who first challenged the financial orthodoxy more than three decades ago, specifically April 1977. As a young technical analyst at Merrill Lynch in New York, his research circulated among several of Merrill’s clients. His name for these studies was the Elliott Wave Theorist: the April ‘77 study was a detailed analysis of the 1975-76 stock market, which offered this comment on the random walk model:

“If market moves are arbitrary (as the random walk proponents suggest), then internal components would rarely ‘make sense’ mathematically, and then only by statistically insignificant fluke occurrences. However, there seems to be enough evidence that mass psychology, as recorded in the Dow Jones Industrials, form patterns that are uncannily interrelated….At least this much can be fairly reliably stated as a result of this work: This idea that the market is a ‘random walk’ is probably false.”

Robert Prechter left Merrill soon after; he has published the Elliott Wave Theorist in every month since. Every issue has, in one way or another, “convincingly showed that mass psychology, herd behavior and the like can have an enormous effect on stock prices.”

So while there may be a good story to tell about behavioral economists, I trust you see why I believe there is a vastly better one to tell.

The “enormous effect” of “mass psychology” and “herd behavior” is exactly what explains the financial downturn that began in late 2007. Prechter’s Elliott Wave Theorist anticipated the crisis and warned subscribers beforehand. Likewise, he alerted them to the bear market rally that began last March.

For more information from Robert Prechter, download a FREE 10-page issue of The Elliott Wave Theorist. It challenges current recovery hype with hard facts, independent analysis, and insightful charts. You’ll find out why the worst is NOT over and what you can do to safeguard your financial future.

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Robert Folsom is a financial writer and editor for Elliott Wave International. He has covered politics, popular culture, economics and the financial markets for two decades, via print, radio and the Internet. Robert earned his degree in political science from Columbia University in 1985.

How to be a Professional Currency Trader

So what is a professional currency trader and how do you get to be one if you are just trading currency part time right now? This is the big question for most forex traders because just about everyone who is involved in the forex market has the dream of being able to support themselves and their families from their trading some day.

A professional currency trader could also be described as a full time forex trader but the words ‘full time’ give the impression of working 9 to 5 which is not really what it is all about. The point is to become financially free and enjoy what you do at the same time. If you continue trading consistently and successfully, you could go on to become rich.

There are two things that you need if you want to turn professional with currency trading.

1. A Simple But Profitable System

Successful traders don’t hop from one strategy to another. They develop a successful system, often by tweaking an existing system that they got from somebody else, and then they stick with it.

Usually this is a surprisingly simple system. It’s not something complex that requires insider knowledge of the financial markets or a genius mind for math. It’s the kind of system that you are probably applying right now.

The difference is that they know from experience that their system is profitable so they can apply it all of the time in a disciplined way. They trade when the signals are right and not when they are not. There may be a month when they make no money. That’s OK. They don’t panic. They know it will even out in the long term.

2. Money

It takes money to make money. The old cliche is just as true in forex trading as in any other type of investment. If you have a mini trading account with $1000 in it, you are not going to be able to turn professional tomorrow. It just is not possible to make enough money to live on from $1000 capital because that would mean turning a 300% to 500% profit a month. Get real.

What you can do, of course, is slowly build up your capital. If you can make 10% or even a conservative 5% growth per month, then you can get there in a few years. 10% growth per month, consistently for 4 years, gets you up close to the $100,000 mark where real money is made. Until that time of course you cannot withdraw any of your funds so you must have another source of income.

If your system gives you 5% growth it will take you twice as long but you are probably less likely to crash and burn in the process. However, if you start with $10,000 you can do it in half the time.

Remember to keep a low risk per trade: don’t take big risks to try to make more money. The really big traders keep their risk down to around 1% of funds or even less. When you have hundreds of thousands of dollars in your account, you want to make darn sure you don’t lose it all.

And that, in fact, is probably the biggest secret to becoming a professional currency trader: protect your capital.

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