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.

Interbank Currency Trading Explained

Interbank currency trading is a term that you might see many times on forex websites and forums. So what does it mean?

Originally the forex market consisted almost entirely of banks and other large financial institutions who were exchanging the various currencies of the world with each other. Each one of them would have a dealing desk from which they would communicate with the other banks in their own financial center and around the world. They would be quoting each other the prices at which they or their clients would be prepared to exchange one currency for another and striking deals when they could get a match.

The word ‘inter’ means between, so the interbank market was the market set up between these institutions. As well as banks, they included insurance companies, retirement fund holders and even governments, but in the forex market they are usually all called banks to keep things simple.

When most of the major currencies’ exchange rates ceased to be fixed in the 1970s, speculative trading became possible. The banks employed full time traders to increase their profits by speculating on the rise and fall of currency prices. At that time the trading was done almost entirely by telephone. By the beginning of the 21st century it was becoming possible to use the internet.

Now that so many homes in the more prosperous countries have computers with a high speed internet connection just about anybody can become a currency trader on their own account. However, we do not have the ability to set up our own dealing desk and communicate directly with the banks and other traders. We need an intermediary, and this is where forex brokers come in.

Forex brokers, or dealers, take on the retail traders like you and me as clients and then negotiate with the interbank currency trading market. Some brokers have their own dealing desk so they are directly part of the market. These brokers are less likely to offer mini forex accounts and most of their clients will be trading standard lots.

Other brokers have an arrangement with one of the banks to use their dealing desk which is another link in the chain. This gives them the ability to accept smaller fund balances but it can mean higher costs. You may have a higher spread or you may find that the price is manipulated to guarantee the broker a fee on top of the bank’s spread.

Many people these days use the term interbank to include anybody who is involved in foreign currency exchange as a buyer or seller. However, interbank currency trading is not the same as retail forex trading. Understanding the difference can help you to ask questions of a potential broker that could result in a better deal for you.

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.

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.

Foreign Exchange Training: Learning to Make Money with Forex

If you want to make money with forex, you will surely need some foreign exchange training. Even if you plan to have someone else trade for you through a managed account, or use automated forex trading software, a basic understanding of the market and the risks is essential.

If you want to go a step further and become involved in the exciting world of forex trading for yourself, you will want more instruction so that you have a deeper understanding of the market and the techniques that you can apply. Without that forex education, you would probably lose money rather than make it.

Currency exchange trading is probably one of the most profitable markets to have opened its doors to the smaller investor in recent years. It attracts more and more people because of its comparatively low margin requirements, identifiable patterns and trends, and the tempting possibility of making a lot of money in a short time. However, it is a risky market where large sums can also be lost, so you need the best training before you start in order to protect your investment.

There are many sites and individuals offering foreign exchange training on the internet. These include websites where free information is set out for you, ebooks that you can download either for free or paid, forums, membership sites, coaching programs and personal mentoring.

Any of these can help you to master the complex and dynamic forex market. You may want to start out with a free site and then if you find you are receiving good information, buy their paid products. If mentoring is offered to you, be cautious until you know the provider well. Mentoring is expensive and you need to be sure it will be suited to your situation and needs, as well as checking on the qualifications and experience of the mentor.

Some membership sites provide step by step forex training. If you undertake a step by step course, be sure to follow all of the steps and do not skip. Even if you think you know something, doing it for real (or just on a demo account) can be a very different experience.

A good currency trading education program will help you to understand the significance of your trading decisions, both when entering and when exiting the market. Knowing when to close a trade is as important as knowing when to open one.

You can also expect it to cover interpreting charts and indicators to identify possible future movements in the currency markets. You cannot expect to trade forex successfully without ever looking at a chart, so it is important to be sure that you understand this thoroughly. You will also need to know something about market news, signals and analysis.

Successful forex trading can only grow out of a desire to learn and a strong drive to master the skills of currency trading. It is not an easy way to make money, at least not in the beginning. It requires dedication and persistence. But if you apply these qualities to your foreign exchange training, you may find that beginning forex trading is a life changing experience.

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