While at first glance it may appear that there is no real difference between currency trading v/s stock investments, they are in fact two completely different entities. When you purchase shares of a company you are actually buying a share of the ownership, however, when you buy a currency of a country you do not get to own any part of the country whatsoever. So why exactly would anybody want to trade in currencies if they do not get to own anything?

The Real Differences between Currency Trading v/s Stock Investments

As opposed to stock investments where something is actually bought, currency trading is based on simple speculation of currency prices. Admittedly that may be a rather simplistic explanation for currency trading, which in fact is a rather complex operation as it involves trading several currencies against several others and that too across several time zones.

The nearest you can get to comparing currency trading v/s stock investments is that they are both based on the premise that you buy low and sell high. Other than that, currency trading and stock investments belong to completely different realms of investing.

Here’s a short summary of the differences between currency trading v/s stock investments:

• The typical leverage that an investor can expect in currency trading is as little as 100:1 whereas in stock investments, stock brokers will lend investors up to 2:1.

• Because it is carried out over so many time zones, currency trading goes on 24 hours a day. This means that margin calls can occur anytime while you are sleeping, which is not good news at all. On the other hand, trading in stock markets is done only during fixed trading hours of the time zone the investor is in, which makes it easier to make a call on buying or selling any particular stocks.

• Trading cycles in currency trading are extremely short; several trades could be executed within minutes of each day. However, stock investments are made taking into consideration timelines of several months and sometimes; several years.

What to Look for in Currency Trading

Keeping in mind the salient features of currency trading v/s stock investments, here are a few things you need to watch out for if you intend to dabble in currency trading:

Do some ground work before plunging in – Currency trading is done on an international platform and it is crucial that you should be aware of the different factors that could affect currency rates including central bank policy changes and trade imbalance figures in addition to domestic economic indicators.

Watch the market carefully – The changes that occur in currency trading may be incremental but they will happen in a twinkling of an eye without any forewarning. You should be alert to these changes so that you can either choose to liquidate or cover your position before your broker executes that notorious margin call.

Take advantage of demo trades – Most brokers will allow you to execute paper trades that are not real. However, because they use real currency figures during these demo trades, it is the perfect way for you to get a real feel of currency trading.

While there is certainly no need to be intimated at the thought of entering the Forex trading market, it is important to know the basic differences that exist between currency trading v/s stock investments.

Basic Considerations when Choosing a Forex Broker

Proper professional status in Forex trading starts with the right accreditation, so look for a broker who is registered with the Commodities Futures Trading Commission (CFTC) as a certified Futures Commercial Merchant (FCM). This accreditation means the broker has met the minimum basic requirements as a Forex trading professional, and his capabilities are vouched for by a leading trade organization.

As a beginner, you will no doubt require your trades to be highly leveraged, with the broker expected to provide ninety-nine percent (or more) of the capital required for any given trade. This means you will want to choose a broker employed by a large firm with the financial resources to enable you to make your trades. Forex trades are also not insured by the government, so choosing a large firm helps protect you should any problems arise.

Additional Considerations in Choosing a Forex Broker

Here are few more factors you need to take into considerations when choosing a Forex broker:

• Availability – The Forex market trades twenty-four hours a day, all around the world. Make sure your broker is in a time zone that facilitates easy communication, and that he will be available during your standard business hours.

• Spread Policy – Brokers make their profits on spreads, which are the slight differences between prices when buying and selling paired currencies. The size of the spread a broker charges has a critical impact on your ability to make money in Forex trading. Spread policies often vary widely from one broker to the next, so look for one who can provide a deal that matches your needs.

• Account Size – Forex trading occurs in standardized lots of 100,000 units. Even with extreme leveraging, novice investors may be overwhelmed by this capital commitment. Some Forex traders offer smaller accounts that trade in lots of 10,000. Choose a Forex broker whose account size offerings match your level of commitment.

• Support – Your broker is not going to be available at all hours with advice and recommendations, but the brokerage should have a website or software available that can help you collate the vast amounts of information that must be processed to succeed at Forex trading. Have prospective brokers demonstrate their support systems to you, and eliminate any that do not provide a detailed matrix of information.

• Recommendations – If you have colleagues whose opinion you trust, ask for recommendations. Let their experience and knowledge of professionals in the industry guide you. Do some research and make sure any prospective broker has an abundance of satisfied clients willing to sing their praises.

You should have a comfortable, trusting rapport with the Forex broker you choose. There should be a two-way exchange of information, ideas and planning – this is, after all, a business partnership. Take your time choosing a Forex broker that is right for you.

For a novice, dabbling in Forex trading is like trying to find your way out of a maze comprising of a bewildering array of diagrams, charts and technical indicators. To successful navigate through this maze you need to know the basic concepts of line graphs, bar and candlestick charts.

What Are Line Graphs, Bar and Candlestick Charts?

Line Graph – The line graph is one of the most commonly used analytic tools and is seen in all the different forms of trading. Line graphs are typically employed to indicate price movements over a period of time in order to recognize emerging trends and explore opportunities.

Forex traders employ line graphs to register price movements over the course of the day and also to chart comparative price movements for weeks and months and even for years. Line graphs also help Forex traders find a moving average over a more extended period of time.

Bar Chart -A bar chart uses a more familiar format to present data. Price movements are indicated vita vertically inclined bars. Taller bars indicate a larger price variance from high to low, which means greater volatility. The high price is indicated at the top of the bar and the low price is indicated at the bottom.

A bar chart will also features small indicators to the let and the right of each bar; the opening price is indicated on the left hand side and the closing price is indicated on the right hand side.

Candlestick Chart - A candlestick chart is a slightly more advanced version of the bar chart. They are color coded to indicate gains and losses at closing and offer additional information at a glance.

White or green color is used to indicate a gain at closing time, black or red is used to indicate a loss at closing time and the shaded areas at the top as well as the bottom is used to indicate the session high and session low. The areas where there is no shading at all indicates that the price closed at exactly either the low or the high. Price volatility can be ascertained by the length of the candlestick.

Over a period of time candlesticks tend to form patterns, which help predict and detect trends and influence the trading decisions that an investor will make. Although they have quite a serious purpose, the patterns have interesting names such as the Morning Glory, the Hanging Man and the Hammer.

What Line Graphs, Bar and Candlestick Charts are used for

Forex traders typically employ line graphs, bar and candlestick charts to study trends over a wide range of trading periods. There are intra-session models that indicate daily volatility as well as weekly, monthly and annual models that offer Forex traders invaluable price perspective over different periods of time.

While it is not absolutely necessary for the average trader to grasp the mathematics underlying these line graphs, bar and candlestick charts, it is important to have a basic understanding of what they mean and how the data can be practically implemented to leverage trading.

Forex signals as a trading tool are essentially buy and sell indicators that are based on sound technical analysis. Trends, which are statistically analyzed using volume data and historical prices are then used to establish the probability of future price movements.

These Forex signals vary in complexity from something as simple as “Purchase Swiss Francs at 1.2495 to flashing icons and text on trading software. This software consists of built-in algorithms that employ current market data with sound technical analysis and generate a signal. Forex signals as a trading tool can be delivered in several different ways including text messages to a cell phone, email or IM message.

One technical indicator that is commonly used is referred to as Moving Average Convergence/Divergence (MACD). This technical indicator employs the average price movement over a period of time and generates a signal when the price crosses below or above a certain set threshold. It’s time to buy when the value moves above the line and its time to sell when the value moves lower.

Some signal services allow the Forex trading process to be even further automated by offering clients the opportunity to leave standing orders for carrying out a recommendation when a certain predetermined signal is generated. For example you get an email with the recommendation to “Purchase Swiss Francs at 1.2495 and the broker will automatically enter an order to execute it.

Using Forex Signals as a Trading Tool Discriminately

Using Forex signals as a trading tool indiscriminately and exclusively can result in an unmitigated disaster. You have to use Forex signals intelligently and in combination with other investment techniques to make a profit and avoid major losses.

While using Forex signals are undeniably useful and can make life easier, it is downright foolish to leave your investments exclusively at the hands of any automated service. It is always important to have some control over your finances while still using Forex signals as a trading tool.

Benefits of Using Forex Signals as a Trading Tool

Forex Signals give the investor a much needed break from having to monitor prices on an almost constant basis and also help simplify the often incomprehensible and baffling price charts. They also help investors make more informed decisions about the best time to buy and sell their currencies as well as the best asking or selling prices.

Precautions When Using Forex Signals as a Trading Tool

Signal services can cost an investor in the region of $50 to $250 per month. Whether paying a fee to use Forex signals as a trading tool is worth it or not is really up to each individual investor as it depends on individual trading styles and each individuals end goal. As always, better judgment should always be used when entrusting your money to someone else.

Market, limit and stop orders are are commonly used in the Forex trading market and to understand any one you also have to have an understanding of the other two. Let’s first take a look at market orders.

A market order refers to an order that an investor places to execute a trade at the current market price. Keep in mind that the concept of ‘current’ could very be quite different from that of ‘current’ in stock markets. In the Forex markets the changes are so rapid that the ‘current’ price can change in a flash.

Because the Forex markets are so extremely volatile, most market orders could have a marginal to a significant deviation from the price indicated on the investor’s screen. Unlike the stock market where you can place an order to sell a stock for a fixed amount and you can be sure you will get the quoted price; in the Forex market the likelihood of getting your asking price is small; at least a small differential is almost inevitable.

In order to offset the inherent difficulty in determining the correct market orders, it is necessary to have limit orders as well as stop orders.

Putting Market, Limit and Stop Orders to Good Use

A limit order is essentially a request to ensure that you will not purchase for anything more than or sell for anything less than the limit price.

Here’s a small example that will clearly explain how market, limit and stop orders can be used practically in the Forex market:

If the market rises to $1.1955 after you’ve purchased euros at $1.1905, you can take the opportunity to book in at least a minimum profit of 40 pips by placing a limit sell order of $1.1945 on your euros.

On the other hand, perhaps you wish to purchase a currency, say British pounds (GBP) and the current price of $1.7750 is too high for you. Placing a limit buy order for buying GBP at $1.7705 would indicate to your broker that you wish to buy GBP but the maximum you are willing to pay is $1.7705 per pound and nothing more.

This would typically have a specified time limit and if the price either does not rise or drop to the limit price before the expiry of the time limit, then the limit order is deemed expired and unfulfilled.

The main difference between a stop order and a limit order is that a limit order indicates an order to sell or buy at a minimum specified price or something better whereas a stop order indicates an order to sell or buy only when it reaches a specified price. After that, it is considered a market order, which means it is now subject to market fluctuations.

A stop-limit order is a combination of both- a limit order and a stop order. In a stop-order, your order gets executed when the market reaches a pre-determined price. It now becomes a limit order, which means your order will only get executed at the pre-selected limit price or anything better.

Market, limit and stop orders are valuable tools for any amateur investor who wants to dabble in Forex trading. Knowing how to leverage these concepts to your advantage can give you a definite competitive edge even amongst he more experienced Forex traders.

Understanding the Concept of ‘Margins’

Because of the large amounts of money that changes ownership at every trade, most of the players in any Forex trading market will include larger organizations and corporates and even governments. Individual investors can find it almost impossible to find that kind of money to go up against such powerful adversaries. In order to give them a toehold into the Forex trading market, many brokers allow their clients to invest in the Forex market on something called a ‘margin’.

This means that the broker will give the client a short term loan of up to 99% of the required total amount if the investor can come up with just 1% of the total. If this may sound too good to be true; it is. If all goes well, the investor as well as the broker come out of the deal smiling.

Understanding the Concept of Margin Calls

However, these deals can also go sour and result in what is called ‘margin calls’- not a very nice scenario for the investor. If you, as the investor wish to invest in euros in anticipation that it would rise against the dollar, you would need to pay the broker 1 % of the total cost you wish to invest; the broker puts in the balance 99%. If the euro gets devalued against the dollar in the ensuing days the broker may debate the wisdom of letting the investment ride. At some point if the broker decides that the money he has loaned you is at a high degree of risk, he can decide to make a margin call. This means that your investment will be sold off at lower than the buying price and you are obligated to make up to the broker for the loss he has suffered.

Tips & Strategies for Avoiding Margin Calls

Only deal with brokers you know and trust – While you do not have to be back-slapping buddies or intimate friends with your broker, it is important that you know enough about him to be able to trust him. Don’t make the mistake of trading in a good, trustworthy broker for a flashier one who promises you the moon; you could very well find yourself hearing far too many margin calls for comfort.

Maintain a healthy credit – Be realistic about your financial status and avoid jumping into the deep end of Forex trading using all your savings. Forex trading is too volatile for small players. If you absolutely must; make sure you only limit yourself to trading with money that you can afford to lose.

Keep an eye on the market – In fact keep both eyes on the market. Currency prices are extremely sensitive and will fluctuate quicker than you can imagine and with the huge sums involved, even a marginal fluctuation can result in an overwhelming loss.

If you intend trying your hand at Forex trading, the best advice you can get is to stay ever sharp and diligent in order to avoid getting crushed by margin calls.

Calculating Pivot Points

A pivot point is essentially the mathematical average of three prices; the closing price of the current day, the low of the previous 24 hour period and the high of the previous 24 hour period.

The formula for calculating pivot points is Pivot Point = (H+L+C)/3 where L is the low for the preceding 24 hour period, H is the high and C is the closing price of the current day.

Because Forex trading is done round the clock, determining the value of C can be pretty tricky. In order to avoid any confusion, 4 p.m., which is the closing time of the New York Forex market is considered as standard. This number, which is typically denoted as P is used along with support points and resistance points to form the base of any Forex trading strategy.

The formula for calculating resistance and support points is as follows:

R1 = (P x 2) – L

S1 = (P x 2) – H

R2 = P + (R1 – S1)

S2 = P – (R1 – S1)

Although Forex traders differ in their methodology, the key to successful Forex trading is determining the optimum price for the support and resistance levels. Some traders prefer basing their trade on the pivot point itself whereas others would prefer opting for the previous day’s closing price.

In a bullish market where the price moves higher than the pivot point, the pivot point becomes the point of resistance whereas in the reverse trend where the price moves below the pivot point, the pivot point becomes the support point.

How Pivot Points Are Used In Forex Trading

Understanding pivot points is the key to successful Forex trading. Besides helping traders to evaluate trends, knowing the pivot points can be extremely useful in developing any entry and exit trading strategy.

Investors typically place orders to buy any currency pair when the price breaks through the pre-determined resistance point. In the event that the prices moves below the pre-determined support level pivot points help in determining a stop-loss price.

While it is not advisable to rely solely on a single indicator in Forex trading, pivot points have proven to be pretty reliable especially when used in combination with other technical indicators including MACD (Moving Average Convergence/Divergence).

The effectiveness of pivot points is attributed to two observed tendencies:

1. When the day’s prices start higher than the pivot point, the prices typically tend to stay higher than the pivot point until such time that it hits the day’s first resistance point.
2. If the day’s prices start below the pivot point, the tendency is to stay lower than that point until such time that it reaches a support point.

Often referred to as ‘trading between the lines’ the approach is quite popular with most Forex traders, while some still view it with some skepticism. While the degree of the influence of pivot points may be debatable, there is no doubt that pivot points do play an important role in Forex trading.

Explaining Stop-Loss, Limit-Order & One Cancels The Other (OCO) Orders

Take for example the USD/CHF currency pair that is being traded at 1.4625, which means the dollar can be sold for 1.4625 Swiss Francs. One of the distinctive traits of Forex trading is that exchange rates change rapidly and that too, by large amounts. If the dollar happened to be on the downslide and fell to about 1.4600 within a specific time- it could be one hour or one day- the investor may want to consider issuing a stop loss order at 1.4575. This stop loss order converts into market orders, which are then subject to realization when it has reached the stop price.

Trying to determine your stop price can be tricky. While you may hesitate to pull out in the event of a 5% price drop in the hope that it would recover, you may very well wish you had gotten out at a 10% if the price goes down to another 20%.

On the flip side, you’d be over the moon if your luck turned and the price went up to 1.4900. It’s all in the timing and therein lies the catch; it is almost impossible to predict which way the market is headed.

You may wish you could put in an order for selling when the market price reached its peak but it’s difficult to determine where the peak is. There’s no way of knowing whether a drop back in the market is just a momentary downward fluctuation or the onset of a precipitous drop. To be on the safe side you can request a limit order and lock in at least some of the profit.

One Cancels the Other (OCO) Orders offer the investor a middle path wherein he can request the broker to make a decision based not only on one condition but on a pair of possible conditions. If, for example, the investor had simultaneously placed a limit order at 1.4725 and a stop order at 1.4575, upon the realization of any one of the conditions, the second part of the order automatically stood canceled.

Practical Implementation of One Cancels The Other (OCO) Orders

One Cancels the Other (OCO) Orders can be placed by investors to purchase Swiss Francs at 1.4700 or euros at 1.1905. The different ‘mix and match’ combinations that are available will invariably differ from one broker to the next as well as the kind of account you hold and the relationship you have with your broker.

While it is always advisable to have a diverse spectrum of investing strategies, implementing One Cancels the Other (OCO) Orders is by far one of the simpler and more effective of all Forex trading techniques.

A Spread Example

A standardized Forex trade entry will look something like this:

Euro/USDollar:         Bid=1.1900              Ask=1.1905

The bid is the price at which a broker will buy dollars, and the ask is the price at which a broker will sell dollars. That difference of 0.0005 is the spread, and forms the basis of the profit model for Forex brokers. Lots in Forex are standardized at 100,000 units, so those tiny fractions of a point can add up quickly, particularly when you consider the volatility of the market and the fact that it operates twenty-four hours a day.

Any investor interested in the Forex market must learn to take the spread into account at all times. From the above example, should you purchase euros at the ask price of 1.1905, you will need the bid price to rise at least 0.0006 (to 1.1906) just to make a profit when you sell them back for dollars. As you can see, making a profit is not as simple as just waiting for any up-tick in price. You have to be aware of the spread and wait for the market to rise above this built-in investment cost.

How Brokers Calculate Spreads And Investment Costs

Like many other trading markets, the Forex market is leveraged to a great deal and many brokers allow their clients to invest on a margin of well under one percent. This means that even novice investors without access to deep reserves of capital can participate in Forex trading. This is another way of making it easier for investors to profit from trades and beat the spread.

There is no industry standard figure for spreads, and they will vary from broker to broker. Some brokers may use a sliding scale to determine the spread: smaller investments may carry a higher spread, while clients are offered a break in the spread on larger investments. Other brokers may offer more attractive spreads to clients that have larger accounts, or who have been with the brokerage for a longer period of time. In general, you should expect your spread to decrease as you gain experience in the market and develop a working relationship with your broker.

Forex Trading – Calculating Spreads and Investment Costs

Forex brokers make their profits directly from ‘spreads,’ rather than the standard practice in the industry at large of applying a commission or a fee to all transactions. Calculating spreads and investment costs for a trade is equivalent to knowing the cost of your investment, and is a crucial feature of doing business in the Forex trading market.

A Spread Example

A standardized Forex trade entry will look something like this:

Euro/USDollar:         Bid=1.1900              Ask=1.1905

The bid is the price at which a broker will buy dollars, and the ask is the price at which a broker will sell dollars. That difference of 0.0005 is the spread, and forms the basis of the profit model for Forex brokers. Lots in Forex are standardized at 100,000 units, so those tiny fractions of a point can add up quickly, particularly when you consider the volatility of the market and the fact that it operates twenty-four hours a day.

Any investor interested in the Forex market must learn to take the spread into account at all times. From the above example, should you purchase euros at the ask price of 1.1905, you will need the bid price to rise at least 0.0006 (to 1.1906) just to make a profit when you sell them back for dollars. As you can see, making a profit is not as simple as just waiting for any up-tick in price. You have to be aware of the spread and wait for the market to rise above this built-in investment cost.

How Brokers Calculate Spreads And Investment Costs

Like many other trading markets, the Forex market is leveraged to a great deal and many brokers allow their clients to invest on a margin of well under one percent. This means that even novice investors without access to deep reserves of capital can participate in Forex trading. This is another way of making it easier for investors to profit from trades and beat the spread.

There is no industry standard figure for spreads, and they will vary from broker to broker. Some brokers may use a sliding scale to determine the spread: smaller investments may carry a higher spread, while clients are offered a break in the spread on larger investments. Other brokers may offer more attractive spreads to clients that have larger accounts, or who have been with the brokerage for a longer period of time. In general, you should expect your spread to decrease as you gain experience in the market and develop a working relationship with your broker.

Shop around in order to find a deal that works for you. Do not select a broker solely on the basis of the spreads and investment costs. A low spread may look attractive at first, but it is often the case that discount brokers will only offer poor service and repeated delayed or rejected trades that end up costing you more money in the long run. Try to find a happy medium between service and cost in the broker you select. Above all, make sure you have your own desires firmly in mind and make the choice that accommodates all of your needs.

GBPound/USDollar              Bid=1.7439              Ask=1.7442

The paired currencies here are the British pound and the United States dollar. The ‘bid price’ is the price in US dollars at which a broker will buy British pounds, and the ‘ask price’ is the price in dollars at which a broker will sell pounds. The difference of 0.0003 between these two numbers is the ‘spread,’ and the source of a broker’s profits.

Forex trades typically occur in lots of 100,000 units. Per the above example, in order to make a single trade you would be required to buy 100,000 pounds at a total price of $174,420. This is an enormous outlay for even experienced traders, which is where the concept of ‘leverage’ comes into play.

Leverage offers a way to use small amounts of capital to invest much larger sums. Brokers typically loan their clients the vast majority of the monies needed for transactions, often providing up to ninety-nine percent of the necessary capital. This relationship is at the heart of leveraged investing.

If the investment is a winner, there is no need to worry; the investment can be liquidated at a profit and all monies are safe. If the investment is a loser, the broker may liquidate the position at a loss in order to protect his ‘loan’ to the client. If the broker has a good relationship with the client, he will give a warning and allow the client to inject new monies into the investment in order to forestall a liquidation and allow the investment time to recover a positive gain.

Leveraged for ninety-nine percent, a purchase of a single 100,000 unit lot of pounds at an ask price of 1.7442 would cost you $1744.20 (1% of the total price of $174,420). Fair enough, but how does one make a profit?

Outlining A Sample Trade: The Potential For Profit

Still using the above sample trade, pretend the market rises to the following:

GBPound/USDollar              Bid=1.7445              Ask=1.7448

If you decide to sell, the total price is $174,450. Your profit is the sale price of $174,450 minus the initial buy price of $174,450, or $30. This may seem like a meager sum, but remember the deal was leveraged and you only had to front the relatively modest sum of $1774.20. This is how fortunes are won in Forex trading!

Additionally, price swings of several ‘pips’ (ten-thousandths of a point) can occur frequently in the Forex market, so under ideal circumstances the opportunity to reap a profit can arise in just a few minutes. Forex is also a twenty-four hour market, so the investing action really is non-stop! Of course, in a sample trade you can also wait longer periods for more substantial price changes to take place. With experience, you will find a style of trading that suits you.