Rules for success in forex trading

There are lot of things you should do if you are seeking Forex trading success. As we all know foreign exchange market is the largest financial market in the world. The investor should need to know the basic rules of foreign currency, there are lot of trading rules i want to share few of them with you.

Rule no 1 : DO NOT BE OVERCONFIDENT AND OVER TRADE.

After some successful winning trades traders can easily become overconfident which can lead them to over trading which is very very risky in foreign currency exchange. Success can only come from Careful money management not from over trading.

Rule no 2 : TAKE A BREAK WHEN THINGS DO NOT WORK OUT RIGHT.

If you are failing in the market even after implementing your best forecasts then it is always advised to the traders to take a break because a little break can refresh and charge you.

Rule no 3 : NEVER INVEST YOUR ENTIRE CAPITAL ON ONE TRADE.

Putting all your capital on one trade is suicidal, by distributing your Capital in some portions can give you a big advantage, If you lost the first trade, you still have some more opportunities to be right.

Rule no 4 : ALWAYS REMOVE PROFITS FROM YOUR ACCOUNT.

I think probably no more than 1% of traders have a rule to take profits out of their trading account. Wise investors always take profits out of their trading account, otherwise the chances are high that you may lose them all back in trading.

Rule no 5 : ALWAYS USE MONEY THAT YOU CAN AFFORD TO LOSE.

Everyone should only trade with the "extra" money, i.e, money that is not particular to pay bank and housing loans, telephone and electricity bills, etc. One of the major reasons for investing only with extra funds is that your trading judgment will remain objective.

I hope these rules will help you a lot in Forex trading.

What currency pairs to trade in Forex ?

Although there is lots of currency pairs offered to Forex traders, if you are a beginner it is easier to start with major currency pairs:
EUR/USD
GBP/USD
USD/JPY
There are several good reasons for that:
1. These currency crosses are widely traded, thus providing liquidity which is needed in order to benefit from price changes.
2. They have tight spreads, except may be for GBP/USD, which most of the time receives higher spread quotation from Forex brokers as it is more volatile (e.g. has wider price ranges than other pairs).
3. They all are traded against US dollar, which automatically suggest that the most active trading hours would be during New York trading session – the session with the highest volume of trades.
4. And finally, there are many Forex trading systems that are developed for trading those pairs and can be found online.
What currency pairs to avoid?
Exotic and uncommon currency pairs should be avoided by novice Forex traders as some further knowledge is needed to trade such pairs successfully.
Here is the list of major currencies beginner traders should focus on:
Euro (EUR)
US Dollar (USD)
British Pound (GBP)
Swiss Franc (CHF)
Japanese Yen (JPY)
Australian Dollar (AUD)
Canadian Dollar (CAD)
Also novice Forex traders should try to avoid currency pairs which have high spreads. Spreads vary from broker to broker. The information about spreads can be found at brokers’ websites, or at the special column called “Spread” on the trading platform itself, or from the Ask/Bid table (found also on the trading platform) by subtracting Bid price from the Ask.
Here is an example:

On the screenshot we have USD/CHF spread = 3 (Ask – Bid = 0.9992-0.9989 = 3)
GBP/USD spread = 3
EUR/USD spread = 2
USD/JPY spread = 2


Currencies that have high spreads are more volatile, e.g. have wide price ranges and longer price spikes, which unprepared traders may find difficult to trade.
Also a common mistake done by many beginner traders is that they try to monitor too many currency pairs at once. Not only it makes trading hectic and more difficult to manage, it also prevents deeper analysis of the currency pairs and actually learning their “behavior” over the time.
Currency pairs do have their unique ways to move, react to economical events, form trends etc.
By studying one currency pair at the time, Forex traders have the ability to observe its behavior and learn the ways to trade the pair even more effectively

The Spread, A Forex Brokers Profit

In our example from the previous article, we actually alluded to a few things. The first, is that there were a few costs in our example trade of 1 lot of GBP/USD. The hidden cost is the “spread” or the commission the broker earns for completing our trade.

How Forex Spreads Work

Unlike stocks or other tradeable securities, there is no set commission rate. With stocks, you may be accustomed to paying $6.95 to complete an online trade. In forex, we don’t pay commissions, instead the cost to trade is built into the forex bid and ask prices.

Bid and Ask

The bid and ask prices can be confusing, but we’ll make as much sense of the two prices as we can. The bid price is the price you would get when selling the pair. The ask price, is the price the market is asking for the pair. For instance, the pair GBP/USD may offer a bid price of 1.6101 and an ask price of 1.6104. If you bought the pair at 1.6104, you would immediately be able to sell the pair, at a loss, for 1.6101. Your net profit/loss would be negative 3 pips.

Why the Difference?

The difference between the bid and ask price is the illusive spread mentioned above. This spread is for the broker, for completing our trades. By selling to traders at one price, and buying from traders at another price, the broker is able to make money by completing our trades. A spread of 3 pips would create a profit of $30 for the broker, for each lot traded. This may seem to be horribly expensive, $30 a trade vs $6-7 for stocks, however the spread in forex is actually less than in the stock market.

Stock spreads vs. Forex Spreads

Spreads occur naturally in the stock market as well as in the foreign exchange market. The difference is that the forex market is not a centralized market like the stock markets. When you go to buy stock, there is a spread in the bid/ask price which is profit for the marketmaker, or the person who sits on an exchange and completes orders. In forex, the spread goes to the broker, who is a market maker in that they pair two orders to complete a trade.
All in all, spreads on the stock market are much, much higher than on the foreign exchange. The spread on the foreign exchange market adds up to roughly .03% of a trade. In the stock market, the spread is often 20 times greater, or about .6% of the cost of the trade PLUS the commission to complete the trade. All in all, the costs of trading the foreign exchange market are much cheaper than the stock market

How Money is Made With Forex

So, you know how the forex market works, now its time to find out how investors make money with forex. The premise of the foreign exchange market is simple, to exchange one currency for another currency which you believe will go up in value. The basics are much like the stock market, so anyone with any financial experience should pick up the foreign exchange market rather quickly.

Making Money With Forex

You make money in the foreign exchange market when one currency rises in value against another. For this portion of the tutorial, we’ll use the pair GBP/USD as our example.
We’ll start with 1 lot, or 100,000 units of GBP/USD. We think the Pound will strengthen against the US Dollar, so we buy one lot at 50:1 leverage and a price of 1.60. This means that we are buying $160,000 of the Pound, and staking $3200 and “borrowing” the other $156,200 through leverage. In the backend, our forex broker is moving $160,000 from a US bank account to a Pound denominated account. We’ve essentially sold, or traded, $160,000 for 100,000 pounds.

Cashing In

Four hours have passed and the GBP has strengthened against the USD by 50 pips. The forex broker’s quote is now 1.6050 and our 100,000 pounds are now worth $160,500, giving us a total profit of $500 on a $3200 investment. That’s not a bad return at all, it’s a gain of nearly 15% in just a few hours. Granted, we have used 50:1 leverage, but even then, results like these are more than typical!

Is Making Money in Forex Really That Easy?

Actually, it is. Making money on the foreign exchange market is as easy as knowing in which direction a currency pair is likely to travel. See, the difficulty is not in making money itself, but in knowing how to make money. In the following chapters we’ll reveal how to know in which direction a currency pair will go, but we still have a lot more to learn about the foreign exchange market itself

Forex Market Trading Times

The foreign exchange market is the only market in the world that is open 24/7. Investors are able to place trades every single day of the week, however, most pairs will move very little on the weekends as very few investors stick around to trade.

When Various Markets Open

When one market closes, another one opens, allowing traders to trade the market 24/7. Below is a list of the various open and closing times for the Tokyo, London, and New York forex markets.

The Best Times to Trade Forex

The best times to trade the foreign exchange market is when the most traders are trading. As such, investors should look to trade when more than one major market is open. As you can see in the chart above, the Tokyo and London markets overlap for 1 hour each day, and the London and New York markets overlap for 4 hours each day. This is when the most currency is traded, as more than one location is actively buying and selling different currency pairs.

Different Times, Different Currencies

Though anyone can trade any currency regardless of their country of origin, some currencies are more often traded during certain periods of the day. During the London trading session, the US Dollar (USD), the Great British Pound (GBP), and the Euro (EUR) are the most actively traded currencies. During the Tokyo session, the Japanese Yen (JPY) grows in volume. If your broker offers sliding spreads, those that change depending on volume, your best bet is to place trades during these market times in order to pay the lowest price in spreads and maintain the highest amount of market movements

The Basics of The Forex Market

 

The foreign-exchange market, or forex, is the largest market in the world by volume. That is, more money
exchanges hands on the foreign exchange than in any market in the world. Some $1.5 Trillion is exchanged daily, compared to $25 billion on the New York Stock Exchange. Across the world, the daily volume of stock exchanges is till just one third of the volume of the foreign exchange market! It’s easy to see why the foreign exchange market has grown to be so big, brought about by greater interest in the market by retail investors like you and I.

So What is the Foreign Exchange?
The foreign exchange market is simply a market for money. Currency pairs, such as GBP/USD and USD/JPY are simply the value of one currency against another, in effect the exchange rate of the currencies. In the pairs above, the pairs represent the value of the Great British Pound against the Dollar (GBP/USD) and the US Dollar against the Japanese Yen (USD/JPY).

A Uncentralized Market
There is no central processing market for the foreign exchange. Instead, the market is made up of interbanks, which operate the foreign exchange market by processing orders to trade one currency for another. The market exists only among banks, it does not exist as a market itself. This makes the foreign-exchange market a over-the-counter (OTC) marketplace.

Until the internet opened up online trading for people like you and I, the foreign exchange market was dominated by the banks and other larger players. Small investors could not easily trade the forex market, and could not access leverage and other tools which make it so profitable. In fact, in order to trade the foreign exchange market, you would have to have as much as $10 to $50 million dollars. Today, many brokers allow investors to open up an account for as little as $500, and some even $1!