Forex and stock investing are not the same and it is wise to know their differences before you start trading.
Stock Investment vs Forex
For stocks investment, you're buying into a company. Buying shares is short for 'purchasing a share of ownership'. By contrast, when you enter Forex by buying Japanese yen, no one is making an investment in Japan.
Leaving politically motivated actions by large central governments, currency is usually exchanged in order to facilitate the movement of goods and the payment of services between multiple countries, but that's a relatively small percentage of the total $3 trillion daily volume. The bulk of this daily transaction comes from simple speculation.
Well, perhaps it is not very simple. Trading euros against dollars against yen against pounds against... in a twenty-four hour market with a dozen time zones... can get very complicated- if you don't know what you are doing.
Margin differences between the two markets are enormous. Most stock brokers will leverage (lend investors money) up to 2:1. In currency trading 100:1 is common and some forex trading brokers are even willing to offer you up to 500:1. Since price movements occur twenty-four hours a day every day, margin calls can occur while you are sleeping and that can make for a bad awakening.
Trading cycles are generally much shorter. Stock investments are made, even by professionals, on timelines of months or years. Currency trades are often completed within a day or even minutes. Yes, that happens in the equities markets, too. But, it isn't the norm even though it's more common than ever.
All these differences suggest some lessons for the investor interested in forex trading.
Do Your Homework!
Be aware of factors affecting currency rates. That includes not only the standard domestic economic indicators, but trade imbalance figures, central bank policy changes and others.
Watch the market
Small, rapid changes can force your position into an area that motivates your broker to execute a are even willing to offer you up to 500:1. Since price movements occur twenty-four hours a day every day, margin calls. Be prepared to cover your position or liquidate at times favorable to you. Know the broker's margin call policy and practice. You'll be required to sign a margin agreement when opening an account. Read it first.
Practice, Practice, Practice
When starting out, take advantage of the demos offered by most brokers. Execute paper trades - trades that don't execute on the real markets - using the real currency figures.
Get a feel for the amounts, the percentage changes and get used to converting currencies from one country to the next. You should be able to estimate without much thought how much 1,000 pounds is in dollars at the current exchange rate.
Opinions and size don't matter.
Unlike stock markets, the size and complexity of the forex markets makes it virtually impossible for any investor, no matter how large, to dominate the price. Program trading, fund trading and so on that can cause large movements in particular equities has a negligible effect on currency prices.
Similarly, analyst projections have much less influence in currency trading. Many will read eagerly some influential columnist's opinion of the future of IBM. Opinions of that kind are largely discounted in currency trading.
It's a different world out there
There are around 4,500 stocks listed on the NYSE and 3,500 on NASDAQ. And many more on other exchanges. A few hundred are major players. By contrast, only a dozen currencies account for 99% of all trades. With four major markets trading twenty-four hours per day, the action is very concentrated.
No need to be intimidated though
Currency trading has moved in the last decade from the realm of the professional trading millions at a click to mini-accounts of $250. One such broker is Forex Yard. If you would like to further your investment knowledge, I would highly recommend that you read this book-
Trading for a Living by Dr A. Elder.
Quick Forex Tip #7
Like other types of investment, you must be aware of what kind of ground you are stepping into. In other words, before getting a live Forex trading account, you must be properly educated first about the background of Forex trading. You must learn how you will maximize your earning potentials as well as decrease the risk that you are into through practicing with free demo accounts. Moreover, you must have a trading system to follow and the necessary tools that will help you analyze varying conditions of the Forex market to position yourself on the profiting aspect of a certain trade. |
Quick Forex Tip #8
In Forex market alone, there are HUGE major players (such as Central banks, commercial banks and companies) partaking on the $3 trillion worth of daily turnover. With a large number of Forex players, there is really a need in switching from manual to automated Forex trading system.
There are two types of automated Forex trading system. They are:
1. Desktop-based system- all Forex-related data are stored on your desktop's hard drive. This system is unpopular to Forex traders because all data are susceptible to computer virus contamination and other security problems. Worse, when the computer malfunctions, all essential information might be lost and cannot be retrieved (unless you have some back-up files of your own). However, it is little expensive compared to the other types of automated trading system.
2. Web-based system- the security of your Forex account and other data are provided by your web-based provider. These are hosted on secured servers. It is also convenient in the sense that there will be no software required and it is universally compatible with your Internet browser. |
Quick Forex Tip #9
Forex trading is getting more and more popular each day. Besides, who wouldn't want to trade in the largest and the most liquid financial market in the world? Trading in Forex will certainly give you the opportunity to earn a lot of money. However, trading in this ever liquid market also has its risk. It is a fact that many people who traded in Forex lost a substantial amount of money and some of these people are seasoned traders.
This is why it is very important for you, as a beginner trader in the Forex market, to have the proper knowledge and education on how to trade in the Forex market. Firstly, there are hundreds or even thousands of available websites in the internet that offers Forex education. Some of these websites offer dummy Forex trading where you can practice trading in the Forex market using dummy money. |
