Forex trading is a market that exists primarily online. There are many different currencies being traded on this market including: U.S. dollars (USD), British pounds (GBP), Canadian dollars (CAD), Swiss francs (CHF) and Eurozone currencies (EUR). The Forex market is highly leveraged meaning that the more money that is placed on the line the higher the percentage of profit that is generated from each transaction that is made. As a trader you are allowed to open a trading account with a broker. Once the account has been opened, you are typically required to open a customised Forex brokerage account (also known as a customised trading account) where your maximum draw down (i.e. your maximum loss over the total number of trades you make during any one trading session) is determined.
There are two types of trading strategies that you are permitted to use once you have an account under your belt: Hedging and Contingency. Hedging occurs when you take positions in both the long and short term to mitigate any potential losses that may occur as a result of price movements. With hedging you cover the most immediate downside risks by holding positions in both the short and long terms. This is achieved by placing protective bets on price movements that will either go up or down. The primary benefit of hedging is to protect your capital and limit your exposure to risk, whilst also ensuring that you are profitable from the investment that you have made.
Contingency is very similar to hedging but instead of holding position over time, you place protective bets over short periods of time. For example, if you are anticipating the price of oil will drop by $5 within the next two days then you would sell your existing free account to open a new, cash-managed, hedged account. The primary benefit of this form of trading is that it is designed to minimise your risk and increase your profitability. Although every trader will have different goals for their free accounts, they all share a common aim; that your account is maximised and profitably held. This form of hedging is one of the core elements of any good Forex trading strategy.
As part of your forex trading strategy you will need to ensure that you are always aware of the quotes that are being offered. These quotes are essentially a comparison of the price of one particular base currency against another. The quote currency is typically the currency that is being quoted against the US dollar, it could be the Euro, the Japanese Yen, the Australian Dollar, or the British Pound. These quotes will vary widely based on which base currency that you are trading against. It is essential to be aware of the quotes that are being provided by every major forex broker.
There are also different levels of account risk management that are available when it comes to choosing the best managed account provider. You can choose between low, medium and high level risk management levels which correspond to the amount of money that you would like to deposit into your account, the length of time that you wish to maintain your account open, and the amount of time you wish to keep your trading account open. Of course, if you are new to the forex market, or if you have recently lost your job, or have other financial problems, then it may not be possible to meet these criteria and therefore you will require a higher account risk management level.
The most important factor that will determine how profitable you will be in the foreign exchange market, is the nature of the currencies that you deal with. If you deal with one or two mainly traded commodities, your profits will be relatively low. However, if you deal with a wide variety of different currencies, you will have a much higher chance of profiting from forex trading. This is because there is much less risk associated with dealing in a wide variety of different currencies compared to dealing with only a couple of main ones. In order to improve your chances of profiting from forex trading, it is important that you learn about the most commonly traded commodities.
When we speak of a forex trading system, it is usually in reference to a specific pair of currency. The pairs include the US dollar against the Japanese yen, the Euro against the British pound, and the Australian dollar against the Japanese yen. There are a number of different base currencies that are traded on the forex markets. These base currencies include the Euro, the US dollar, the Japanese yen, the Swiss franc, the Canadian dollar, the Australian dollar, and the Australian AUD. As you become more educated about the forex markets, you will learn that there are many more other currencies that are traded on the Forex markets, but these four currencies are the most commonly traded.
It is important that you know which currency pair the US dollar is expected to be traded against in order to profit from forex trading. In other words, if you trade forex trading against the EUR/USD, then you will make money when the EUR/GBP falls in price and the USD increases in value. Similarly, if you trade forex trading against the GBP/JPY, then you will make money when the GBP/JPY drops in price and the USD increases in value. If you understand the basic information about these currency pairs, you will also find it quite easy to determine when is the appropriate time to purchase or sell a particular currency.