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Understanding Forex Trading, Making money, Risks and profits

Foreign exchange (also known as forex or FX) refers to the global, over-the-counter market (OTC) where traders, investors, institutions and banks, exchange speculate on, buy and sell world currencies.
Trading is conducted over the ‘interbank market’, an online channel through which currencies are traded 24 hours a day, five days a week. Forex is one of the largest trading markets, with a global daily turnover estimated to exceed US$5 trillion.

Beginners Guide to Forex trading
  download PDF Here

Understanding Currency pairs
All transactions made on the forex market involve the simultaneous purchasing and selling of two currencies.

These are called ‘currency pairs’, and include a base currency and a quote currency. The display below shows the forex pair EUR/USD (Euro/US Dollar), one of the most common currency pairs used on the forex market.

Note: Forex prices are often quoted to four decimal places because their spread differences are typically very small. However, there is no definitive rule when it comes to the number of decimal places used for forex quotes.
On the forex market, trades in currencies are often worth millions, so small bid-ask price differences (i.e. several pips) can soon add up to a significant profit. Of course, such large trading volumes mean a small spread can also equate to significant losses.
Always trade carefully and consider the risks involved.
How much can you Make From Forex Trading

You’ve probably heard of stories where a trader took a small account and trade it into millions within a short while.
But what you don’t hear is that for every trader that attempts it, thousands of other traders blow up their account.
Let’s not treat trading as get a rich quick scheme. Instead, treat it as a business you’re looking to grow it steadily over time.
Now, let’s say you can generate 20% a year (on average).
With a $1000 account, you’re looking at an average of $200 per year.
On a $1m account, you’re looking at an average of $200,000 per year.
On a $10m account, you’re looking at an average of $2,000,000 per year.
This is the same strategy, same risk management, and same trader.
The only difference is the capital of your trading account.
Can you see my point?
That’s not to say you can only make 20% a year because, for a day or swing traders, the percentage could be higher (as you have more trading opportunities).
But no matter what strategy or system you’re using…
…the bottom line is you need money to make money in this business, period.
So, how much money can you make from forex trading?
Well, there’s no one factor that determines how much money you can make in forex trading.
Instead, you must look at these 5 metrics:
  1. Trading expectancy
  2. Trading frequency
  3. Account size
  4. Bet size
  5. Withdrawals
Then apply this formula… Trading expectancy * Trade frequency * Bet size
And you’ll have an objective measure of how much money you can make in forex trading.
How much money do I need to start forex 

You can start forex trading with as low as $100 on forextime But some brokers can accept as low as $10 
How do I withdraw my Earnings? 
  1. Go the Withdraw page within the ‘My Money’ section in MyFXTM.
  2. Select the payment method and click ‘Withdraw’.
  3. Select the MyFXTM account or wallet you wish to withdraw funds from and complete the necessary fields.
  4. Select a reason for withdrawal and enter the PIN that was to you via email or SMS and click ‘Submit’.
The time required for the funds to be transferred to your account will depend on the payment method used.
- Bank Wires: Between 3- 5 business days.  
- Credit/debit cards: Between 3 – 10 business days.
- E – wallets: Within 1 business day.
  • Exchange Rate Risk
  • Interest Rate Risk
  • Credit Risk
  • Country Risk
  • Liquidity Risk
  • Marginal or Leverage Risk
  • Transactional Risk
  • Risk of Ruin
Exchange Rate Risk

Exchange rate risk is the risk caused by changes in the value of currency. It is based on the effect of continuous and usually volatile shifts in the worldwide supply and demand balance. For the period the trader’s position is outstanding, the position is subject to all price changes. This risk can be quite substantial and is based on the market's perception of which way the currencies will move based on all possible factors that happen (or could happen) at any given time, anywhere in the world. Additionally, because the off-exchange trading of Forex is largely unregulated, no daily price limits are imposed as exist for regulated futures exchanges.

Interest Rate Risk 
Interest rate risk refers to the profit and loss generated by fluctuations in the forward spreads, along with forward amount mismatches and maturity gaps among transactions in the foreign exchange book. This risk is pertinent to currency swaps; forward outright, futures, and options. To minimize interest rate risk, one sets limits on the total size of mismatches. A common approach is to separate the mismatches, based on their maturity dates, into up to six months and past six months. All the transactions are entered in computerized systems in order to calculate the positions for all the dates of the delivery, gains and losses. Continuous analysis of the interest rate environment is necessary to forecast any changes that may impact on the outstanding gaps.

Credit Risk
Credit risk refers to the possibility that an outstanding currency position may not be repaid as agreed, due to a voluntary or involuntary action by a counterparty. Credit risk is usually something that is a concern of corporations and banks. For the individual trader (trading on margin), credit risk is very low as this also holds true for companies registered in and regulated by the authorities in G-7 countries. In recent years, the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC) have asserted their jurisdiction over the FX markets in the US and continue to crack down on unregistered FX firms. Countries in Western Europe follow the guidelines of the Financial Services Authority in the UK. This authority has the strictest rules of any country in making sure that FX companies under their jurisdiction are keeping qualified customer funds secure. It is important for all individual traders to thoroughly check out companies before sending any funds for trading. It is fairly easy to check out the companies you are considering by visiting the authorities' websites:

Country & Liquidity  Risk 
Although the liquidity of OTC Forex is in general much greater than that of exchange traded currency futures, periods of illiquidity nonetheless have been seen, especially outside of US and European trading hours. Additionally, several nations or groups of nations have in the past imposed trading limits or restrictions on the amount by which the price of certain Foreign Exchange rates may vary during a given time period, the volume which may be traded, or have imposed restrictions or penalties for carrying positions in certain foreign currencies over time. Such limits may prevent trades from being executed during a given trading period. Such restrictions or limits could prevent a trader from promptly liquidating unfavorable positions and, therefore could subject the trader's account to substantial losses. In addition, even in cases where Foreign Exchange prices have not become subject to governmental restrictions, the General Partner may be unable to execute trades at favorable prices if the liquidity of the market is not adequate. It is also possible for a nation or group of nations to restrict the transfer of currencies across national borders, suspend or restrict the exchange or trading of a particular currency, issue entirely new currencies to supplant old ones, order immediate settlement of a particular currency obligations, or order that trading in a particular currency be conducted for liquidation only. OTC Forex is traded on a number of non-US markets, which may be substantially more prone to periods of illiquidity than the United States markets due to a variety of factors.

Leverage Risk
Low margin deposits or trade collateral are normally required in Foreign Exchange, (just as with regulated commodity futures). These margin policies permit a high degree of leverage. Accordingly, a relatively small price movement in a contract may result in immediate and substantial losses in excess of the amount invested. For example, if at the time of purchase, 10% of the price of a contract were deposited as margin, a 10% decrease in the price of the contract would, if the contract were then closed out, result in a total loss of the margin deposit before any deduction for brokerage commissions. A decrease of more than 10% would result in a total loss of the margin deposit. Some traders may decide to commit up to 100% of their account assets for margin or collateral for Foreign Exchange trading. Traders should be aware that the aggressive use of leverage will increase losses during periods of unfavorable performance.

Transactional Risk 
Errors in the communication, handling and confirmation of a trader's orders (sometimes referred to as "out trades") may result in unforeseen losses. Often, even where an out trade is substantially the fault of the dealing counter-party institution, the trader/customer's recourse may be limited in seeking compensation for resulting losses in the account.

Risk of Ruin 
Even where a trader/customer's medium to longer term view of the market may be ultimately correct, the trader may not be able to financially bear short-term unrealized losses, and may close out a position at a loss simply because he or she is unable to meet a margin call or otherwise sustain such positions. Thus, even where a trader's view of the market is correct, and a currency position may ultimately turn around and become profitable had it been held, traders with insufficient capital may experience losses.


Step 1: Understand the Lingo

A firm grasp of the most commonly-used forex lingo will make your entry into the market much simpler. Some words and phrases you’ll hear over and over again include:
  • Base currency: The currency you are holding. If you’re from the United States, your base currency is most likely the U.S. dollar.
  • Quote currency: The currency you are going to purchase.
  • Bid price: The price that your broker would be willing to “bid” or “buy” the base currency you are holding.
  • Ask price: The price that your broker will “ask” you for in exchange for buying your quote currency of choice. The ask price is always higher than the bid price.
  • Spread: The difference between the bid price and the ask price. This is just the broker’s commission.
  • Pip: The smallest measurable value of currency movement. The word “pip” is an acronym standing for “percentage in point,” and a single pip is equal to 1/100th of 1% of your currency. For example, if the value of the USD rises by a single pip, that means it increased in value by $0.0001.
Once you know the lingo, you can read a few forex books. Make sure to check out Benzinga’s picks for the Best Forex Books for Beginners. Forex books may seem like they’d be dry, but the authors make sure the reader is entertained and well-informed.
2. Choose the Right Broker
Before you begin forex trading, you’ll need to choose a brokerage firm. Your brokerage firm will help you make trades, and many brokers also offer additional financial services. Working with a reputable broker can mean the difference between profiting from your trades and losing money between the bid and the ask price.
Don’t be afraid to thoroughly research and read the reviews of a variety of brokerage firms. Not all brokerage firms, offer forex trading, so make sure its available before you open an account. Working with a broker that offers multiple outlets for customer service is highly recommended for beginning traders.
If you can’t figure what forex broker to use – don’t worry. Benzinga compiled a list of some of the Best Forex Brokers in the United States to help you narrow down your choices. If you don’t have time to read our full review, take a look at some of our quick picks below.

Step 3: Analyze the World Economy

Making money trading currencies is all about accurately predicting the movement of the global economy. To be a profitable trader, you must convert your base currency into a quote currency set to rise in value, then convert your quote currency back to your base currency when the value peaks.
Research the trading positions, GDPs and political climates of countries you are interested in purchasing currency from, and you’ll get a great “lead” on which quote currency is worth your investment and which countries have economies projected for growth.
This customizable widget from Trading View is a great starting point.

Step 4: Make Your First Trade

Once you’ve decided which quote currency you’re going to buy, it’s time to place an order for your first trade. Your brokerage firm probably provides an online trading software that allows you to place an order to buy or sell a currency.
Using your trading platform, place a market order with your broker. The specifics of your platform may vary.
View a standard market order execution:
After you’ve finished placing your order, sit back and let your broker handle the rest.

Final Thoughts on How to Trade Forex

Before you get started, read up on sometrending forex news and understand therisks associated with currency trading. Your wallet (and your peace of mind) will be more at ease. 
Below is a video on Forex Trading for beginners 

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