In the world of Forex trading, volatility equals big profits.
Forex, (which is shorthand for Foreign Exchange) is the largest market in the world. With 3 Trillion dollars in money exchanging hands every day, a trader only has to catch a tiny percentage of that to parlay a small nest egg into significant profits.
And there are significant advantages which trading Forex, or FX, for short, can offer. One is that there are no “commissions” as you generally think of with stock trading. The broker is paid by means of the “spread” between the bid and ask prices. This is really nice, because if you want to get started in FX trading, and you want to start small (which is an excellent idea), all you have to cover is the spread, rather than a spread and a commission.
Here’s how it works….
Because of the various opportunities for leverage and margin in the FX markets, you can start with a small account, say $1,000.00, and adjust your pip size to 10 cents/pip.
As a general rule, a pip is 1/100 of a cent. That may seem unusually small for a trading amount, but believe me, it really adds up!
In a $1,000.00 account, you can set your lot size to leverage $1,000.00, on just a $100.00 margin. Then, each time your currency pair moves 1 pip, you make (or lose) 10 cents. Again, that doesn’t seem like much until you see that currency pairs move 100-300 pips per day! That works out to be $10-$30 daily on a $100 margin, or 10%-30%.
I do not price my gains against my margin. Instead, I price them against my entire account. That means I could be looking at gains of 1%-3% every single day. And believe me, these steady gains can add up quickly!
Getting Started with FX Trading
I’m sure you’ve all seen the Forex advertisements claiming you could double your money every month. And mathematically, that is true.
However, wise traders know the probability of that happening is very low. Truthfully, 95% of all FX traders will run their account down to zero in just a matter of months. That means 5% of all traders are collecting the money from the 95% who are losing! The market is unbelievably lopsided, but that doesn’t mean that a small trader is out of luck. With some patience and a good strategy, an FX trader can return 10% monthly over an extended time period. (Good traders don’t measure their success on a daily time frame—that’s way too short.)
The problem with most novice FX traders is that they are more like gamblers…and they don’t stay in the business long enough to actually get a good return. They blow out their accounts and figure the game was rigged, or that their broker was cheating them, or some other excuse….
The fact is, most traders jump into the deep end of the pool, and don’t know how to swim. That’s because the FX is a different animal from stocks and bonds and commodities…
Why I Am Short the Euro
Right now, there is a lot of activity in the FX markets. Traders and Investors worldwide are trying to ascertain which currency is the most sound and stable, and which will produce the best return. For my money, currently, I am short the Euro. While a lot of people are bashing the U.S. Dollar (and believe me, there are plenty of reasons to do so) from an FX standpoint, the dollar appears to be in much better shape than the Euro.
As all currencies trade in pairs, which means that one trades against another, if I am short the Euro, I will be long the USD. Currently the USD is trading about $1.30 to the Euro. This means it costs $1.30 to buy one of the European currency. I am looking for this to fall over the longer term down to what is called “parity” level. This is where $1 USD will buy 1 Euro. That would be a drop of 30 cents– or 3,000 pips.
If you are keeping score at home, that would equal $300.00 at 10 cents/pip, or 30% on a $1,000.00 investment.
However, a larger trader may size his pip to 10.00 each. That would provide a return of $30,000.00. And all we are doing is trading against the disparities between the two currencies.
As with all markets, the FX does not move straight up or down, and there will likely be a lot of bumps in the road between here and parity. But each one offers a new chance to enter as we sell the rallies.
Until next time…Happy Trading!
Bill Jenkins
April 30, 2009
The Truth About Forex Trading was originally featured in the Tomorrow In Review.