An introduction to forex - By: Andre Issey

Forex trading, put simply, is the exchange of currencies to take advantage of the varying values of each currency relative to another currency. It can also be used by companies to provide a degree of security, and it can be useful for companies to be able to pay in different currencies based on where they are buying from. For example, an American Company could buy European goods and pay for them in Euros. Forex traders however, generally stick to speculative trades where the buyer has no intention of taking a delivery of the purchased currency. Such trades are made via a Forex broker.

Forex traders use a technical analysis to predict future price movements and make according investments. The level of analysis can be critical for entry points, exit points, and knowing when to cut your losses on a trade. While there are hundreds of indicators to look at, the trick is finding the right ones. Common indicators include the RSI, or relative strength index and the MACD, or Moving Average Convergence Divergence, which is a good measure of the “momentum” of a currency.

Other tools used for the trading include things such as leverage and stop losses. Leverage is a loan from a forex broker to multiply the gains or losses that you would make on a trade. A stop loss is a tool that buys you out of a trade if it falls below a certain preset limit to stop trades from spiralling out of control. Trailing stop losses can also be used to follow an uptrend but not a downtrend. This can be used to protect profits already made on a trade.

The extent of stop losses and leverage often depends on volatility of a currency pair. A highly volatile currency pair with large daily swings would be very risky to use a high leverage since that could equate to large losses. On very stable currency pairs however, a larger leverage could be used to increase the possible profit. Stop losses can also be adversely affected by a volatile market, if swings in the market are large; they might “trip” your stop losses and cash you out of a potentially winning trade. Though experts have said, don’t lower your stop losses in a volatile market, since this is effectively cutting holes in your safety net.

Good luck on your trades, and please keep in mind forex and CFDs are leveraged products, incur a high level of risk and may not be suitable for all investors. You should not risk more than you are prepared to lose. Before deciding to trade, please ensure you understand the risks involved and take into account your level of experience. Seek independent advice if necessary.

About the Author

The author has an interest in forex trading and forex brokers.

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