Earn money by forex trading

WHAT IS FOREX TRADING?
Forex trading, simply, is exchanging one
currency for another. Most are traded against
the dollar. Other highly traded currencies are
the euro, pound, yen, Swiss franc and
Australian dollar.
The first currency quoted in a currency pair on
forex is called base currency, which is
generally the domestic currency. The second
currency is called the quote currency and is
typically the foreign currency.
For example, if you were trading in rupee-
dollar, rupee would be the base currency and
dollar the quote currency. The price shows
how much quote currency is needed to get
one unit of the base currency.
In this market, the volume of trade is
expressed in the base currency. Example: In a
100,000 rupee-dollar trade, 100,000 is the face
value and is a standard contract or a lot. No
matter which currency you have in your
account, the trading software automatically
sets the exchange rate.
The profit or loss in trade is expressed in the
quote currency, as the currency pair price is
given in it. For instance, if you buy euro-dollar
at 1.3000, and sold it at 1.3010, your profit is
$0.0010 or 10 pips for each euro. A pip is the
smallest measure of price move on an
exchange.
Spread: Each trade has two prices - bid and
ask. The bid price is the rate at which the
broker buys and you get on selling. The ask
price is the offer price at which the broker sells
and you pay to buy. The difference between
bid and ask price is the spread (broker's profit).
In a euro-dollar trade at 1.4000/1.4003, the
spread is 3 pips. On trading 100,000 euro-
dollar, the broker earns 100,000 x 0.0003 =
$30, irrespective of your profit or loss. If the
currency pair rises 10 pips (from
1.4000/1.4003 to 1.4010/1.4013), you will earn
only 7 pips because you bought at 1.4003 and
sold at 1.4010.
Typically, a lower spread is better for traders,
as it gives higher profit.
Leverage and margin: In case of a small
investor who invests, say, $1,000, if the price
moves up by one per cent, you will earn $10
and your broker only $0.30. It's not a great
deal for you; worse for your broker. Thirty
cents will hardly justify his salary.
Ergo is the concept of leverage financing,
where a trader deposits only a presumed risk
(margin) and the rest is provided by the
broker. Margin requirements vary from one to
five per cent, depending on the broker. A
margin of one per cent may translate into a
trade of up to $100,000, even if you have only
$1,000 in your account. The margin
corresponds to a 100:1 leverage.
Applying a 100:1 leverage, as above, your
and the broker's profits are multiplied by 100:
you get $1,000 (100 per cent of your
investment) and the broker gets $30. The flip
side -- if the price falls one per cent, your
entire capital is lost.
Margin call: On opening a trading position,
you can designate a part of your capital as
collateral on your margin, which will be set
aside and protected. On a capital of $3,000,
say, your margin is $1,000. You use $2,000 to
trade and if you lose, the broker will close
your position and you will get back the
collateral.
Let's say you bought 100,000 units of euro-
dollar at $1.3217, which rose to 1.3227. You
immediately sell those units and get $100
back. But, if the rate declines to 1.3207, you
stand to loose $100.
Some losses are inevitable for any trader.
However, the key is to limit losses by using
stop-loss and controlling risk. If you set a limit
order, you would have realised the potential
profit without having to monitor the trade
closely.
Caution: Making $100,000 from $100 is
possible in this trade, provided you follow the
rules of the game - be careful. "However,
investors tend to equate currency with stocks.
A big mistake," said Pramit Brahmbhatt, CEO,
Alpari India. The risk factors are more complex
here. Any change in macroeconomics is a big
hazard, adds Brahmbhatt.
Rekha Mishra, senior research analyst,
Bonanza Portfolio, concurs: "Unlike other
markets, forex is highly volatile and most
liquid. One should follow certain ground rules
here in order to manage risk."
You can start with analysis, fundamental and
technical. Skill to anticipate can be honed only
by experience over a period of time.
"A demo account may expose you to the heat
of a fast-paced, decision-making process,"
said a forex trader. "One can also start trading
with mini or micro accounts to reduce risk
appetite." But, do not draw conclusions based
on earlier trades.
Despite being a 24-hour market, all hours may
not be equally beneficial for trading on forex.
You may plan your trading to catch the
highest trading hour(s) to maximise profits.
Freshers can take small exposures till they gain
confidence.

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