The forex market is one of the largest trading markets in the world; in which one currency is traded for another.
It’s a realm with many levels of access, which depends on how powerful a player you are in the market. A small percentage of large scale businesses use the market for its intended purposes, to exchange currency to pay for services and materials as well as the salaries of workers who live in other countries. The remaining majority perform transactions purely to earn a profit.
Interbank deals account 51% of all transactions. In this upper tier, everyone is in the loop on how the market will flow. Mutual funds, pensions and insurance companies make up the second tier. As levels decrease so do the available capital and buying power within the market. These hedge funds have had an increased impact on the forex market since 2001. Central banks can also step in when needed to regulate the value of their currency and assist in economic matters.
Before one takes the leap into running a fully-fledged Forex Trading Enterprise, one must be aware that forex trading is not your run of the mill business. It is considered one of the most unregulated markets in the world. There are no authorities to govern procedures and no mediating bodies to intervene in case of disputes between buyers and sellers. Almost every transaction is performed with the click of a button.
The popularity of the internet has opened forex trading as a business option to the public. It was previously an area in which businesses such as hedge funds, banking institutions and large-scale corporations were only able to flex their muscle.
Vast technological improvements, at the onset of the 21st century, removed the veils of mystery to reveal a foreign exchange market that can alarmingly be likened to the Wild West. There are no punishments against insider trading, most big deals come from knowledge gained from close government sources. Unlike futures trading, there is no upper limit as to how much currency you can purchase if you have the capital to back up your deal. It is also the most accessible market in the world as it online 24 hours for every working day.
This seemingly less regulated market along with the prospect of making millions in mere seconds makes trading in Forex a lucrative business. In this article we will overview exactly how to start a profitable online forex business.
Research is the key. The obvious first step would be to arm yourself with knowledge, especially to the specific lingo related to forex. While forex markets appear to trade similarly to Equity markets, there are key differences.
There is no over the counter trade, meaning there is no universal single exchange rate for any currency pair, as trading continues for 24 hours. When the Asian markets closes, European markets are in the middle of their day of trades, while their American counterparts are opening their trading day.
Like any market there is a ‘spread’, which is the difference between the buying and selling price. These differences are abbreviated as XXX/YYY for example USD/EUR. Changes in the differences between buying and selling prices are measured in pips, a term unique to forex trading. It measures changes in prices to the fourth decimal place, since the values of currencies usually do not register large scale changes in such short spaces of time.
Since losses to an inexperienced trader can be quite pronounced, it’s better to gain experience by trading with a practice account. There are many legitimate trading platforms which offer this service for a small minimal fee or even for free.
The amount of capital you have at your disposal determines the type of leverage you require. If you have limited capital available, one would require the use of a broker who leverages the amount of your bid. This is because the profits gained in trading currencies are usually between 3 to 20 pips, an infinitesimally small fraction of a cent. Leverage means that for example for every dollar you bid your broker backs you up with 100 dollars more, thereby increasing your profit margin but also increasing your risk factor should you make a loss. Traders with less capital are offered smaller accounts with minimum balances of around $250.
Once you have gained sufficient experience, it’s important to decide on a market strategy, one which hones in your basic skills and utilizes your trading confidence while minimizing risk. This will ensure a successful endeavour through superior skill development.
Risk taking is essential in any business, but taking too many risks in forex trading can result in huge and often unnecessary losses. The best way to avoid this is practice trading with a level and cool head.
Remember every forex trade should be a calculated decision and not a blind gamble; one has to analyse all the information related to country whose currency you are trading in. There are many indicators which traders use to determine the projected prices of currencies such as:
• Non-Farm Payrolls
• Purchasing Managers Index (PMI)
• Consumer Price Index (CPI)
• Retail Sales
• Durable Goods
One should also pay close attention to current affairs. Meetings and conferences at national or international levels, as well as even tiny changes in position of the monetary regulators such as the Federal Reserve or the IMF are very important.
Apart from analysis of the media, one must develop a significant skill in technical analysis. Which involves an above average understanding of mathematical concepts such as:
• The Elliott Waves
• Fibonacci studies
• Parabolic SAR
• Pivot points
A useful tip for beginners in the business is to trade alongside the trend and accumulate smaller profits over a longer time rather than take uncalculated risks to ‘get rich quick’. Treating your forex trading as a business means considering all areas of cost which eat into your profit. Some of these factors include:
• Losing trades
• Broker spreads or commissions
• Computer (hardware)
These are the major running costs of any online Forex business. The key to running a successful Forex Business is consistent and disciplined thinking and behavior.