Investing 101 Targeting your Investment Strategy

Foreign Currency trading can be the vehicle towards great investment opportunities, when trading on leverage, it is possible to double an account overnight, but also it is possible lose your assets just as quickly. Foreign exchange trading is not for everyone, but I think just about everyone should at least attempt on a demo account and once one builds confidence, He or she may elect to trade with real money. I personally have been trading forex (which is short for foreign exchange since early February, and let me tell you, I have lost money on foreign exchange. I got a little bit of beginners luck, started to look good early on, but I quickly found out how bad losses hurt. A word of advice do demo trading for a month minimal, the test is doubling a mini account of around $1,000 once you do that you know you have what it takes to start trading for real.

So now that I have that little intro out of the way I want to provide information, that I wish I knew back when I started foreign exchange. First off how do you make money? When I started, I realized if you buy and the rate goes up and you sell you make money, but really, I did not really understand why. I did not even really know basic terminology, like what is a lot? Of course I know now and I will tell you a lot is a tradable unit of currency in the foreign exchange market. A pip is a point of movement in the market for instance if the usdjpy moves from 0.8437 to 0.08438 it has increased one pip. There are two types of lots mini lots and standard lots which usually go hand and hand with mini accounts and standard accounts, basically if you have a mini account you probably trade mini lots, if you have a standard account you trade standard lots. Using mini lots a pip of movement is worth approximately 1 us dollar. When using a standard lot one pip of movement would be worth approximately 10 us dollars in increase or decrease. Another term is “the spread” which is the difference between the bid and the ask price. This means if you enter a trade in the usdchf the bid price might be 1.2271 and the ask price might be 1.2274. If you sell, which is the equivalent to a stock market short sell where you do not have any of that particular stock you are just simply betting that it will decrease in value, you would sell at the ask price of 1.2274 and not be in profit until the market moves past the bid or 1.2271. The difference between the two prices is the spread and it goes to the broker as a fee for entering the trade. The pip spread differs in each currency and each broker may have different spreads for these currencies, so brokers offer spreads as low as 1 to 2 pips, while others may offer 3 pips as a minimum. The next major term you would need to know is currency pair. That’s what all these little abbreviations I’ve been throwing at you mean. USDJPY for example is the dollar-yen pair where you put the US dollar against the Japanese yen and the rate is the exchange rate. If the rate is at 121.06 that means that is how many yen you can buy for one dollar. As the Yen changes in value against the dollar or visa versa the rate can change. If you enter into a buy position in the USDJPY you are actually buying the dollar and selling the yen, so you are hoping that the dollar will increase in value, and or the yen will decrease in value.

So that’s the basic terminology, so sign up for a demo account and experiment a little with trading, get your feet wet, and I will have another blog for you tomorrow.