Basic Money Management For Forex Traders
Money management in the foreign exchange currency market requires educating yourself in a variety of financial areas
. First, a definition of the foreign exchange currency or forex market is called for. The trading forex is simply the exchange of the currency of one country to another. The relative values of various currencies in the world change on a regular basis. Factors such as the stability of the economy of a country, the gross national product, the gross domestic product, inflation, interest rates, and such obvious factors as domestic security and foreign relations come into play. For instance, if a nation's government is unstable, is expecting a military takeover, or is about to become involved in a war, then that nation's currency value may go down in relative value compared to the currency of other countries.There are five major forex exchange markets in the world, New York, London, Frankfurt, Paris, Tokyo and Zurich. Currency trading happens around the clock in various markets, Asian, European, and American. With different time zones, when Asian trading stops, European trading opens, and conversely when European trading stops, American trading opens, and when American trading stops, then it is time for Asian trading to begin again.
Most of the trading in the world happens in the forex trading markets; smaller markets for trade in individual countries. Forex trading is the simultaneous buying of one currency and selling of another. Over $1.4 trillion dollars, US of forex trading occurs daily and sometimes fortunes are made or lost in this market. The billionaire George Soros has made most of his riches in trading forex. Successfully controling your money in forex trading really needs an understanding of the bid/ask spread.
Simply put the bid ask spread is the difference between the price at which something is proffered for sale and the price that it's actually bought for. For instance, if the ask price is 100 dollars, and the bid is 102 dollars then the difference is two dollars, the spread. Many forex traders trade on margin. Trading on margin is buying and selling assets that are worth more than the money in your account. Since currency exchange rates on any given day are usually less than two percent, forex trading is done with a small margin. To use an example, with a one percent margin a trader can trade up to $250,000 even if he only has $5,000 in his account. This means the trade has leverage of 50 to one. This amount of leverage allows a trader to create good incomes very quickly. Of course, with the chance of high incomes also comes along with high risk.
People who do forex trading do so because they're allured by 24-hour trading days, by strong liquidity - unlike stocks, buying and selling is almost instantaneous - and the truth that forex trading usually happens without paying commissions.
Like many other speculative business, a key part of money management for the forex trader is only using cash that can be place at risk. It's wise to set aside a portion of your net worth and make that the only cash you use in trading forex. While the chances of good profits are there, if you should have a problem and get wiped out, you'll only have a limited amount of money placed at risk. Also remember that the forex market is in constant motion. There are always trading opportunities. If a currency is becomming stronger or weaker in relation to other nation's currencies there is always a way for profit. For instance, if you believe that the Euro is gong to get weaker compared to the US dollar then selling Euros is a great bet. If you believe that the dollar is going to become weaker than the yen, or the pound sterling, then selling dollars is wise. Staying updated on the news and current events in the nations whose currency you hold is a good move in trying to predict the trend of the currency rates. Numerous of people get to the points where they can predict currency varations based on political or economic news in a given country. Bear in mind that though forex trading is all about speculation, managing your money and controlling how much you can afford to gamble should be prioritize.
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