Menu

Posts for forex market

Currency Trading: Is It Right for Me?

How to Invest Money, Make Money Online, Personal Finance - Janice Friedman - July 20, 2020

man holding smartphone

Are you looking for your next significant investment? Maybe you’ve recently come into some extra money and want to make it grow. Currency trading could be the right move for you to make.

Currency trading on the world’s foreign exchange market is one of the simplest ways for individuals to break into the world of investments. It’s relatively easy to learn, has less risk than many other forms of investment, and practically anyone can do it successfully.

What Exactly Is Currency Trading and How Does It Work?

Currency trading by individuals takes place 24-hours a day online at the foreign exchange market. Also, currency trading takes place at financial centers around the world, so the market is always open for traders. New York, Tokyo, Sydney, and London are a few of the main hubs. If you’re in search of a form of investment that you can micromanage on your own time, in between work and sleeping, trading currency may be right for you.

There are three main “lots” involved with currency trading. Each lot is made up of the base currency of your choice. There is the standard lot, which is 100,000 units of currency. The mini lot, which is 10,000 units of your chosen money. And last but not least, the micro lot, which is 1,000 units of base currency.

The Forex

As mentioned above, currency trading takes place on the Foreign Exchange Market, also known as the Forex market, or FX for short. It is the largest market for investing in the world and continually grows every year. Several trillion dollars worth of trading currency is completed daily on the Forex market.

File:FOREXX.jpg

Image CC by 4.0, by Raksha Shanbhag, via Wikimedia Commons

Until recently most of the currency trading taking place on the FX was done by professionals. Now, with the rise of online currency trading platforms, just about anyone who is interested in trading currency can get involved.

The Forex market appears as somewhat complicated at first glance due to the level of various players and operations taking place. To give you a better idea of how trading on the Forex market works let’s take a look at the major players who’re involved.

Central banks

The central banks of the world are by far the most crucial players of trading currency on the FX. Any actions by the world’s central banks directly influence the economy of their nations. They control the market operations and set the interest rates which dictate the rise and fall of currency rates.

Other banks

Banks are one of the most significant players involved with currency trading. The livelihood of big banks depends in large part on their trading currencies on the Forex market. These banks help FX investors with their transactions as well as partake in speculative currency trading themselves.

Corporations

Large corporations and global firms that deal with importing and exporting rely on the Forex market to aid in the process of transferring goods and services.

Professional investors

To grow various funds, professional investors are a frequent participant in currency trading. Hedge fund managers are also known to partake in speculative currency trading as well.

Individual traders

In today’s world of currency trading, individual traders have become one of the biggest proponents of the FX.

The major currency pairs

Currency trading is the act of purchasing and selling one primary currency for another. These traded currencies are currency pairs. Three letters represent each type of money that is available for trade on the Forex market. The first two letters are an abbreviation of the country from which the currency originates. The third letter represents the official name of the money.

money from around the world laid out on a table

Image CC by 2.0, by Images Money, via Flickr

There are quite a few currency pairs available for trading on the Forex market. However, most professional investors and individual traders stick with the most liquid currency pairs. The four “major” currency pairs, and the three “commodity” pairs.

The top four major currency pairs

  • The euro and the U.S. dollar (EUR/USD)
  • The U.S. dollar and the Japanese yen (USD/JPY)
  • The British pound and the U.S. dollar (GBP/USD)
  • The U.S. dollar and the Swiss franc (USD/CHF)

The top three commodity currency pairs

  • The AUS dollar and the U.S. dollar (AUD/USD)
  • The U.S. dollar and the Canadian dollar (USD/CAD)
  • The New Zealand dollar and the U.S. dollar (NZD/USD)

Only a small amount of all currency trading on the Forex market consists of currency pairs outside of these primary seven currency pairs. However, there are slightly over two dozen combinations that traders can invest in using just these seven currencies.

Understanding pips

To be successful at currency trading on the FX, one must first understand all of the basics. Pips are one of the essential pieces of information that you’ll want to learn regarding currency trading. A pip, or percentage in point, is the smallest FX trading measurement. A single pip typically accounts for one-hundredth of one percent.

Because individual traders tend to focus on micro lots for currency trading, it’s crucial to understand that one pip is roughly a ten cent move in the value of currencies. Trading in micro lots makes currency trading much less risky in the case that the trader fails to reach their desired goals.

When dealing with mini lots, a single pip equals one dollar. In a standard lot, one pip equates to ten dollars worth of currency. Certain money types move up to 100 pips at a time per trade. This investing makes losses extremely manageable for experienced traders.

Currency trading lingo

If you’re interested in getting into currency trading, you need to be familiar with the regular currency trading lingo. Here is a handful of the most critical currency trading vocabulary for you to get to know before trying your hand on the FX.

Nicknames for popular currency

  • Aussie: the main nickname for the Australian dollar
  • Buck, and greenback: are both nicknames for the U.S. dollar
  • Cable, pound, and sterling: the nicknames for the GBP
  • Kiwi: the main nickname for the New Zealand dollar
  • Swissie: the primary nickname for the Swiss franc
  • Little dollar, and loonie: nicknames for the Canadian dollar

Typical FX measurement lingo

  • Figure: a term which indicates a round number, 1.4 for example
  • Yard: a word which represents one billion units of currency

Making Money with Currency Trading

To become successful in currency trading, you must attain a certain amount of knowledge as well as exert enough willpower and have a bit of luck. With enough determination, you’ll gradually build enough experience. Generating profits from the majority of your trades will eventually become second nature.

hand holding a stack of money in its palm

Image CC by 2.0, by Pictures of Money, via Flickr

The best way to start currency trading is with small amounts of money. There are even demo accounts that allow you to practice trading on the FX. Watch the Forex and financial news reporting daily. Study global trends in the world’s economy and practice as many trades as possible.

Common roadblocks

There are a few common roadblocks along the way as you start with FX trading. Investing too much before learning the ropes, for instance, will shut you down before you even get going. Likewise, a common fear of losses is crippling to many individual traders as well, possibly because they are solely responsible for their financial losses. Their trading funds are also much more limited in comparison to professional investors or bankers.

On the other hand, greed is something to look out for as well. When you begin to understand the ins and outs of trading on the FX, it’s all too easy to become a bit sure of yourself and even greedy. The best way to prevent unnecessary losses due to this sort of behavior is to make yourself a hard and fast rule about how many pips you deal with each day.

Keep in mind that with any trading, whether it be stock trading, commodity trading, or trading on the FX, there will always be risk involved with such activities. You should also be fully aware of the fact that between 75 percent and 80 percent of individual traders who invest in FX currency trading end up losing money at some point or another.

So, Is Currency Trading Right for You?

That answer is entirely up to you, and factors such as your personal preferences and current life circumstances. If you feel comfortable with calculated risks, are overly confident in your ability to gauge the economics of countries around the world, and have a bit of cash to spare, Forex trading could be just the thing for you.

Don’t forget that you can always start off with FX trading risk-free by opening a demo account. Remember to study the fluctuations of the major currency pairs. Also, take full advantage of live trading on a demo account until you’re comfortable with your level of understanding.

Do you have experience with currency trading on the Forex market? Good or bad, we’d love to hear all about it in the comments section below! If not, then what are you waiting for? Get out there and learn the basics so that you can get to work building profits through FX currency trading.

Good luck!

Continue Reading

Why You Need to Understand the Commodity Channel Index

How to Invest Money - Janice Friedman - May 13, 2020

Commodity Channel Index

You’re new to the world of Forex trading. You are just starting out in the Forex market. You’re learning new terms and how they relate to buying and selling in the marketplace. And, a new word pops into the picture to further confuse you. The Commodity Channel Index, or CCI. What is it? How are you going to use it as a trader?

These are all questions that beginners ask about. It may seem overwhelming at first, but luckily it’s much easier to understand than you probably think!

What is the Commodity Channel Index

The Commodity Channel Index, or CCI, is an indicator providing technical analysis of trends in the Forex market. This indicator belongs to the oscillator group of Forex indicators. The index oscillates between levels of +/-100, with modifications to +/-200, and has a lookback period of 14-days. When CCI rises or dips below the 100 (or 200) level, this indicates over buying or selling is occurring.

The CCI is a standard indicator for Forex traders, meaning they don’t have to download it on different platforms. It comes standard on different trading platforms. The oscillator measures momentum in the Forex market. In trading, momentum refers to a security’s price. It indicates whether the rising or falling of that price will continue in the same direction. The Commodity Channel Index calculates and depicts the rate at which prices are rising or falling. And, it indicates if that price will continue to rise or fall, for a set period.

How to Use the Commodity Channel Index

The commodity price index relies on a basic formula, shown in the picture below.

CCI = (Typical Price - Simple Moving Average) / (0.015 x Mean Deviation)

CCI measures relations between prices and Moving Averages (MA), and the deviations in those prices. The first step in using the CCI is to set the time interval for calculating averages.

In most trading platforms, the Commodity Channel Index comes standard. It eliminates the need to calculate the MA manually. Traders can use the tool to help determine deviations in the price of an asset. It can help traders see if prices will fall or rise, given recent trends. The calculations rely on a time interval set. It gives specific parameters traders can use safely. They can use this information to decide if it is time to buy, sell, or wait on an investment decision.

The CCI will provide more buy and sell signals for active traders. Traders can also use the CCI to measure the strength of a market trend. The indicator can also warn traders of extreme market conditions which are taking place in the Forex marketplace.

The Commodity Channel Index isn’t an exact answer to trading questions. It doesn’t provide a 100 percent guide of when assets are overbuying or overselling (OB/OS). Instead, it provides traders with information about trends. These trends circulate depending on the time frame traders choose to input in the indicator formula. The CCI is a tool, not a precise science. It is ideal for traders who want to learn fundamental market trends and to make the right decision moving forward.

Problems with the Commodity Channel Index

There are also problems with the Commodity Channel Index worth noting. Traders who rely solely on CCI charts, and don’t use other indicators, will be at a disadvantage. Some issues with the commodity channel indicator may include:

  • False signal readings, since they are predictions, not exact fluctuations
  • Buy and sell signals can be too high/low (depending on +/- 100 or 200 settings)
  • It can over or underestimate profits and losses
  • It utilizes a time frame, set by the trader, rather than exact timing parameters
  • Beginner and novice traders might not know how to read indicators, causing false readings and errors properly

Like any indicator, the Commodity Channel Index is just that — an indicator. It is not going to provide 100 percent accuracy and can make incorrect predictions like other trading tools. And, it also varies given external market conditions that the indicator doesn’t account for in Forex. So, as a trader, it’s important to understand there are flaws in the system.

Benefits of the Index, in Spite of Its Flaws

The above section details some of the issues with the Commodity Channel Index. Don’t move so quickly in throwing it aside when choosing indicators and tools to help you as a trader. There are also many benefits to consider, that the CCI presents to traders. In addition to indicating trends, it also allows traders to set the parameters. Doing this can provide a big picture or small picture depiction of market trends in the Forex marketplace.

It is also a great supporting tool. Like other graphs, charts, and calculators, it supports traders in the decision-making process. It helps them visualize buying and selling patterns, for a set period. Traders can also rely on this tool to identify a divergence in the charts. The indicator also helps determine overbuying and overselling that’s occurring with specific assets. It’s also an excellent tool for calculating moving averages and other Forex strategies traders develop.

As long as traders use it wisely, and as a helping tool, they’re going to benefit from the CCI. It can also provide invaluable insight into other trends in the market. And, when traders use it with other indicators, they have a larger picture to help them make wise decisions.

Pivot points also work well with the CCI. The reason for this is because both methods rely on turning points in market trends. Adding moving averages will further enhance the benefits of these three tools. There’s no shortage of ways to use CCI and Forex indicators. As long as traders correctly read them and know their limits, they can benefit from these tools greatly.

Basic Rules of the Commodity Channel Index

When using the CCI, traders must understand the basic rules as it relates to buy and sell indicators. The Commodity Channel Index serves as a baseline of recent fluctuations in the market. So, it will provide current over and under buying or selling of assets. These are some factors to keep in mind when using the buy and sell indicators the CCI presents.

Buy indicators

The Commodity Channel Index provides traders details about buying a specific asset. For example, if the CCI indicator dips below -100, and begins curving upwards, this is a positive indicator. This indication means the price levels are steadying out for a specific asset. If a bullish divergence occurs, this is also a buy indicator. A bullish divergence occurs when an upward movement in CCI occurs. This divergence happens while prices of an asset remain the same or move downward on the indicator graphs.

Again, this information isn’t a 100 percent guarantee that people should jump in and buy an asset. However, the trends indicate that the asset is moving in an upward direction, and may result in positive gains.

Sell indicators

There are also sell indicators a trader should familiarize themselves with when dealing with the Commodity Channel Index The first sell indicator is if the CCI crosses above 100, and begins to take a downward curve. In this case, it may be an indication that the price of the asset is going to continue to drop.

A second sell indicator is when a bearish divergence is visible in the Commodity Channel Index graph. A bearish divergence occurs when the price between the CCI and actual price movement, are on a downward trend. The downward shift in the CCI and the cost of the asset increasing or moving sideways is a contrary indicator. It possibly means a trader should sell the asset, rather than hold onto it.

Benefits of Utilizing the Commodity Channel Index as a Trader

As the name implies, the commodity channel indicator is an indicator. It indicates to traders whether they should buy, sell, or hold onto an asset. It provides traders with details about previous market trends, given a period the trader enters into the CCI formula. The CCI can also produce insightful information about fluctuations in overbuying and overselling in the Forex market. It is, however, an indicator, and shouldn’t be the sole source a trader utilizes, to make their decisions.

Bearing this in mind, traders can significantly benefit from reliance on the commodity channel indicator. It is one of the many tools a trader should keep in their arsenal of trading indicators and calculators. It comes standard on most trading platforms. And, it is a tool investment professional, as well as traders with more experience, rely upon for trend indications. So, as a beginner trader, you can also depend on it as a tool for predicting market trends. This information helps you make insightful decisions, given recent trends for specific assets you’re comparing. As long as traders use it accordingly, the CCI provides invaluable details. It serves as a guide of when and how traders should act when dealing with specific assets.

Understanding the basics of the CCI is the starting point for incorporating it into your trading toolbox. These are a few of the reasons to use the CCI. You can rely on the data points as a guide for buying and selling assets in Forex.

 

Featured Image: CC by 2.0, by Adam Greene, via Flickr

Continue Reading