Welcome everyone! Tom Alongin here, CEO of Park Avenue Trading. For those of you who know me, I want to wish you a good hello. For those of you who don’t, I’m a retired chief forex dealer for several international banks in New York.
Let’s get on to what this is about. So what’s traded on the foreign exchange currency, the market itself, it’s currencies.
Major Currency Pairs
The most forex trading pairs are called the majors and they’re traded against the US dollar. The major pairs consist of the euro, the sterling, and the yen, the Swiss franc. Now when the dollar is not involved in the equation, in other words, it’s the sterling versus the yen, sterling versus the New Zealand, the euro versus sterling, it’s called a cross trade. Now I don’t understand why they don’t consider those majors because really most European traders and myself when I worked in the bank, we would do cross-trading more than we do straight dollar trading.
But anyway, forex is always traded in pairs. It’s one currency against another. So for example, in major currency pairs, like the US dollar-yen pair, okay, it’s the dollar versus the Japanese Yen.
Now, by you buying the dollar on the foreign exchange market, by taking the offer and buying the dollar, okay, you’re basically simultaneously going short the Yen. So you can look at the trading forex in two different ways. You can look at the trades on being long with the dollar or shorting the Yen. Okay? So, basically through the bid and offer spread, you are getting short or long simultaneously because trading forex is in currency pairs.
Forex Trades and Trending
Forex has a great trending capability. So that’s one of the benefits, you know, the market, once it begins trending, it trends and often, in the global market, stays in a trend for quite a while.
And it makes sense because it’s really the economics behind it. Now I’m not a fundamentalist per se, but I have to be a moron on to dismiss the fundamentals because I believe that technical (trading) analysis, which is what I do, and fundamental analysis go hand in hand.
But the fundamentals take a long time to work through the forex market, and you know, if you’re just going to trade fundamentals, it’s very difficult to try to put all the pieces and news together and make any type of short-term trading decision on it.
If you’re a long-term forex trader, and you know, everybody says long-term trading when the trade doesn’t go in their direction immediately. “Oh, that’s a long-term trade. The market’s down I expected that.” But as soon as the market goes in a direction they need , it becomes, a short-term profitable trade they are willing to capitalize on.
Shorting in Forex Trading vs Shorting in the Stock Markets
One of the great benefits of forex trading is being able to short trading currencies.
Technically with the stock market, short-selling involves first borrowing shares held by other investors. That party can then sell those shares. Later, the shares need to be repurchased by the short-seller, and then returned to the original owner who lent them. “Naked” short selling involves the short selling of shares that do not exist. It is illegal—the legal way to short-sell is to first borrow the shares before selling and opening a short position. Naked short selling, or naked shorting, is the process of selling shares of an investment security that has not been confirmed to exist.
In contrast, conventional short selling begins with an investor borrowing shares. Naked shorting in the stock market is done without having first borrowed the shares, hence the ‘naked’ moniker. Naked short selling is not legal in the United States. A seller of a security is required to deliver shares of the security to a buyer promptly at settlement. Since naked shorting involves the selling of shares that do not exist, or have not been borrowed, a scenario is made possible where the seller fails to deliver the equity security to the buyer at settlement. Put simply, if shares are not available to ‘cover’ a short sale, the short position is said to be naked. SEC violation ding ding ding…
However, unlike the stock market, with forex trading, shorting currency pairs is not only legal, but it’s one of the trading strategies in the foreign exchange market that can make you more money than other markets.
Accessibility to Trade Forex
Originally, the forex market was available only to banks, hedge funds, and insurance companies like AIG. But now with the advent of the computer and retail forex brokers that connect to the EBS system (electronic brokering system), it’s easier for new forex traders to develop trading skills and begin trading. Forex trading brokers shade the prices adding a little bit here and there in order for them to make money. That’s how they basically fund themselves to give you free demo accounts to practice trading with and all the tools that you could possibly imagine to start trading. I mean, there are some tools on a demo account that I, in 35 years of trading have never even heard of!
But here’s a tip: don’t bog yourself down with so many technical analysis tools. You know, your trading riches don’t come from the tools themselves… technical analysis is important but there are many other factors that will make you successful in forex trading, not just technical indicators. Technical analysis with indicators itself is okay, so just don’t bog yourself down with it.
Plus, while the stock market or other investment opportunities require significant start-up capital, market participants can get into the fx market and begin their trading journey for a small initial investment. By getting a demo account, learning risk management tools, and a trading platform, a beginner could leverage the advantages of forex trading and its high liquidity and make some extra money!
Liquidity of the Currency Market
The Forex market is the largest and most liquid financial market in the world. One of the main benefits of foreign exchange currency trades versus trading stocks and other financial instruments is that it is a global market and the largest financial market in the world. With over 6.6 trillion traded a day (on average), in this liquid market, it offers a trader unparalleled liquidity and dwarfs all other markets. The market is so large and deep with over 15 million forex traders worldwide, that no one entity can control prices in order to manipulate them to their advantage, even Central Bank intervention is useless against the main trend of the market (that’s why it’s always good to fade the intervention.) With this unparalleled liquidity, it offers a great advantage to all different trading styles.
The highly volatile forex market offers traders a wide range of trading opportunities, including over 80 currency pairs and a variety of trading instruments such as options, futures, and CFDs. With its high liquidity and round-the-clock trading, the forex market remains an attractive option for traders of all levels.
The Benefits of Financial Markets Open 24 Hours
Another one of the forex trading benefits is the opportunity for the forex trader. The forex markets are open 24 hours a day, five days a week starting around 5 p.m. Eastern Standard Time on a Sunday and it closes at 5 p.m. Eastern Standard Time on a Friday.
Other financial markets, like the NY stock exchange, close at 4.00pm. However, the forex exchange gives forex traders an incredible business opportunity since it’s open 24 hours a day. And it’s very desirable for those that can only trade on a part-time basis because maybe they have other business to attend to during the day, maybe they have a J -O -B, a job, okay? So, therefore, the market being open 24 hours a day, five days a week, gives the trader ample time to basically deploy their trading strategy when they see an opportunity in the morning, noon, or night, whenever it occurs.
Now, you should have a trading strategy that has a positive edge, obviously, and you should also have a trading strategy and trading style that you trust to give you several ample opportunities to trade during the day, so you don’t get that fear of missing out. Okay? Fear of missing out is very, very bad for traders. It causes them to do things spur of the moment without any real thought behind it, and that could be the death of a trading account. So, we don’t want any fear of missing out.
The Benefits of Leverage in Forex Trading
Leverage is a key concept in forex trading that allows traders to control larger positions of the fx market with smaller amounts of capital. Essentially, leverage allows market participants to borrow money from their broker in order to increase their buying power. For example, if a trader has $1,000 in their account and uses leverage of 100:1, they can control a position size of $100,000. This means that even small price movements can result in significant profits or losses.
However, while leverage can amplify gains, it can also amplify losses, so it’s important for traders to use leverage wisely, avoid high risk temptations, and trade within their risk tolerance. Different brokers offer different levels of leverage, with some offering up to 500:1 or higher. It’s important for traders to understand the risks and benefits of leverage before using it.
Small margin requirements are what we were talking about in the beginning. Forex trading currency pairs is an incredible ability to build wealth and see the wealth get built on a month-on-month basis as opposed to doing a franchise or something or investing in some other type of business.
Leverage gives the forex trader the ability to make extraordinary profits, and at the same time, keep risk low. If forex traders understand money management, very important, you have to understand how to manage the money. Everything should be basically based on an R-value, which is, if I’m risking, say, 60 pips on this trade, that’s one R-value. So, therefore, I want a multiple of R back.
You know, Its like 1.5 to 3R or greater back on the trade. Paul Tudor Jones said it best because he stated that he basically wants 5R. You want 5R on a trade. It’s hard to get 5R on a trade, okay? But if your R value is small if you’re going for 10 pips. Okay, then you get 50 pips. That’s 5R. But, you know, let’s say for instance we’re dealing with 50, 60 pips or 70 pips or even 100 pips is your 1R. Well, you want 500 pips back. That’s pretty tough to get, okay? But what he said was if he was trading at 5R, 5 times what his risk was, he could be trading at a 20% win rate and still make money. You know, he’d say, I could be a complete idiot and still make money. So that’s the idea of R-value. You want multiples of R back.
The Benefits of Low Capital Barrier in Forex Trading
Low capital barriers! Forex offers the ability to open an account with as little as $500. In some places it’s even smaller. What I suggest is if you’re going to trade that small of an account. You need to be trading mini’s, alright? And, you know, you have to put everything in perspective. If you are able to make over the course of a month, $100 with a $500 investment, that’s incredible. That’s great, that’s a 20% rate of return for yourself in a month.
So, you have to put everything in perspective of what you have and how much you’re making based off of what you have. You can’t say, “I put $500 in here and I haven’t made my million dollars yet.” Okay, that’s fantasy, alright? So, just keep in mind everything needs to be in perspective. Everything is in relationship to what you have, okay? Generally, low transaction costs. Now, here’s the thing. You’re in control of this. You’re starting a business. So, basically, what you want to do is, you know, transaction costs are very, very important. You want to pay the lowest transaction cost possible.
But also, you want the bid-offer spread to be good. In other words, if you’re going to pay the lowest transaction cost yet the bid-offer spread in your price is three pips always, well then you’re really not paying the lowest transaction cost. Because, with most forex brokers, you’re going to pay it through the spread too. So now if you have to find basically a happy medium with this okay? So you have to find a reputable forex broker…not some guy that’s out in the Seychelles Islands somewhere that’s saying “Oh, give me your ten thousand dollars and I’ll give you seven hundred to one leverage, no brokerage, and the tightest spreads that are out there. That guy’s gonna steal your money.
Finding a Reputable Forex Trading Broker
You want a reputable broker. You need to find good ones…like in the States you have forex .com, you have many others like Gain Capital, and you have Dukascopy, which is for overseas, you have plenty of good ones to choose from. Just don’t fall for the, you know, oh this guy is going to give me the lowest spreads plus offer me a tremendous amount of leverage.
Leverage is a double-edged sword. In the States you cannot get more than fifty to one leverage that’s another positive benefit: basically, you have the small amount that you put in the account and you have leverage. Here in the States you just get 50 to one so I’m going backward a little bit talking about the leverage that I talked about before I didn’t mention it so there you have what I consider to be the benefits of forex trading.
Now, if you are interested, I have a website, I invite you to go www.parkavenuetrading.com. I have a free gift if you sign up for the email.
Remember enjoy the party, but dance near the door.