Everything you need to know about Forex Trading Online
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FX is short for Foreign Exchange which is the global currency market. If you do a search on investopedia.com you will find the following explanation:
The fx market is the market in which participants are able to buy, sell, exchange and speculate on currencies. The fx markets
The fx markets aren't dominated by a single market exchange, but involves a global network of computers and brokers from around the world. Central banks use their massive buying and selling capabilities to alter exchange rates through their open market activities and in many cases will do so not with profit in mind, but rather for any number of policy reasons.
The largest and most liquid financial market
According to the Bank for International Settlements, the foreign exchange markets averages about $5 trillion per day in traded volumes, making it, by far the largest and most liquid financial market in the world.
The most frequently traded currencies are the so-called majors consisting of:
- The US dollar (USD)
- The euro (EUR)
- The Japanese yen (JPY)
- The British pound (GBP)
- The Swiss franc (CHF)
- The Canadian dollar (CAD)
Buying and selling currencies with the purpose of making profits are often called Forex speculation. As a trader, you speculate in a currency either to strengthen or to weaken against a counterpart. That is why Forex is traded in pairs, so-called currency pairs.
The most commonly traded pair is the Euro against the US Dollar (EURUSD). A Forex trader can either "go long" which means to buy the EURUSD pair speculating that the Euro will strengthen against its counterparty, in this case, the USD. If the trader is correct and EUR gain on the USD the trade is generating a profit, the more EUR strengthens against USD the larger the profit will be.If the trader is speculating that the USD will strengthen against the EUR he will instead "go short" the EURUSD pair and make profits when the price is going down.
Example for going long EURUSD: If the price is 1.20000 it essentially means the trader is getting 1,2 USD for 1 EUR. If the trader buys at 1.2000 and sells at 1.2100 a 100 pip profit has been generated.
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This is what you need to know when choosing your online broker
When choosing your online broker it´s important that you are aware of the different business models that brokers apply. Many brokers are upfront with their model but some are not, let´s start off with some basic terminology that you need to understand when comparing different brokers online:
- ECN - Electronic Communications Network. The ECN is an electronic system where buyers and sellers come together to execute trades. The network matches buy and sell orders currently and when specific order information is not available, it provides prices reflecting the highest bid and lowest ask listed on the open market.
- Market Maker / Dealing Desk
A market doesn’t reflect the "real" market directly but simply quotes similar prices to what the market displays. Any order you enter is processed internally at the market maker and never goes out to the market. Basically, any profit you generate goes out of the broker’s pocket and every loss ends up as a win for the broker.
- An STP broker typically sends all or some of the orders through to the bank. Basically, an STP Broker is a kind of hybrid between the ECN and Market Maker. It´s not uncommon that a broker that calls themselves STP actually market makes the unprofitable clients and let the profitable traders go straight to the bank since they do not want to take the risk of dealing with a winning strategy.
SCM is a pure ECN broker, download our MT4 platform and register for a demo account to see for your self:
MiFID II rules are just around the corner (January 2018)
MiFID II rules are just around the corner. While the exact rulings that will be implemented are not fully clear, one thing is for certain, traders will be entering a world of far greater trading transparency. One of the major results and outcomes of this rule is to help the client understand the cost of their trade.
Trading transparency will be a great tool for traders when deciding on which brokerage to choose. Now traders will be able to see who the counterparty of their trade was and how long the latency of the trade was. These pieces of information while they may seem insignificant are actually enormous in determining the quality of your trading firm.
Why is it important to know who the counterparty of your trade is? You want to know that you are actually trading with a prime broker and bank and not having a market maker take the other side of your trade.Now you can be certain who is the counterparty and make sure you are trading under fair trading conditions.
The latency is another critical factor in picking a broker to trade with. Many times the speed of your trade execution is the difference between making money and losing money on a trade. With trade transparency, you can see how long it took for your trade to get filled. You want to make sure you are trading with a brokerage that can maintain fill rates of 50 ms or better. Anything more and you could be giving up pips to the market.
With laws coming into effect in the new year, we are already seeing lots of consolidation within the industry. There are many more rules attached to the new set of laws. Keep an eye out for more updates and their effects on the industry.
Security of Funds and Scandinavian Banking
In a recent survey by the World Economic Forum Competitiveness, Swedish banks ranked among the safest in the world, due to its stable fiscal policies and robust finances. Sweden's banks, one of the most well-capitalized banks in the world, made it through the financial crisis unscathed, compared to many other European banks. With a core 1 capital ratio well above 18%, Sweden's largest banks Nordea, Swedbank, Handelsbanken, and SEB are considered one the most well-capitalized banks in Europe which makes the Nordics an even more attractive place to keep money in.
Given Sweden's long history of sound fiscal policy and sound economic development, Sweden and the banking system has generally enjoyed a very stable growth despite the 2008 financial crisis. Although Sweden was hit by a real estate crisis in 1990, the Swedish banks learned a valuable lesson when the housing market collapsed and implemented better monetary monitoring and tighter lending.
Get the most out of your Forex Trading.
Some of the most common challenges we see our clients meet on a daily basis are:
- Not having enough time to cover all markets we want to cover
- The lack of a team to bounce ideas of (and share a laugh to blow of steam for that matter)
- The lack of skills to analyze a trade set up from several angles
The list could be made longer but you get the idea, trading is hard and mentally demanding. The best performing traders we see are the ones that manage to control their focus and spending energy only on what matters for their results, instead of being everywhere, at the same time, all the time. The latter being a very common beginners mistake that almost always leads to costly lessons for the trader.
So, how do you overcome these common mistakes and fast forward to where your trading makes you money on a regular?
Well, there is, of course, more than one way that leads to success in trading and you might have figured it out already. In that case, we salute you and might be able to introduce you to a few clients in our managed portfolio where we hand pick the best performing strategies.
If you are not there already, don´t ypu worry. We have something for you and we are almost sure it will improve your trading results tenfold.
A few months back SCM partnered up with the analysis and education company ForexAnalytix. As an SCM trading account holder, you can now get full access to the whole ForexAnalytix portfolio of trading tools. This includes:
- Free forex signals
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