For this post I would like to have a look a little bit at Forex trading. Chances are anyone who finds this post will already know about it, but for those who don’t Forex trading is the trading of foreign currencies. All of that stuff you see on the news about how much the dollar is worth is as a result of how much money people are paying for it on the Forex market.
While Forex trading use to be the domain of large banks, companies and very wealthy people, with the rise of the internet it has become possible for retail investors to get involved. As yet another form of investment, just like shares, property, precious metals, bonds, managed funds etc, Forex trading has its own set of characteristics which will render it either suitable or not suitable for what you are trying to achieve.
In this post I would like to talk about the characteristics particular to Forex trading and what I have found so far about how it all works. Over time then I will post about how it is going and what I am upto in my Forex Trading.
Firstly how I got interested in it. I have tried a fair bit of share market trading (on the Australian Stock Exchange; ASX) in the past, but never very successfully. I got my portfolio up to about $20,000 largely from what I put into it, but also with a couple of really good trades, like with oil search (OSH), Baraka Petrolium (BKP) and the reject shop (TRS). But I also lost alot of money on some very poor trades like Yates Gardening (no longer traded) and Nylex (NLX). So rather than shares I wanted something a bit more, secure?? Well not so much secure, as reliable. I am young and just at the start of my career, so my level of risk aversion is very low. I can afford to loose everything I invest, since I have many years of work ahead of me and can just earn more. But that doesn’t mean to say that I WANT to loose everything. So I was after a form of investment that produces more reliable returns. When I was in New Zealand for the 2000 new Years Eve I came across a thing called Bonus Bonds (http://www.bonusbonds.co.nz/index.html). They are government insured, very reliable bonds. Unlike most bonds however, rather than distributing investment return equally according to the number of bonds the bondholders have, Bonus Bonds distributes the income as a series of some 200,000 cash prizes each month. The major prize is $1 million, with a series of other prizes under that. I make about $120 or so per year from the $4000 or so I have in that. Which is a very low rate of return but I know that the value is never going to drop and I can cash them in at any time. I see it as more like a perpetual lottery ticket. So long as I hold the bonds I have the chance of winning $1 million each month, but unlike a lottery ticket, at any time I can cash my ticket in and get my money back.
In the last couple of weeks though I noticed all these ads online that kept going on about Forex trading. I thought it was just something business-suited types would do so have never thought about it. I had some time while I was having lunch though so I read a bit about it and found that anyone could do it and with mini accounts you only needed about $250 to get started. Upon further reading it turns out it is better to have about $2500 to start, but either way it was afordable for retail investors. I looked at a few trading brokers, but couldn’t quite work out which were good and which not. FXCM (http://www.fxcm.com/) looked like it had excellent trading software, also you could join with a demo account so you could practice trading without real money. When I joined though the software couln’t find the servers, and when I wrote to them they said to ring so they can help me more effectively but it was a hassle to ring new york.
I recently went down to Melbourne for a friends wedding and as it turns out another friend had also recently got into Forex trading and so he showed me the broker he used, IG Markets (http://www.igmarkets.com.au/), which is Australian so you can get local help if you need it, plus it seemed to work really well.
When I got back to Sydney I started my own demo trading account with IG Markets which gives you $100,000 of pretend money with which to try Forex trading and their trading platform (software).
I expected Forex trading to be difficult, as I don’t really follow the markets, and don’t have any training in economics. It all seems a bit artificial to me, all this nonsense about recessions and bank collapses etc. Surely if you were a multi billion dollar bank you would recognise that you were in trouble, before you were billions of dollars in debt and had collapsed!!
Anyway, that’s just my thoughts. So back to Forex trading. I had my demo account and started trying to work out how you traded Forex. I made a few dodgy trades as I tried to work out how to place orders, how much to place, how to set stop losses, what limits were how to chart the different currency pairs etc.
NB I won’t reinvent the wheel by explaining all these terms here as there are countless web sites that have all that. If you are interested in learning more about Forex trading and the terms and mechanisms involved I found a very good explanation of it all at BabyPips.com (http://www.babypips.com/school/).
My first 10 trades were all losses. I lost about USD$588, within minutes of starting, but since it was practice money I just ploughed on. When trading Forex, you are buying and selling contracts for bundles of money. Generally each contract is for 10,000units of what ever currency you are trading. The currency pairs are quoted to four decimal places, the Aussie dollar for instance is currently at 0.6544 US dollars, which means for each Australian dollar you will get 0.6544 US dollars. The currency pair is listed as AUD/USD.
This means that if you buy one contract of 10,000 US dollars, using Australian Dollars and the price goes up 0.0001. You get 10,000*0.0001 = $1
Each 4th decimal place is called a pip. So in Forex trading what you are after is pips. If you have a look at that Baby Pips web site (http://www.babypips.com/) there are lots of references to Pips. That is why. Pips are everything in Forex trading. You are out to make pips.
To a trader this is very important as you need to forget all about that you are trading in contracts for tens of thousands of dollars. In order to be a good trader you have to be absolutely emotionless. You can loose whole fortunes by becoming attached to your trades. So you have to be very disciplined. Forget the money. You are just after pips.
In my first profitable trade I bought 2 contracts of AUD/USD for 6283.2 pips (IG Markets have since switch to displaying pips as dollar values, ie 0.62832) and sold them for 6299.0. I therefore got 15.8 pips = $31.60.
I was very excited to have actually made some money. In developing my trading strategy I decided that in order to always make a profit you could simply just never sell at a loss. Why wouldn’t everyone do that? I wasn’t sure but it seemed reasonable to me.
By doing that I then went on to make 21 trades on that first night and ended up $1795.24 ahead by the time I went to bed.
I learnt also that there are peak trading times when due to the volume of money being traded the chance for profits are much larger. The hottest time is when the european and US markets overlap (12am – 4am Sydney time). The European markets however centre aroung London. They open at 8am London time (7pm Sydney Daylight Saving Time), so you still get some very good trading from 7pm in the evening.
It was very exciting to make $1795.24 on my first day trading. It didn’t seem to difficult either. I thought I would be bound to loose next time.
The next day my opening balance was $101,7924.24 and after 14 trades my closing balance was $102,594.20 so I had made another $798.96. That was very exciting too. I wondered why everyone wasnt Forex trading then. I figured I would loose the next day. Instead I made 12 trades and ended up with a balance of $103,812.06 ($1217.86 profit).
My fourth day was the hardest day to make a profit, there were no patterns in the currencies. Nothing was trending in any particular direction making it very hard to predict what direction anything was going to move in. After only 4 trades I went to bed with a closing balance of $103,967.63 (only $164.57 profit).
Last night, my 5th night as a currency trader, was actually the easiest day for making a profit. All the currency pairs I was looking at were swinging wildly up and down so you pretty much just placed an order, waited for the currency pair to swing in the opposite direction, then closed the position for a profit. It was crazy. Once I had 10 or so open positions on the AUD/USD pair and the price swung in a favorable direction. The trading platform shows you what your current profit would be if you closed that position right then. With this one swing I could close all of those positions for thousands of dollars of profit, but I couldn’t get to them in time before the price swung in the other direction. I still got a good few though. I kept planning on going to bed but another reversal would offer me all these profits on my open positions so I stayed up. In the end after making 26 trades I went to bed with a closing balance of $107,795.55 ($3,818.92 profit).
The crazy thing is each of these nights of trading I spent a maximum of 4 hours doing it. Last night only took three and a quarter hours to make $3,818.92. That is a hell of a lot better than any business or job that I know of.
I am sure it can’t be all that easy as this week has been. This demo trading account is active for 14 days, so I will finish those 14 days and see how it goes. I was planning on doing another 30 day demo account with another broker to get more practice before using real money, but if making a profit with Forex trading continues to be this easy, it would be a massive waste of money to spend 30days trading pretend money when I can trade real money.
So to sum up this week I made 77 trades and a total of $7,795.55 profit.
I will be interested in seeing how next week goes….