In this video traders we are going to look at the top 5 forex questions.
So what are the top five forex questions according to Google.
Let's answer them, this is perfect if you're a beginner forex trader, just trying to find
your feet and finding how it all works.
1) What does Forex Trading really mean?
Forex trading is really trading or speculating on the difference in one currency against
another.
So in real simplified terms all you're doing is that you're speculating or betting on the
direction of once currency pair.
And a currency pair would be USD (US dollar) against JPY (Japanese Yen).
So you're betting on how strong or weak the relationship between those two is.
It sounds complicated but ultimately you're looking at something to increase in value
if you're buying the pair and for the pair to decrease in value if you're selling the
pair.
Now I've done a detailed video in the past about the relationship between strength and
weakness.
But ultimately forex trading is betting on the exchange rate increasing or decreasing
between two specific currencies.
That's ultimately what you're trying to do.
Forex, foreign exchange, some call it currency trading but same kind of thing.
Basically speculating on how that exchange rate changes over time whether its a short
timeframe (few minutes say) or a longer timeframe (could be years!) but speculation on that
exchange rate.
2) Why should I consider trading forex?
To me trading is trading.
Forex benefits include very cheap to trade in relation to other markets when it comes
to the bid-offer spread which is basically your cost to trade.
Generally you won't have commissions or the spread plus commission which is the real total
cost will be a lot smaller generally particularly if you stick to the more popular currency
pairs and you're trading with a reputable broker.
Margin requirements can change slightly depending where you are in the world but historically
they've tended to be less than say trading stocks directly or trading futures contracts.
There is also a lower barrier to entry, i.e. most forex brokers will let you open an account
with a smaller amount of money than say a larger broker that specialises in stocks just
because of the higher value that you've got to be trading to get some movement.
So the leverage is the margin - it gives you more bang for your buck.
There are also plenty more resources out there for forex traders as its very popular.
Loads of content out there, loads of videos including here on youtube.
Loads of educational material as well.
Carefully don't make a double-edge sword and start over-consuming content that you don't
need to but at least if there's a big library of stuff out there, you can pick things that
you like and kind of dig into.
So that's one of the advantages of forex trading compared to say trading crude oil.
Crude oil is less popular and a little more expensive for instance.
3) Is forex
trading risky?
Yes, all trading is risky.
We've said that, disclaimers are included at the end of the videos for good reason because
it is quite risky.
The chances and likelihood are that you'll lose money trading.
The hope is that over time you'll come ahead and make some money but the risk is still
there.
But in the beginning you are more likely to end up losing money.
You shouldn't be trading with any money you can't afford to lose.
You should also understand that you can lose a lot of money and there are ways to mitigate
risk.
We talk about stop losses and we talk about keeping position sizes small.
But if you keep your stop orders strict, you keep your position sizes small you can lower
and mitigate the risk.
You can't eliminate it completely, there are things that can happen which means that you
can have a significant loss to your account and in some cases there is legislation that
prevents this but in some cases you can lose an amount in excess of the funds in the account.
So make sure you are aware of what's going on.
It is super risky but you can also get extreme reward with it.
And its the same with anything in life.
Big risks, big rewards and that's the game that we'll ultimately playing.
4) How can i trade a currency I don't have?
This question is related to buying a currency and what you're trying to speculate.
Ultimately, what you're doing is speculating on the exchange rate between two currencies.
So say USD/JPY - how many USD dollars does it take to buy 1 Japanese Yen.
Or how many Japanese Yen can I get for 1 US dollar.
That's ultimately what you are speculating on.
If you're going to buy the currency and you are actually buying the physical currency
so to speak you have to have a currency to exchange it in so for me being in the UK I
go on and use my British Pounds and I buy say Japanese Yen.
Say I was buying literally notes - I would then have an exposure to the currency exchange
rate between the USD/JPY.
If it went in my favour then when I sold those Yen back and made a bit of money, if it didn't
I would lose money.
That's what we'll doing if we were in a home currency.
But if we are speculating on another currency all we'll doing literally speculating on the
exchange rate between the two and if we don't own the currency we can do stuff like spots,
futures contracts, options - we are purely simplifying - speculating on the movement
of those two currencies (the exchange rate between those two currencies).
We are not necessarily taking ownership of the currency...
Very simply put we put some money to use as margin / collateral for the trade we are taking
and then use that to speculate.
5) How can compete with the big institutions banks.
In some ways you can't.
You don't have a lot of research or resources these guys have but you don't necessarily
need to.
We don't need to trade all day, everyday - we don't have pressure on us to produce a certain
amount.
We can trade when we like - we are very small in relation to banks.
We don't have to worry about splitting trades into tranches or blocks to minimise the effect
on the market.
And don't forget banks and institutions now aren't really speculating on currency exchange
rates as much as they were a long time ago.
They are taking orders from big companies and governments and potentially big individuals
and making money on these transactions.
They might even put a hedge in place for a company which has some sort of foreign exchange
risk.
They do speculate in some ways but it is far less than they would have done before.
So yes there are some firms out there that are there purely to speculate on exchange
rates and currencies like hedge funds for example and proprietary trading firms.
And if we are trying to compete with those we are trading a different thing - those hedge
funds are generally looking for changes in macros - economic shifts in sentiment..etc