The definition of forex trading - the art and science of trying to predict movements of global currencies - might sound a little too complicated for novice investors.
But whether you realize it or not, anytime you purchase something made overseas - whether it's Italian olive oil, German cars or one of the gazillion plastic things manufactured in China - you are participating in a foreign exchange trade. The manufacturers of goods in one country want to be paid with their local currency, so importers have exchange the equivalent value of their country's currency into that of the other country.
And at an even more hands-on level, chances are anytime you travel overseas and pay for a good or service with cash, you'll have had to exchange your native currency to whatever is used locally.
If you're looking to expand your investment portfolio beyond stocks and bonds and you have an interest researching and understanding finance and the global economy, then forex trading might be for you.
According to Zachary Storella, CEO of forex trading site CountingPips, traders use information from a variety of sources (macroeconomics, technical analysis, statistics, trader sentiment, etc.) to make the best educated guess on where the market is going.
What makes Zachary passionate about forex trading is generating new ideas that can be used to implement actionable trades.
His most successful trading ideas to date have come from focusing on the fundamentals of a currency or country, either a change in a central bank's policy or a macroeconomic news event, so his ideas generally relate to those areas.
"I also think the global economy is exciting to follow; it is an ever-changing landscape, and within that landscape there are some opportunities to try and benefit on the changes," he adds.
Zachary recently checked in with us to offer a primer on forex trading for newbies. Read on to learn how you can get started:
Tell us about CountingPips...when and why did you start your site?
I started CountingPips.com in 2007, a few years after beginning to trade currencies. It was started as a way to keep myself on top of all the current financial market news and currency trends. It has provided an additional incentive to always be learning about the markets, economics and finance. The site has since expanded beyond that initial purpose to include many outside contributors and all types of articles on many aspects of the global markets. We send out a weekly newsletter with highlights from our site and have also recently begun providing trading software for traders.
Who should be reading it?
I think it would be beneficial for anyone who is interested in staying on top of the financial market news, macro economic indicators and those who have a particular interest in currency movements. We have numerous contributors who provide many varied opinions and analysis on the markets while there are continuously updated sections on commodities, stocks, technical analysis and macroeconomics as well.
What's the meaning of the name CountingPips?
Pips are simply the smallest denomination of a currency price quote. Stocks go up or down in points. In forex, currencies (currency pairs) go up or down in pips. As a trader, you generally keep score in terms of pips, like I won or lost X amount of pips last week. Each pip will represent a fixed amount of money, like $1 or $10. So as a trader, it seemed like everything revolved around pips, and it felt like a natural name for a forex website.
Amusingly, I remember at the time, I had never come upon any other sites with pips in the name. I was thinking I was somewhat clever, but it didn't turn out that way at all! Actually, there were many sites with pips in the name at the time, and a few were very well known.
How easy is it for investors to get into forex trading? What do you need to get started?
It is rather simple to get started in forex trading with the availability of free practice accounts, also called demo accounts. This is a simple and easy way to get one's feet wet without any expense. Free practice trading accounts can be downloaded from numerous online forex brokers and allow traders to practice in real time like real-money accounts. You will be able to get familiar with the mechanics of trading and can practice all the strategies you can think of before putting any real money at risk.
From there, with the ability to practice in real time, you would want to go ahead and educate yourself the best you can on the markets you choose to trade in. Whether it is through books, courses, online classes, videos, webinars, getting a mentor or whatever is the best way you learn. The key is to never stop seeking out the right information. There are loads of resources all over the internet and many great books.
Once a trader decide to jump in to trade real money (always start small!), the psychological aspect of winning and losing real money becomes a dominant aspect very quickly. It is a different animal than practice trading and takes discipline, patience, mental toughness and experience to persevere as a trader.
What are the basics of forex trading for novices?
A basic concept for new traders that can seem confusing at first is to understand the fact that when trading forex, you are actually choosing to buy one currency while you simultaneously sell another. This is called trading in currency pairs. The first currency in a pair is called the base currency, while the second one is called the quote or counter currency.
For example, the EUR/USD is the Euro/US Dollar currency pair and the most traded currency pair of all. If you think the Euro will rise against the dollar in the future, you would want to buy this currency pair. If you think the Euro will fall against the dollar, you would want to sell this currency pair.
Simply, you are comparing two things. One currency from one country against another currency from another country. This can be the major currencies like the Euro and Swiss Franc down to more "exotic" currencies like the South African Rand or the Polish Zloty.
Some forex trading terminology, like currency pairs and pips, can seem difficult at first because is it new or unfamiliar, but it really is not too difficult to get the hang of after a little while.
What are some good habits or best practices smart forex traders develop?
Common habits of smart traders I've seen is hard work, preparation, focusing on risk and persistence. It is difficult to be a successful trader if not fully prepared with a game plan prior to making trades or prior to important events. Focusing on risk and thinking in terms of risk is always of paramount importance, as one does not want to lose too much on any one trade and impair their ability to make further trades.
Learning to accept losses is especially hard but an important part of trading. Losses happen to every trader - there is no way around it - and a trader has to best minimize their losses. One has to somehow psychologically accept that losses will happen, and you have to just move on to the next trade. Interestingly enough, it is usually easier to learn from your losses than your wins because there may have been something you did not take account of that caused your loss. Next time around, you likely will look at that aspect in your preparation.
What are some bad habits that forex traders can get into that they should try to ditch?
I think one of the most common bad habits of forex traders is trading too much. Many traders can get caught up in thinking that every signal is worth trading or that they need to be active all day or in every market to maximize their profits. Usually the opposite is true and traders should focus on trades that they have the strongest conviction will be successful.
Another bad habit is jumping from strategy to strategy when things don't go well, while another one is getting into a trade without knowing where to get out.
I think many bad habits arise when traders fail to prepare effectively or when we lose the discipline to stay with what we planned to do.
What are some of your favorite resources for learning about and following the forex market?
Starting out, I read as many books as I could find on the subject, and I still read as many books as I can. Books I would recommend and have enjoyed are the Market Wizards books by Jack D. Schwager, I by Adam Kritzer, 7 Winning Strategies for Trading Forex by Grace Cheng, The Alchemy of Finance by George Soros and Diary of a Professional Commodity Trader by Peter Brandt.
Beyond those, I like to keep up on central bank news releases and read studies and market commentaries from large banks and trading houses.
What are the biggest headlines in forex trading today? Issues/events/news traders should have on their radar?
At present, one of the major issues in the markets is the Eurozone's focus on declining inflation and whether the European Central Bank will be forced to provide additional measures to push down the exchange rate of the euro.
China's economy is always at the forefront of the news, and whether that government can maintain economic growth while taming their huge credit boom is a major concern. This has large implications for the global economy as well as the Australian currency, as China is Australia's largest trading partner.
Another China-centric story that is of major interest to me is when and if the Chinese currency can become a more tradable currency and evolve into a more or less free floating currency like the U.S. dollar, Euro and others. The Chinese currency at this time is constrained in a government-controlled trading band, although the government has pledged to allow a more market-based function in the future.
One of the larger U.S. stories is the longer-term outlook for a rise in U.S. interest rates over the next few years. The Federal Reserve is scaling back a huge stimulus that was enacted after the financial crisis with an outlook of raising interest rates in 2015. This will have implications for many markets beyond the currency markets, including the stock markets and bond markets.