Basic questions on trading

[rookie007]

Hi, I'm a newcomer to trading and there's a few things I've been wondering about that I couldn't find through google.


1. Something I would like to understand better is what is actually happening when you engage in forex trading. For example, I set up a demo account on Forex.com that put 50,000 USD in my virtual account. How then am I am able to buy more USD against other currencies as it seems to me that I should have to have that other currency in my account before I can sell it for dollars. Or how can I engage in EUR/GBP trading when I have neither currency in my account? I know it's because I'm trading one currency against the other but I'm not sure what this means.


2. I've read a fair few articles that mention Warren Buffet and his value investing approach. He talks about looking for business that are undervalued that lead to profitable situations when the market eventually reflects their true value, he refers to it as "buying dollars for 50c". What I would like to know is how he comes up with valuation for a business? How does he decide a stock is worth $10 when it is currently priced at $5?


3. What are peoples opinions on Technical Analysis? Are there people out there making serious money with this approach? I've seen a few articles that basically make it sound redundant but from what I read it's split down the middle on using fundamental analysis (which was was also made to sound redundant, as any information is already reflected in price) or technical analysis, and I presume there are people employed by large companies using it so I don't know what to think.


4. Who sets stock prices? I know higher demand and lower supply drives prices up but who literally sets the higher price? I was also wondering about how a price can open (gap) higher (or lower) than the previous day's closing price?


5. What market would you advise investing in as there seems to be loads of them out there. From what I see forex looks good with high leverage, no commision fees, 24hr trading, etc.... I like the sounds of swing trading over the course of a week or two, I am not interested in putting money into something and sitting on it for a few years I would like to be actively trading and seeing relatively quick results of trades as in over the course of a week or two. I don't mind losing trades as long as I'm winning on a fair few more than I'm losing. The stock market is too long term for me (at the moment anyway), would the forex market be a shorter term market that you could analysis adaquately(as in you wouldn't just be looking at noise) over this kind of timeframe, if not what market would suit? I've been playing internet poker for a living for the last few years but I am sick to death of it at this stage and the games have dried up significantly, especially since the yanks got the boot, so I am prepared to looking to give trading full time a go (after I've learned enough and been trading for a few months on demo accounts).

 

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2. One way of valuing stocks (or bonds or derivatives) is by the present value of the expected future cashflows. If Buffett expects future cashflows to be higher for a company than the rest of the market expects then he'll think that the share is worth 10 when it is only trading at 5. In other words he looks for shares that the market has undervalued.

4. The 2 most important prices for any financial instrument are the bid and offer. Traders can put a bid into the market, this is the price at which they are willing to buy. The highest bid is called simply "the bid", and anyone selling will hit this price. Traders can also put an ask (or offer) into the market, this is the price at which they are willing to sell. The lowest offer is "the offer", anyone wanting to buy will pay the lowest offer. For any liquid instrument there is always a bid and an offer, with the offer always higher. It's important to understand this because there isn't one price at which you can both buy and sell, there are 2 prices, one for selling and one for buying. The more liquid and instrument, generally the smaller the spread between bid and offer. The price that is reported in the papers is just the last price that actually traded that day, but that doesn't mean that you can go in the next morning and trade at that price, you can only trade at bid or offer, which may have shifted significantly, or else you can put out your own bid or ask into the market and hope to get filled. All the bids in the market represent the total demand at any one time, all the offers represent the total supply. As supply and demand shifts then so do the bid and offer.

5. Every market has it's own characteristics. If you think stock markets are only for long term investors then you're mistaken, equity indices have a much higher volatility than FX.