Forex Currency Trading - The Basics

Forex is the name given to the foreign exchange market, where international currencies are bought and sold. Due to the development of free exchange rates, the market began in the 1970s and has become the world’s largest financial market with a daily turnover of US$1.9 trillion. To put that into perspective, that’s over thirty times the daily turnover of the rest of the US equity markets combined.

Unlike normal stock markets which are traded on exchanges that are located in a specific place, Forex currency exchange takes place via an Over The Counter (OTC) or interbank market. This means that transactions are conducted electronically between brokers.

Thanks to this and global time zones, Forex is a genuine 24 hour financial market. The day begins in Australia and moves around the globe as each of the leading financial markets open in Tokyo, London and New York. So it’s always possible to find someone who is willing to buy or sell international currencies. This gives investors the chance to respond to price changes caused by a variety of economic, social and political events at any time of the day or night.

There are two main reasons for trading currency on Forex. Approximately 5% of Forex trades are undertaken by multinational companies and governments who buy or sell products and services in a foreign country and have to convert their profits into their domestic currency. Forex allows them to hedge (or protect) their profits so that in the even of a dramatic currency fluctuation, their profits won’t be reduced.

However, the other 95% of Forex activity is due to people or organizations trading for short term profit. Forex allows you to trade virtually any currency, although in practice most activity (85% of total turnover) relates to the major currencies which include the US Dollar, the Euro, the Japanese Yen, the Swiss Franc, the British Pound, the Australian Dollar and the Canadian Dollar.

Trading on the Forex exchange involves simultaneously buying one currency and selling another. For example, if you buy USD/EUR, that means you buy the US Dollar and sell an equivalent value of the Euro. Closing you position involves buying the Euro and selling the US Dollar.

The price of all currencies traded on Forex are influenced by the laws of supply and demand. If the demand for a currency outstrips the supply, the price rises. Alternatively, if supply is greater than demand, the price of a currency will fall.

Forex trading has a number of significant advantages that make it an extremely attractive form of speculation.

First, due to its size and lack of exchange controls, it’s almost impossible for any person or organization (including central banks and governments) to significantly influence prices for an extended period of time. This means that you can enter the market secure in the knowledge that your investment is competing on a level playing field with every other investor around the world.

Second, due to the vast size of the market, the liquidity is excellent. So unlike the position with many stocks and shares where you might find it hard to sell certain investments, you can open and close Forex trades almost instantly as there are always scores of international buyers and sellers.

Third, it’s relatively easy and cheap to get started trading Forex. All you need is an internet connection, a broker and perhaps $500 - $1000 to open a trading account. Once you’ve got these things you can trade 24 hours a day from Sunday afternoon through to Friday evening. And thanks to the availability of information on the internet it’s possible to find all the data that you need for the purposes of analysis and decision making.

Fourth, it’s possible to make substantial short term gains with relatively little capital thanks to the number of daily fluctuations in currency prices and the ability to leverage your capital (often up to 100 times) thanks to margin trading.

However, due to rapid fluctuation of currency prices and marginal trading, Forex trading carries significant risks, so caution must be required when deciding which trades to make.

When it comes to decision making, there are two basic Forex trading strategies, technical analysis and fundamental analysis.

Technical analysis relys upon using price charts, trend lines, support/resistance levels, highest price, lowest price, transaction volumes and various other mathematical formulae to identify trading opportunities. This is based upon the belief that everything that may influence the price of a currency has been considered by the market and factored into the current price.

Crucially, technical analysts don’t try to defeat the market. The are content to predict short term, minor fluctuations using patterns from the recent past and the belief that history will repeat itself. The main disadvantage of the method is that all the results are purely historic and cannot always be relied upon as an accurate guide to the future.

Fundamental analysis looks at wider factors such as the national economy of the currency, the political stability, employment figures, industry figures, interest rates, tax policy and a wide range of other economic indicators. However, before basing your investment decisions on these factors alone, it’s important to consider both technical analysis and the fact that market expectations can influence the price of a currency as much as reality.

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Finding A Great Forex Broker

Just as you have investment brokers to manage your portfolio, you may find it advantageous to sign on with a Forex broker. If you have decided to go that route, then there are a few basic considerations that you may want to keep in mind as you search for just the right currency broker to help you do well in the market.
One of the first things you will want to look for in any broker you hire to help you with currency exchange would be accessibility.
There is no value whatsoever in having a broker that is too busy to return your calls or respond to email queries.
The whole point of having the broker is so you have an expert who is able to interact with you on what currency to buy and to sell, and when.
A broker that considers their time too valuable to spend with you is not a broker that you need to do business with.
An attribute that you want to seek out is that of being a partner in a financial venture.
The bottom line is that if you are not making money, then your broker is not likely to be doing all that well either.
If you eventually lose your shirt and have to drop out, then the broker has lost a client.
It is in the best interests of both you and your broker to make sure you are making money and increasing your portfolio. Interestingly enough, not all brokers have this mind set.
Look for the ones that are interested in seeing your assets grow over the long haul and stay away from the ones that are looking to make a quick buck with you before moving on to the next person.
Accountability is another trait you want to look for in your broker. When making a recommendation to buy or sell a particular currency, a broker with this attribute will be able to articulate to you all the reasons why this would be a positive move for you.
While “trust me” may be all you need if you are playing a board game with a friend, it is not enough when you are talking about your money. A solid reputable broker will know that and always has some very good reasons for the advice he or she gives you.
Essentially, a great deal of what you are looking for is simply honesty, integrity, and an obvious knowledge of how currency trading works.
When you are able to find someone who exhibits all these characteristics, as well as being dedicated to making money with the customer, not off the customer, then you have found a Forex broker that is worth doing business with.
If you need help locating a good broker, a good place to start your search is the internet.
Insert Forex forums into a search engine and look for good reccommendations from other Forex traders.
It should be noted Forex trading involves substantial risk of loss and is not suitable for all investors

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Why to trade currencies?

• Forex is a 24-hour market. This creates a great number of trading opportunities every day. It also allows to trade currencies part-time.
• No big player controls the forex market. Because of the liquidity, no single bank or fund can influence the price at the expense of small retail traders, at least not for long.
• The forex market cannot crash. Unlike stocks, currencies are valued relatively to each other. If one currency depreciates, another goes up.
• You can profit from both rising and falling currencies. Even if you do not physically hold a particular currency, you can still sell it. You can go long or short, capturing all the price movements. But, of course, if the currency moves in the opposite direction to that you have predicted, you will lose money.
• Low starting capital. Some online forex brokers let their clients trade with as little as $1. Thanks to high leverage, you can make substantial profits even with a small trading account.
• Low transaction costs. Most forex brokers do not charge any commission. They are compensated by the spread that can be sometimes as low as 10 cents for every $10,000 traded.
• Free tools. Most online forex brokers give away tons of free stuff. You can practice forex trading on a free demo account. You get access to free forex charts, free technical indicators, free economic news feeds... even to free professional market analyses.
• Instant execution of trades. Under normal market conditions, trading orders are executed instantaneously. Many forex brokers also allow you to automate your trading strategy, using algorithmic trading.

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Which currencies can be traded?

Forex currency symbols consist of three letters. For example, USD stands for the US dollar, EUR for the Euro, and JPY for the Japanese Yen. Some currencies are also known under nicknames:

• American dollar (USD) = Greenback
• British pound (GBP) = Cable or Sterling
• Swiss franc (CHF) = Swissy
• Canadian dollar (CAD) = Loonie
• Australian dollar (AUD) = Aussie
• New Zealand dollar (NZD) = Kiwi

The most popular currency pairs include the so-called majors (EUR/USD, USD/JPY, GBP/USD, USD/CHF) and commodity pairs (USD/CAD, AUD/USD, NZD/USD). Any other combination of these currencies (for example EUR/GBP or AUD/JPY) is called a currency cross. Many forex brokers also offer exotic currencies, such as HKD, TRY, and ZAR.

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When and where are currencies traded?

Forex is open 24 hours a day, 5.5 days a week. It is up to you when you want to trade – full-time from 9 to 5, part-time after work, or once a day, before going to bed.

Unlike a stock market, the foreign exchange market has no physical location. It is rather a decentralized electronic network of banks and forex brokers.

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Factors affecting forex trading

Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. Supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.

Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several . These elements generally fall into three categories:

Economic factors.
These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.
Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).

Political conditions
Internal, regional, and international political conditions and events can have a profound effect on currency markets.
For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.

Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:

1. Flights to quality: Unsettling international events can lead to a "flight to quality" with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts.
2. Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.
3. "Buy the rumor, sell the fact": This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought". To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.
4. Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect - the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.
5. Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form patterns that may be recognized and utilized by traders for the purpose of entering and exiting the market, leading to short-term fluctuations in price. Many traders study price charts in order to identify such patterns

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What are the benefits of forex trading?

Two way opportunities, that means you can earn profit from upward or downward price movement. For example if you buy (go long) and the price moving upward, you will be in profit. and the otherway, if you if you sell (go short) and the price moving downward, you will be in profit

Extreme liquidity of the market. Forex is the most liquid market in the world, and that means you can buy or sell anytime you want

Long trading hours, Forex allows you to trade 24 hours a day and 5 days a week (except on weekends).

Leverage to amplify your profit, you can use a relative small quantity to trade bigger amount (usually from 1:50 up to 1:500) for example you have $100, without leverage your profit is only $0.01 but with 1:100 leverage your profit will be $1. (leverage makes your profit 100 times bigger, this also applies to loss).

Free of comission, Relative Low Spread Cost, usually online forex brokers offer you comission free trading, no brokerage fee, no exchange fee, and smaller trading transaction cost.

Flexible Trading Lots, you can trade rather standard lot (100K), mini lot (10K), or even micro lot (1K)

Automated / Robot Trading, some trading platform such as Metatrader enables automated trading

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