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What is Forex?

>What is Forex? Forex is the acronym for Foreign Exchange. It is the market place where the currencies of the world are traded. The Forex market is also regarded as the largest market in the world with a daily turnover of around 3.2 trillion dollars. This is thrice the size of the combined US equity and Treasury markets. The Forex market is also unique when compared to the other financial markets as it has no centralized or physical location. It is just a network of banks, financial institutions, hedge funds, corporations and retail traders buying and selling currencies with one another. Because of this unique characteristic, the Forex market is not bound by a single time zone. It operates on a 24 hours timeline from one time zone to another where all the major financial centers are located.

Previously, the only way a retail trader can access the Forex market was through the commercial banks that deal with currency trading for investment and trade purposes. In 1971, when the major currencies of the world floated their currencies, trading in currencies increased tremendously. Nowadays, apart from importers and exporters dealing with Forex, there is a whole new array of market participants in the Forex market. They include hedge funds, portfolio managers, speculators and the retail traders. Each individual group of market participants has differing objectives for dealing in Forex. They range from payment for goods and services to risk hedging to pure speculation.

By definition, Forex trading is the action of swapping currencies from different nations with each other at a rate determined by the Forex market. For example the currency used in the European community is the Euro while the currency for the United States is the US dollar. Thus, when a trader buys the Euro, he will also be selling the US dollar at the same time. In Forex terms, this means going long with the Euro and US currency pair (EUR/USD).

Generally, to trade Forex, you need to go through a market maker or a Forex broker. As a retail Forex trader, you will select the currency pair that you want to trade in. the selection will be based on your own analysis. Normally, the Forex broker will not be making any recommendation to you but will just execute your trading orders.

To make money on Forex trading, you can either take a long market position or go short on your market position. By going long, you are buying a currency pair and hoping to sell it later at a higher rate and thus profiting from the differences between what you paid for and what you got from selling the currency pair. Going short is the opposite scenario. In this situation, you will be selling a currency pair at the current market rate and hope to buy them back later at a lower rate. This is one of the main attractions of the Forex market. You can profit from the market regardless if it is a bull or bear market. As long as you can predict which direction the market is heading, you can position yourself to take advantage of the market trend.

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Forex – From Banks to the Internet

Ever since the 1970s, due to increasing globalization of international trade, international financial transactions are becoming more common as compared to 50 years ago. This has resulted in the Forex market undergoing a profound transformation not only in terms of volume traded but also in terms of coverage, structure and method of transactions. Among some of the major structural changes that have occurred in the Forex market are:

• Massive wave of deregulation in the global financial sector

Many Governments in countries all over the world have eliminated their control and the limitations placed on the financial sector in order to spur a growth in the financial system. The result of this is increased competition both domestically and internationally among the various financial institutions.

• Fundamental movement towards globalization and institutionalization in the saving and investment sectors

As a result of this amalgamation, financial institutions and fund managers around the world have more access to a greater pool of funds for investment purposes. With a view for diversification, investments pour across national borders and currencies in increasingly larger quantum as these institutional funds look for greater profitability.

If our world operates with just a single currency, there would be no Forex market or Forex rates. However, our reality comprises of differing sovereign nations with their own respective national currency. Thus, the Forex market plays a crucial role in helping to facilitate trades among the various nations of the world. Without the Forex market, there will be no mechanism for facilitating payments between exporters and importers of goods & services. Prior to the last two decades, the Forex market was generally determined by mainly the commercial banks as they were the main go-between for trading partners.

However, with the liberalization of the financial sectors, the Forex market had expanded exponentially from a situation the commercial banks were the main players among themselves to include a larger group of market participants. They included the brokers and market makers as well pension funds, hedge funds and investments firms. The focus of the Forex market widened from servicing international trading partners to accommodating huge amounts of overseas capital flows. As trading in Forex became more widespread, competition became more intense resulting in numerous firms beginning to offer Forex trading facilities to the small retail trader.

Immense technological progress in computing powers and the World Wide Web also helped to spurs the development of the Forex market. With increasing competition among the various financial institutions and brokerage firms, this has resulted in lower margin. The timely arrival of these technological progresses also helped these firms to lower their cost and offer even more competitive services for the small retail investors.

The internet allows for real time execution of trades and access to huge amount of global market information. The result is a paradigm shift from trading with a brick & mortar institution like a bank to a virtual world of online Forex brokers. Today, the financial markets are still undergoing developments. It has grown larger than anyone can ever envisaged and will continue to do so as the small retail investor becomes more and more sophisticated.

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Tips for New Forex Traders

With around 3 trillion US dollars worth of currencies traded daily, the Forex market is the largest financial market in the world. It is an extremely exciting business to be in as it provides a simple way for both the traders and investors to build up profits rapidly. Nevertheless, for those new to the Forex market, it is crucial to know exactly what you are getting yourself into. You should not deal in the Forex market if you are clueless as to what the Forex market entails. Despite having said this, we still countless novice traders repeating the same mistakes over and over again. Some of these common errors that the make include:

• Not embracing the correct outlook toward trading in the Forex market.

• Not having the right attitude

• Unable to differentiate the significances of the different currencies traded.

• Having poor management of their trading as well as implementation of their trading strategy.

Outlook:

Many novices fail to appreciate the importance of having the correct outlook toward trading in the Forex market. This is actually about making the proper preparations before beginning to trade in the Forex market. First of all, a novice trader must coordinate his personal goals and mindset so that he can connect with the market as well as with the tools used in Forex trading.

For example, the Forex trader need to think about the time frame with which he is most at ease with when it comes to trading. Using short time frame charts like a 5 minute chart will imply that you should be at ease with market position without risk of overnight exposure. On the other hand, if you prefer to trade with weekly charts, this would imply that you are acceptable to the risk of overnight exposure. It would also mean that you can deal with the fact you will not be trading for several days.

The Right Attitude:

The right attitude would entail having the following traits in one’s mindset like:

• Discipline

• Objectivity

• Patience

• Having realistic expectations

Able to discern the significance between the various currencies traded:

Not all currency pairs are created equal. Each currency pair is being traded for different fundamental reasons. Simultaneously, different market participants go for different currency pairs. The way a bank will trade differs significantly from the way a Hedge fund conducts its business. A speculator will also have a different trading philosophy form that of retail Forex traders. Therefore, in order to capitalize on any opportunities, you need to be able to appreciate these different motivations of the market participants.

Proper management and strategy implementation:

Although no Forex trading strategy is 100% foolproof, this does not mean you can forgo having one while trading in Forex. It still provides a roadmap for you to measure your progress in making your trading decisions. Even though you will incur some losses along the way, at the very least your can see what is the ratio of profits to losses when you implement a particular trading strategy.

Conclusion:

With the countless number of trading techniques that are available today, it is difficult to say which is better and which is no good. What is important for you as a trader is that you must feel comfortable with the trading strategy that you adopted. As the Oracle of Omaha Warren Buffet, use to say there are only two rules in investment. The foremost rule is “Never lose money” while the second rule is “Always remember the first rule”.

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Forex- Fundamental Analysis

Forex fundamental analysis is about identifying and measuring the factors that affect the fundamental worth of financial instruments. These can be economic or political climate of a country as well as the fundamental issues that will influence the supply and demand of a product or services. For example, a decrease in the supply of a product without any change in the demand of a product will result in an increase in the market price. In contrast, any increase on the supply side will have the opposite result that is a decrease in the market price.

In the context of Forex trading, a fundamentalist will study the supply and demand of a country’s currency, its merchandise trade (products & services), its government policies, the way the country is managed. He will also analyze the past and forecasted performances of the country’s economy and the future plans of the country, both economic and political. For the short term, all economic indicators need to be looked at.

Using the data obtained, the fundamentalist will then construct financial models to help predict both the current and forecasted value of a specific currency against its corresponding pair. The underlying idea is that any unparalleled increase in the supply will lower the value of the currency. On the contrary, any unparalleled increase in the demand will push the value of the currency up. Once the fundamentalist is able to discern this estimate from the financial models constructed, he will be able to predict if the currency rate is likely to fall or increase.

Some of the data that fundamentalist trader relies on comes from the economic calendar. Other factors that a fundamentalist will rely on are speeches of the US Federal Reserve chairman, Secretary of the Treasury and those who are prominent in the financial sectors. In addition to speeches, fundamental analysis also relies on interest rates. Normally, interest rates increase will cause the currency value to increase as well as more investors start to park their assets in that country’s currency. Other important economic data that will be studied will include the unemployment rates, the Gross Domestic Product growth rate, figures of retail sales and consumer price index. A high GDP growth rate will indicate a robust economy which in turn implies higher interest rates. Higher consumer price index will mean higher rates of inflation. This will naturally result in interest rates rising meaning that the value of the country’s currency will go up.

The trade balance figures and country budget are also important data that need to be studied. Countries with a high trade deficit will normally indicate a weak currency. One of the main drawbacks of fundamental analysis is that it is difficult to accurately assess interaction between the variables. Thus, a lot of the forecasted estimates are based on the fundamentalist’s experiences. Furthermore, the Forex market has the tendency to be self fulfilling making the analysis obsolete at times. Lastly, depending on the timing, the market usually takes some time to adjust itself to the changing economic factors.

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What is Forex Technical Analysis

With Forex technical analysis, one tries to predict future price movements by analyzing historical market data. The majority of Forex traders use technical analysis to try to get an overall view of their investment’s price movements. Occasionally even a fundamentalist trader relies on technical analysis to get a better picture of a currency trend. With technical analysis, one can discern if the market is one a downswing, upswing or just moving sideways.

Technical analysis works by relying on a few assumptions:

• That all the fundamentals of the market are echoed in the price data. The underlying reasons for the price movements are not essential in technical analysis.

• The Forex market moves in repetitive patterns. These patterns are known as trends and are used as signals to govern a technical analyst investment strategy. The objective of technical analysis is to actually predict future trend by analyzing past trends.

• Because prices in the Forex market moves in predictable ways, Technical analysts do not believe that price fluctuations are random. Thus, once a trend has been established, it will continue for a certain period.

Using the technical indicators available under technical analysis, Forex traders are able to find suitable entry and exit points for their trades. Some of these technical indicators are reflected in price charts, volume charts and moving averages. Each type of technical serves a specific purpose like identifying trends or determining the strength or continuity of a trend. Technical analysis is actually more objective than fundamental analysis as it removes the emotional aspect of trading. Traders using technical analysis are generally more disciplined as they rely solely on the technical charts to form their investment decisions. Entry and exit points of a trade are determined and planned according to what the charts tells us.

The types of charts used by a technical analyst comprises of:

Bar chart

This is one of the most frequently used charts to show the price movements. Every bar indicates a time frame that can indicate one minute or several years. If the time frame is long enough, a pattern will emerged just by looking at the bar chart.

Candlestick chart

Candlestick charts are another type of chart that is commonly used by technical analysts. It is more complicated than a bar chart in so far each candlestick will depict the “high”, “low”, “opening” and “closing” price for the time frame that it represent. It provides more depth than a bar chart.

Point and figure chart

Point and figure charts are like bar charts only that the Xs and Os on the charts are for indicating adjustment in the price direction. These charts do not utilize time scale to relate to a specific day with a specific price action.

Apart from charts, there are also several frequently used technical indicators by the technical analysts. They include:

Trend indicators

These are used to smoothen out the price fluctuations so that the trend can be more easily seen. Examples of these are moving averages and trend lines.

Strength indicators

These are used to indicate how intense are the sentiments of the market by looking at the market positions held by the market participants. The core ingredients of strength are Volume or open interest.

Cyclic indicator

One of the most famous and commonly used theories to explain cycles in price fluctuations is the Elliot Wave theory. It looks at recurring season to try to determine when the next cycle will be.

Support & Resistance

In simple terms, Support and Resistance levels are levels where the market prices normally try to breach repetitively but fail to do so. A good example of this is trend lines.

Momentum indicators

With Momentum indicators, you can establish how strong or weak a trend will be as time passes. Momentums are usually the strongest when trends just started and weakest when they transformed.

What is Forex Day Trading -

Day Trading Indicators and Indicator Trading?

By definition, day trading is defined as the purchase and sale of a financial instrument within a single trading day. This is achievable in all the financial markets but is especially prevalent in the Forex market as this market of the MOST liquid of all financial markets. Normally day traders are a class of trader by themselves. They are well informed and are well capitalized. They use a high level of leverage to maximize their profit levels. They play a very important part in the Forex market as they essentially provide the Forex market with liquidity. In addition, they facilitate the smooth running of the Forex market with arbitrage. This article will take a look at day trading and the traders behind it.

As mentioned earlier, day traders are a class of their own as they are well educated and they do this kind of trade for a living. Unlike many retail traders, day traders are truly professional. And this class of traders has an in-depth knowledge of the Forex market. Thus to be classified as a day trader, there are some criteria to be met:

• In-depth knowledge and experiences with the market

Those who are new to Forex are strongly discouraged from trying to day trade. In most likelihood, novice traders will end up incurring losses.

• Enough working capital

Day traders only utilize their risk capital to free them from the stress and risk of possible financial ruin. In addition, because the margin are ultra thin, a day trader need a large capital to be able to profit form the intra-day price fluctuations.

• A Trading strategy

For one to have an edge over everyone else in the market, one must have a proper strategy before embarking in day trading.

• Discipline

Day traders are normally individuals with a strong sense of discipline. Without discipline, it is easy for one to end up trading based on emotion.

To help day traders in their trading decision, they rely heavily technical indicators indentify opportunities to make money. Some of the technical indicators used by them are:

Flag Indicators

This is a charting guide that looks like a flag with a mast on either side. This kind of pattern results from narrow price fluctuations and signifies a consolidation before the proceeding movement resumes. Elliott Wave Theory

The Elliot wave theory, discovered by Ralph Nelson Elliott, explains that the financial markets move in an identifiable and repetitive waveform. Chart breaks

This is another type of indication that a day trader will look for in their trading strategy. With this, day traders look for assets that are trading near support and resistance levels. To help them discern a breakout point, day trader will utilize tools like:

• Channels

• Fibonacci levels

• Gann levels

• Triangles

• Wolfe Waves

Even though day trading is a controversial topic, it is becoming more common as advances in technology allows the average traders access to software tools that are available only to large institutional traders. Nevertheless, novice traders are strongly discouraged from embarking on day trades until they have gained sufficient experiences and risk capital to enable them to trade properly and efficiently.