How to Trade the Forex Market

FX Signals by FxPremiere.com | Whether you’re an individual trader or a financial or investment professional, the foreign exchange (forex) market, also known as the currency or foreign currency market, is where the money is. Forex trading amounts to approximately $5 trillion (yes, trillion, not billion) per day. By comparison, the approximately $700 billion a day bond market and $200 billion a day in stock trading worldwide appear relatively small in size. The total daily value of all the stock trading in the world equals just about one hour’s worth of trading in the forex market every day.

How to Trade the Forex Market

Forex Players – Banks

There are several distinct groups of participants in the forex market. They also serve as market makers in forex trading and trade heavily in their own accounts. (If a banker ever cautions you against forex trading, you might want to ask them why, if forex is such a bad investment, their bank invests such huge sums in the forex market.)

Forex Players – Governments

Governments, through their central banks, are also major players in the forex market. The central bank of a nation will often adopt large positions of buying or selling its own currency in an attempt to control the currency’s relative value in order to combat inflation or to improve the country’s balance of trade. Central bank interventions in the forex market are similar to policy-driven central bank interventions in the bond market.

Forex Players – Companies

Large companies that operate internationally are also substantially involved in forex trading, trading up to hundreds of billions of dollars annually. Corporations can use the forex market to hedge their primary business operations in foreign countries. For example, if a U.S.-based company is doing a significant amount of business in Singapore, requiring it to conduct large business transactions in Singapore dollars, then it might hedge against a decline in the relative value of the Singapore dollar by buying the currency pair Usd/Sgd (US dollar vs. Singapore dollar).

Forex Players – Traders

Last, but certainly not least, are individual forex traders, speculators who trade the forex market seeking investment profits. This group includes a disparate cast of characters, from professional investment fund managers to individual small investors, who come to the market with widely varying levels of skill, knowledge, and resources.

Learning Forex Trading – Currency Pairs

Generally, the smallest fluctuation in an exchange rate between two currencies is called a “pip”. With most currency pairs, which are quoted to four decimal places, a pip equals 0.0001. The primary exception is Japanese yen currency pairs that are only quoted to two decimal places so that a pip equals 0.01. Many brokers now quote to five decimal places, with the last number signifying a fractional 1/10^th of a pip.

The value of a pip depends on both the currency pair being traded and what lot size is traded. For one standard lot, a pip commonly equals $10 (US); trading mini-lots, a pip equals $1; and trading micro-lots, a pip equals 10 cents. The value of a pip varies slightly depending on the currency pair being traded, but those figures are roughly accurate for all pairs.

Advantages of Forex Trading – Leverage

One of the major attractions of forex trading is the unparalleled leverage that is available to forex traders.

High amounts of leverage mean that forex traders can utilize a small amount of investment capital to realize sizeable gains.  However, traders have to keep in mind that just as leverage magnifies profits, it also magnifies losses.

Advantages of Forex Trading – Liquidity

The extremely high volume of trading that occurs in the forex market each trading day makes for correspondingly high levels of liquidity. High liquidity makes for low bid-ask spreads and allows traders to easily enter and exit trades throughout the trading day.

For large institutional traders, such as banks, high liquidity enables them to trade large positions without causing large fluctuations in price that typically occur in markets with low liquidity. Again, that makes for lower total trading costs and thus, larger net profits or smaller net losses.

Advantages of Forex Trading – Volatility

As previously noted, many of the most widely-traded currency pairs often have a daily trading range of up to 100 pips or more. This daily volatility makes for significant opportunities to realize profits simply within the range of price fluctuations that occur within a normal trading day.

Forex Volatility – What Are The Most Volatile Currency Pairs?

There are no restrictions on short selling such as those that exist for trading stocks. A wide daily trading range, with equal opportunities to profit from both buying and selling, make the forex market very attractive to speculators in general and day traders in particular.

Forex Trading Strategies – Fundamental Analysis

There are two basic strategic approaches to forex trading – fundamental and technical.

Fundamental analysis trading is generally more favored by long-term traders – those who buy (or sell) and hold a currency pair for an extended period of time. Fundamental analysis is analysis that is based on economic conditions, both within specific countries and globally.

Forex Liquidity And Volatility

Fundamental analysis may also be based on global economic trends. if investors can realize significantly higher gains from money held in interest-bearing accounts in the United States than from interest-bearing accounts in other countries, then that makes the US dollar more attractive and, therefore, likely to increase in value relative to other currencies.

Forex Trading Strategies – Technical Analysis

Many forex traders favor technical analysis in determining the trading positions they adopt. Technical analysis – analysis based on charts of price movements in a market with the aid of various technical indicators.

Learning Forex Signal Market

Technical analysis is simply analysis that is based on past price movement and market behavior (such as volume or volatility).

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Some technical traders utilize a single technical indicator for trades, while others apply multiple technical indicators as trade indicators.

Open a forex account Guide

The Most Traded Currency Pairs

Technical traders analyze charts of varying time frames based on the trader’s individual trading time frame preference. Traders with longer-term trading time frames are more likely to apply technical analysis to hourly, 4-hour, or daily charts.

The Forex Market – Using forex signals

The forex market is one of the most attractive markets for traders.

Introduction to Financial Markets

However, the lure of “easy money” from forex trading can be deceptive. The fact is that the majority of forex traders lose money, and only a small percentage of traders are consistent winners in the currency trading market.

How to Trade the Forex Market

How to Trade the Forex Market

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