Before 1998, regular traders did not have the access to the Forex trading market as they do today. The activity was strictly restricted to large multi-national corporations, banks and important currency dealers. It seemed that the financial requirements needed to trade were not sufficient enough and the business sizes back then were rather small. Nevertheless, since 1998, regular traders have had access to the astonishing liquidity and the powerful trending quality the global currency exchange rates have.
Forex brokers split away from the interbank units to become smaller independent financial services companies. Doing so, they were able to offer forex trading options to a massive audience of traders and create the biggest financial market in the world. Regular traders from every corner of the globe now have access to the forex market. The large volumes of trades generated in the forex market would not have been possible if it weren’t for the developing internet and advancing trading technology there is today. Unlike the past when Forex trading was limited to professionals, Forex trading is now considered a common way for ‘normal people’ to make money while at home.
As a novice to the Forex market it is not only vital that he/she learns the mechanics of the trading process but the history as well. Therefore, conducting a thorough research about the background and roots of Forex must take place when entering the trading market in order to give you an understanding of the market you are dealing with, and the best chance possible in trading profitably.
The process of Forex trading involves the simultaneous buying of a currency and selling of a currency. A trader will profit off that currency pair where he/she has the choice to buy or sell one currency for another. The trader speculates and gambles on the economic performance of a specific country’s currency by anticipating a change in value of the currency he/she is speculating on.
As a trainee to Forex, you may not have the confidence to create a live account and begin trading straight away even if you have read up on all the details needed. Fortunately, there are hundreds of available demo accounts to take advantage, so a forex trader can gain all the practice and understanding he/she needs.
To make the Forex market more understandable, we have provided some main factors to consider before opening an account with a Forex broker:
To have a successful trading career there are four things necessary. First, you need to search for a decent, regulated broker. Secondly, you need a computer with internet access. Thirdly, you must obtain a Forex account (only if you feel confident enough) and finally you must carry your trades out with the assurance of a reliable trading system.
Trading Hours
The Forex market is open 24 hours a day, 5.5 days a week. Regardless of a trader’s local time, there is always an opportunity to trade. Future markets, stocks and trades take place in a continuous moving circle, having no centralized location for it to occur. As the financial places in Sydney begin their working hours, Forex trading begins. It moves to Tokyo, London and finally New York. No matter where you are globally, trading activities can always take place at whatever the time.
Forex Market Segments
There are several different segments of Forex traders however most of the trades are done by top currency dealers or banks while the rest are usually between dealers and non-financial firms. The HSPC, Merril Lynch, Barclays, Deutsche Bank, City Group etc, are all large international financial foundations where most Forex trading takes place. 73% of traded volume is known to have occurred in the top ten international banks (Wall Street Journal Europe) including the Deutsche Bank and the UBS.
Currency Pairs
During a beginner’s training in the Forex market, he/she has come across the familiar terms of ‘GBP/USD’ or ‘EURO/USD’. These are currency pairs. A trader can buy or sell a currency in exchange for another. Each currency pair has its own individual exchange rate, and each broker more importantly, has their own spread they offer to traders on a currency exchange.
Forex Quotes
A Forex quote verifies the difference in value of one currency in contrast to another. A foreign exchange quote is stated in pairs for example USD/JPD 108.5. This testifies that the United States Dollar is equal to 108.5 Japanese Yen. Using the above example of USD/JPD 108.5, the first currency which is the USD is referred to as a base currency (this always has a value of 1 unit). The second currency is referred to as a counter. You are exchanging the base currency for the counter on every trade, whether you buy or sell in Forex.
Bid/Ask
Brokers make profit off the differences between the ‘bid/ask’ price. Through this, brokers give service to their traders with no commission fee charge. A bid/ask price is stated as a two-sided quote. For example, EUR/USD 1.2335/1.2339. This quote is stating that a trader can buy 1 Euro Dollar with 1.2335 USD, or he/she can sell 1 Euro at a rate of 1.2339. Therefore, the ‘bid’ price of this quote represents the price that the base currency can be sold for and the ‘ask’ price is the price used to buy the base currency. The ‘spread’ is the difference between the bid/ask price.
Forex Charts
Forex charts display price movements in the market over a period of time. It is important that as a beginner trader, you learn how to read and understand what a chart is representing. Without this charting knowledge, a trader can risk losing a lot of money simply because he/she does not recognise what the chart is showing. There are various types of charts that a trader should be aware of:
LINE CHARTS: This chart is rather basic and is commonly used in Forex. It presents the closing prices which is an important aspect to notice during a trade.
BAR CHARTS: This is a more detailed version of a line chart and it displays the closing price along with the opening, highest and lowest prices during a specific timeframe.
CANDLESTICK CHARTS: A candlestick chart consists of the same price presentations (high, low, etc) however it is more easily read and interpreted due to the use of colour. Each candlestick has its own colour in order to distinguish between a bull or bear pattern in the market. Candlesticks also give a signal as to how volatile a currency pair currently is.
Predicting Market Movements
With the use of Forex charts, traders are able to predict future movements in the market. They do this by analyzing certain past movements. This process is risky as a trader could be inaccurately predicting and then land himself a loss of funds. However, each trader has his own preferences when predicting chart movements. Some traders depending on their preferences evaluate charts from a previous week, six months ago or even ten years ago. Traders undertake such intense evaluations in order to feel ready when moving forward with a trade.
Currency Exchange Rates
A Forex trader must keep in mind that bank policies, interest rates, geopolitics and possibly certain hours in the day are factors that can influence currency exchange rates.
Forex Indicators
Forex indicators present trading direction in a Forex chart. They are represented though a specific pattern on the chart. Each one aids a trader in predicting a market or price movement. Skilful traders use up to forty indicators. Indicators can be categorized into the following main forms: RSI, MACD or CMO.
After reading the above information, the process of Forex trading may sound like a piece of cake. However it is not. In order to gain the most profit in your trading career, each variable and aspect of Forex must be clearly understood, practiced and implemented as a try out. It is not difficult to lose money so take each step at a time. If however you do lose some funds at the start of your forex trading experience, consider it a lesson learnt and a mistake to learn from and tackle later on. With experience and learning from mistakes a forex trader can become a very profitable trader.