Foreign exchange, also commonly known as ‘Forex’ or ‘FX’, is the exchange of one currency for another. Forex is the world’s most traded market, with an average turnover in excess of US$5.3 trillion per day.
The New York Stock Exchange only has a daily turnover of around $50 Billion a day so you can see why the forex market is the day traders market of choice and is certainly the biggest financial market out there.
Unlike most financial markets, the OTC (over-the-counter) forex market has no physical location or central exchange and trades 24-hours a day through a global network of businesses, banks and individuals. This means that currency prices are constantly fluctuating in value against each other, offering multiple trading opportunities.
24-Hour Forex Trading
One of the key elements behind forex’s popularity is the fact that forex markets are open 24-hours a day from Sunday evening through to Friday night. Trading follows the clock, opening on Monday morning in Wellington, New Zealand, progressing to Asian trade spearheaded out of Tokyo and Singapore, before moving to London and closing on Friday evening in New
The fact that prices are available to trade 24 hours a day helps to ensure that price gapping (when a price jumps from one level to the next without trading in between) is less and ensures that traders can take a position whenever they want, regardless of time, though in truth there are certain ‘lull’ times when volumes are below their daily average which can widen market spreads.
You might enjoy trading the major currency pairs, or have knowledge about the strength of an exotic currency, or a feel for commodities; some opportunities present themselves to people who keep up with news and events, while others require patient analysis. Traders bring their own strengths and preferences to their trading and, over time, create their own trading style. Each market participant has their goals; some are companies who are hedging currency exposure to protect their business; some are fundamental traders who focus on factors that affect the strength of whole economies; others are technical traders who look for price patterns to trigger their trades. In addition, there are central banks, hedge funds and financial institutions who all bring different goals and interpretations to their trading.
Foreign exchange is a leveraged (or margined) product, which means that you are only required to deposit a small percentage of the full value of your position to place a forex trade. This means that the potential for profit, or loss, from an initial capital outlay is significantly higher than in traditional trading.
What affects the Forex market
The various market participants place different weight on information about interest rates, policy (laws), economic announcements and natural or man-made events: all affect expectations and thus market movements. Remember that in the forex market, you can profit from down-turns as well as rising prices.
All forex is quoted in terms of one currency versus another. Each currency pair has a ‘base’ currency and a ‘counter’ currency. The base currency is the currency on the left of the currency pair and the counter currency is on the right.
For example, in EUR/USD, EUR is the ‘base’ currency and USD the ‘counter’ currency. Forex price movements are triggered by currencies either appreciating in value (strengthening) or depreciating in value (weakening). If the price of EUR/USD for
example was to fall, this would indicate that the counter currency (US dollars) was appreciating, whilst the base currency (Euros) was depreciating
When trading forex prices, you would buy a currency pair if you believed that the base currency will strengthen against the counter currency. Alternatively, you would sell a currency pair if you believed that the base currency will weaken in value against the counter currency.
Some traders find opportunities to trade by looking at fundamental indications of economic health. For example, supply and
demand for a currency decide the price and liquidity, so traders keep an eye on the central bank’s interest rates to see which way the market might move. If a currency has a high interest rate, it might be profitable to invest for the interest alone; however, the reason for the high interest rate might be economic instability. All market participants trade based on their information and expectations.
Fundamental traders look at indicators such as employment rate, inflation and consumer sentiment as well as news about policy changes, interest rate and events. Much of this information is announced by governments according to a schedule, so it is possible to find or create “economic calendars” that will provide inspiration.
Most forex traders use charts to decide when to enter and exit trades, and technical traders in particular pay attention to price patterns. By looking at charts and weighing price, volume, volatility and timing, it is possible to find patterns that indicate opportunities. For example, if the price of a currency repeatedly reaches a given value but does not rise above or fall below it, the currency is said to have found a resistance or support level. Many traders will keep an eye on past patterns and have an opinion on how far the price will move if it does break the support or resistance level.
Over time, various analyses have been developed and built into our trading platforms. Some are simple classics, others are more difficult to apply, and still others are well suited to some currencies but not others. You can take a position at any time – any expectation you have will point to an opportunity to buy or sell.