What is Forex? Foreign exchange market or currency market or Forex is the market where one currency is traded for another. Forex Trading can be extremely profitable. However, it can be extremely risky if you don't understand the basics. The Forex market is one of the largest traded markets in the world. The foreign currency market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates. The greatest thing about Forex is that due to the influx of Forex trading platforms, the average investor can invest on his own and not through a broker.
So why is Forex trading so popular?
There are several reasons why Forex trading had became such a popular investment among world wide speculators.
The Forex market has made an amazing transformation since the advent of the internet. Technology has now made it possible for smaller investors to play on the same level as larger corporations and banks. Anyone with a computer can start trading currencies from the privacy of their home or office. Online Forex trading has changed the way that investors do business. With access to your portfolio 24-hours a day, it is really very simple to get started. Also, Forex trading provides relative large leverage rates to individual traders. Forex traders can do business with up to 200 to 1 leverage rates. With this advantage, ROI is escalated dramatically and traders can always start up small with capital as little as $1000. The broker I use allows you to start with even little. To find out more, check out Interbank Fx. They have awesome tools and a great platform to help you trade with ease. Also Interbank Fx allows you to open a free demo account so you can practice trading for free until you feel comfortable.
Forex Market Hours. The Forex market operates 24 hours a day, 5.5 days a week (6:00 PM EST on Sunday until 4:00 PM EST on Friday). Forex trading begins every day in Sydney, moves to Tokyo, followed by Europe and finally the Americas.
When should I trade currencies? Forex Trading activities are found to be heaviest when major markets overlap. Nearly two-thirds of New York activity occurs in the morning hours when European markets are also open. So you can figure out that at any given time, somebody somewhere in the world is buying and selling currencies. But the volume of transactions reaches its peaks when the major market hours overlap -- the time when Asian market including Australia & New Zealand, the European market and the U.S. market are open simultaneously.
A typical trading day starts with New Zealand, before moving across to Australia, Japan and Asia, Europe and North America. The UK and the US markets account for around half of the total world market, therefore the times at which both are open are particularly busy.
Let’s find out quickly what are the overlapping timings:
* New York Market trade times: 8am - 4pm EST
* London Market trade times: 2am - 12Noon EST
* Great Britain Market trade times: 3am - 11am EST
* Tokyo Market trade times: 8pm - 4am EST
* Australia Market trade times: 7pm - 3am EST
So there are two times when two of the major markets overlap during trading hours -- between 2am and 4am EST for Asian/European markets and between 8am to 12pm EST for European/U.S. markets.
The market is open 24 hours a day doesn’t mean that it is always active. You can make money when the market is moving up or when it is moving down. It will be very difficult to make profit when the market doesn’t move at all.
What is this Bid Ask business all about? Forex prices, or quotes, include a "Bid" and "Ask" similar to other financial products. Bid is the price at which a trader is able to sell a currency pair. The Bid price or sell price of a currency pair is always the lower price in a quote. Ask, A.K.A the "Offer", is then the price at which traders are able to buy a currency pair. In other words, Forex traders always buy at the high and sell at the low of a price quote. The difference between the Bid and Ask is called the "Spread" or "Pip Spread", which is the Trader’s cost per trade or per transaction. There are typically not additional broker commissions involved in trading the Forex market, as there might be when trading other investment markets.
How do I read quotes? Reading a Forex quote may seem a bit confusing at first. However, it’s really quite simple if you are able to remember two things:
1. The first currency listed is the base currency
2. The value of the base currency is always 1 (one)
Here is an example:
A quote of USD/JPY at 112.24 is to say that 1 US Dollar (USD) = 112.24 Japanese Yen (JPY). When the US dollar is the base unit and a currency pair’s price increases, comparatively the dollar has appreciated and the other currency in the pair (usually known as the cross currency) has weakened. Using the above USD/JPY example as a reference, if the USD/JPY increases from 116.04 to 117.51 (147 pips), the dollar is stronger because it will now buy more yen than before.
Pip. Market increments are measured in PIPs or Percentage in Point. A pip is the last digit in the value of a currency pair; 1.4594, 111.19 etc. All Forex currency pairs, except for the Japanese Yen, have 4 decimal places. The Yen crosses only have 2 decimal places.
For example, let’s assume a Forex trader buys 1 standard lot of GBP/USD. The current exchange rate is 1.9615. Essentially this trader is buying £100,000 in exchange for $196,150. Again, for examples sake, assume the Forex market rate rose 15 PIPs to 1.9630 and the trader liquidates the position. The same £100,000 is now worth $196,300, the trader realizing a $150 profit
The Major Trading pairs
EUR/USD – The most popular currency pair by far.
GBP/USD - pretty similar pair to EUR/USD however it is quicker, and the moves are about 50% bigger, 150 PIPs daily is not uncommon for this pair.
USD/JPY -Most of the time USD/JPY is bullish it moves slowly up, when there is a correction on this pair, it moves few hundreds pips down in just few days.
EUR/JPY - pretty much the same as USD/JPY but moves are less predictable
AUD/USD - good substitute where you have no idea where EUR/USD will go, however moves on this pair are smaller then on EUR/USD
USD/CAD - pretty predictable, mainly because CAD is highly associated with oil price,
GBP = Great British Pound
EUR = Euro
CHF = Confederation Helvetica Franc (Swiss Franc)
USD = United States Dollar
CAD = Canadian Dollar
JPY = Japanese Yen
AUD = Australian Dollar
This is basics of Forex trading and some of the terminology that can definitely get you started on the right track.
Fundamental Analysis. Once you have a grasp on the basics of how currency trading works now you have to do some research A.K.A Fundamental analysis. Fundamentals for each currency might include, but not limited to; interest rates, central bank policy, political figures/events, unemployment/employment reports, and Gross Domestic Product (GDP). These statistics, which are made public on a regularly scheduled basis, help market observers monitor the pulse of the economy. Therefore, almost everyone in the financial markets religiously follows them. These are market movers. This is where you will spend probably half of you time tracking these events and how they effect there corresponding currency pair.
Technical analysis. Technical Analysis or “Charting” is the other half of currency trading. This is more of a visual interpretation of a currencies movement. To help make this easier most trading systems allow you to use charting indicators. Here are some of the indicators I use:
MACD is an acronym for Moving Average Convergence Divergence. This tool is used to identify moving averages that are indicating a new trend, whether it’s bullish or bearish. After all, our priority in trading is being able to find a trend, because that is where the most money is made.
Bollinger Bands - Bollinger Bands are not used to for market timing - but give you an all round view of volatility price and when you understand this concept, Bollinger Bands can help you in 3 ways: They can alert you to potential big moves, help set targets and spot market value and entry levels.
Relative Strength Index, or RSI, identifies overbought and oversold conditions in the market. It is also scaled from 0 to 100. Typically, readings below 20 indicate oversold, while readings over 80 indicate overbought.
Best advice is to read over all this information several times and then open a free demo account and practice trading until you are comfortable.