Forex Currency Trading - The Basics By JONAH of Adsenselover.com
Forex is the name given to the foreign exchange market, where international currencies
are bought and sold. Due to the development of free exchange rates, the market began in the 1970s
and has become the world's largest financial market with a daily turnover of US$1.9 trillion. To
put that into perspective, that's over thirty times the daily turnover of the rest of the US
equity markets combined.
Unlike normal stock markets which are traded on exchanges that are located in a specific place,
Forex currency exchange takes place via an Over The Counter (OTC) or interbank market. This means
that transactions are conducted electronically between brokers.
Thanks to this and global time zones, Forex is a genuine 24 hour financial market.
The day begins
in Australia and moves around the globe as each of the leading financial markets open in Tokyo,
London and New York. So it's always possible to find someone who is willing to buy or sell
international currencies. This gives investors the chance to respond to price changes caused by a
variety of economic, social and political events at any time of the day or night.
There are two main reasons for trading currency on Forex. Approximately 5% of Forex trades are
undertaken by multinational companies and governments who buy or sell products and services in a
foreign country and have to convert their profits into their domestic currency. Forex allows them
to hedge (or protect) their profits so that in the even of a dramatic currency fluctuation, their
profits won't be reduced.
However, the other 95% of Forex activity is due to people or organizations trading for short term
profit. Forex allows you to trade virtually any currency, although in practice most activity
(85% of total turnover) relates to the major currencies which include the US Dollar, the Euro, the
Japanese Yen, the Swiss Franc, the British Pound, the Australian Dollar and the Canadian Dollar.
Trading on the Forex exchange involves simultaneously buying one currency and selling another. For
example, if you buy USD/EUR, that means you buy the US Dollar and sell an equivalent value of the
Euro. Closing you position involves buying the Euro and selling the US Dollar.
The price of all currencies traded on Forex are influenced by the laws of supply and demand. If
the demand for a currency outstrips the supply, the price rises. Alternatively, if supply is
greater than demand, the price of a currency will fall.
Forex trading has a number of significant advantages that make it an extremely attractive form of
speculation.
First, due to its size and lack of exchange controls, it's almost impossible for any person or
organization (including central banks and governments) to significantly influence prices for an
extended period of time. This means that you can enter the market secure in the knowledge that
your investment is competing on a level playing field with every other investor around the world.
Second, due to the vast size of the market, the liquidity is excellent. So unlike the position
with many stocks and shares where you might find it hard to sell certain investments, you can open
and close Forex trades almost instantly as there are always scores of international buyers and
sellers.
Third, it's relatively easy and cheap to get started trading Forex. All you need is an internet
connection, a broker and perhaps $500 - $1000 to open a trading account. Once you've got these
things you can trade 24 hours a day from Sunday afternoon through to Friday evening. And thanks
to the availability of information on the internet it's possible to find all the data that you
need for the purposes of analysis and decision making.
Fourth, it's possible to make substantial short term gains with relatively little capital thanks
to the number of daily fluctuations in currency prices and the ability to leverage your capital
(often up to 100 times) thanks to margin trading.
However, due to rapid fluctuation of currency prices and marginal trading, Forex trading carries
significant risks, so caution must be required when deciding which trades to make.
When it comes to decision making, there are two basic Forex trading strategies, technical analysis
and fundamental analysis.
Technical analysis relys upon using price charts, trend lines, support/resistance levels, highest
price, lowest price, transaction volumes and various other mathematical formulae to identify
trading opportunities. This is based upon the belief that everything that may influence the price
of a currency has been considered by the market and factored into the current price.
Crucially, technical analysts don't try to defeat the market. The are content to predict short
term, minor fluctuations using patterns from the recent past and the belief that history will
repeat itself. The main disadvantage of the method is that all the results are purely historic
and cannot always be relied upon as an accurate guide to the future.
Fundamental analysis looks at wider factors such as the national economy of the currency, the
political stability, employment figures, industry figures, interest rates, tax policy and a wide
range of other economic indicators. However, before basing your investment decisions on these
factors alone, it's important to consider both technical analysis and the fact that market
expectations can influence the price of a currency as much as reality.
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