This article will give beginners a better understanding of the Forex market and how it works.
FOREX is short for Foreign Exchange; so named because it comes from the international financial market. This is where many kinds of currency from all over the world are exchanged.
Starting in the 1970’s, the Forex market emerged alongside floating currencies and free exchange rates. As with those who trade stocks, people who trade on the Forex market affect the value of currencies exchanged based on the principles of supply and demand.
A tremendous quantity of money is traded every single day on the Forex market. This pace of exchange makes Forex the singularly most liquid financial market of all, with trades of 1 to 1.5 trillion dollars every day.
Because the Forex market deals in such an astonishing volume of liquid exchanges, traders can open and close positions very quickly; typically within seconds. This is because there are scores of willing buyers and sellers available 24 hours a day in time zones all around the world.
Forex is inherently different from the stock market, which is most often associated with long term investments. Currency trading, however, allows investors to take advantage of miniscule currency prices variations to apply short term trading strategies for monetary gain. There are some long term hedge investors participating in the Forex market too, along with short term investors who borrow from credit lines in order to finance trades that may lead to large profits over a short period of time.
Understanding How Forex Works
In contrast to the NYSE (New York Stock Exchange) or the ASX (Australian Stock Exchange), Forex trading does not have a central hub of activity. Trades happen over-the-counter 5 days per week, 24 hours per day, and are handled via satellite in major European financial centers like London, Paris, Frankfurt, and Zurich; Asian centers, including Tokyo, Hong Kong, and Singapore; and centers like Sydney, Australia, and New York. Dealers both online and in real-time all around the world are continuously available to quote major currency prices.
Investment Strategies: Understanding the Technical Aspects
Clearly, one cannot jump into trading without sufficient understanding of the currency market. In order to have success in Forex trading, one must learn to trade like the experts using certain analytical principles. The experts call this Technical and Fundamental Analysis.
Technical analysis is the process of studying trends in currency price fluctuations over time. This data can create an overall picture of trends in currency values that can be used in strategizing current and future trades.
These patterns of behaviour in currency prices reflect a number of market factors, including events, overbought and oversold situations, interest rate fluctuations, and so on. These types of patterns are often presented graphically and provided immediately for review by your brokerage firm.
Fundamental analysis involves analyzing trends that include political circumstances, rumours and news stories, economic turmoil or progress, national interest rate setting, tax policy, economic growth or recession, and many other factors. The expectations, beliefs, and anticipations of those who trade in the Forex markets can also have a powerful effect in driving prices.
Making Money with Forex Trading
In order to profit from Forex trading, diligence, trading experience, and an understanding of how to use Technical and Fundamental analysis to one’s advantage are necessary. Investors who participate in the Forex markets may take advantage of a level playing field due to the liquidity and rapidly changing nature of the market, which prevents it from being overly influenced by any particular person or fund management.
