If you have any experience with finance or economics, you must have heard about Forex Exchange. Do you ever wonder what exactly the function of these exchanges is? Let us explain that to you. When you travel abroad, always make sure ahead of the tour that you have local money with you for the country you are travelling to, but you have to buy it by paying a certain exchange rate of that currency to your currency. Has it ever occurred to you who set those exchange rates?
Is there any bank or financial institution out there? The answer is yes! Forex exchange is a sort of an intermediary institution for the currencies to set their values against one another. In short, Foreign Exchange is an over-the-counter, decentralized market that facilitates the trading of currencies. The foreign exchange determines the exchange rates for every currency on the basis of their buying, selling, and currency reserves the country holds of the corresponding currency.
Foreign exchanges have existed since the inception of money. After the introduction of payment of commodities, products, or assets through some sort of financial instrument which holds some underlying price or value, the foreign exchanges started to appear in some form or another. But the most recent form of foreign exchange appeared after the introduction of the Bretton Woods System of international Forex. After the inception of the Bretton Woods Accord, the free-floating foreign exchange system emerged.
In a nutshell, Forex is the conversion of the currency of one region or country to the currency of another region or country. For example, conversion of Euro, currency of Eurozone countries, into US dollar, the currency of the United States will be considered foreign exchange or widely known as Forex.
What Is the Forex Market and Forex Education?
Forex market is the place where exchange of foreign currencies takes place. The buying and selling of currencies is done by dealers. In most cases and countries, the banks act as dealers. Customers order the demand for foreign currency, and dealers replenish the desired amount of currency to customers on the Forex rate. As per the structure of the Forex Market, it is considered the most liquid market across the globe. Prominent actors or traders in the Forex Market are banks – both central banks and commercial banks -, financial institutions, investment firms, currency speculators, corporations, and individual buyers and sellers. According to a survey conducted by Bank for International Settlements, Forex Market daily turnover averaged over $6 trillion in 2019. Some of the biggest traders in the international Forex Market are JP Morgan, Deutsche Bank, XTX Markets, HSBC, Goldman Sachs, UBS(Swiss), and Citi.
Following factors may determine the Forex exchange rates:
- Relative Purchasing Power Parity
- Interest Rate Parity
- Domestic and International Fisher effect
- International Balance of Payments
- Assets Markets
- Fiscal and Monetary Policies
- Governmental Budget Deficits or Surpluses.
- Balance of Trade
- Inflation levels
- Economic Health and Economic Growth
- Economical Productivity
Why Trade Forex?
Trading Forex is a choice for most traders. It is not a type of career which your teachers tell you to parents to pursue. Some traders in your friends or family may have encouraged you to try your skills in Forex Trading, but professional traders know that people only succeed in trading if they are passionate about it themselves.
Trading in Forex Markets means joining one of the major market contributors when it comes to high and instant returns. As we pointed out earlier, it is the largest market on earth with multi trillion dollar volume per day. Robust liquidity allows you to make monetary decisions more independently. It means you don’t have to commit to long term financial commitments. Furthermore, Forex markets work 24 hours which means you have more options in a single day than any other market. The leverage is also greater in Forex compared to stocks. There are various currency pairs available on Forex markets that allow traders to opt for more familiar currencies and avoid those which they don’t know much about or which are more risky and need technical knowledge.
Forex Trading Basics
Forex trading is a technical job, and traders need to acquire intensive trading knowledge before they can confidently trade. Most outsiders think FX trades a game of luck and speculations, while others think that it may involve having a strong, divinely gut feeling. The truth is that it only involves getting familiar with the market and how it moves. Long term traders learn these skills over the years and eventually make trading look like just a numbering game, which is too easy for them and too difficult for the outsiders.
One of those basics of trading is Short Selling. New traders get confused by this mostly as how to sell something which they don’t yet own.
The concept is actually even older than the forex markets itself. Traders use this tactic of short selling in stock markets. Short selling means that you borrow stock from a broker under the pretense that you want to sell it in the future. It creates an artificial demand for the currency, and traders then use that for their advantage.
The second most important basic concept of the forex is spread. Like short selling, spread also originated in other markets, and now, almost every market has a spread. A spread is the price difference between the levels of the price they want to purchase or sell an underlying asset.
Some important points, along with learning the basics, should also be needed to learn before trading forex.
- Forex trading is a lucrative market to earn good returns, but it should not be considered a shortcut to earn instant money.
- Excessive leverage can be risky.
- Use sentiment as a guide to turning odds in your own favor.
Forex Fundamental Analysis
Analysis is the key to every market success. When something as complex as forex exchange is involved, where the numbers of factors influencing the market are plenty, the analysis becomes even more important. The first important thing in this regard is making sure which type of analysis one wants to conduct. The very success of the analysis and strategies carried out based on that analysis depends upon that. There are two types of analysis for forex markets, fundamental forex analysis and technical forex analysis.
Forex Fundamental analysis is a method of examining the forex market by analyzing social, political, and most importantly, economic forces. These factors play an important role in effecting and setting the price for a particular currency pair or market as a whole. Here are some of the important and helpful factors to give a good analysis of the market.
- The economic calendar is one of the most important resources a trader should have with themselves and know about all the important events planned for the whole year. The release of important documents, data, and policy from governments and institutions is usually preplanned. It is extremely helpful to know about these events and meetings before them as these meetings leave much longer consequences for future market behavior.
- GDP is another important data to look at and keep you updated in every way possible in this regard. There is a strong relationship between GDP and the forex. For example, if a projection for GDP is lower than expected, then the sell-off of the currency of that country.
- CPI or Consumer Price Index is another important and unique resource to look at.
- Producer Price Index or PPI, along with Inflation, play an important role in making a strong fundamental analysis.
Forex Technical analysis
Let me reiterate the fact that the data is the most important part of analysis of financial markets. This data include charts, trends, graphs and support, and resistance for trade. These charts offer patterns now made based on years of trading knowledge and experience of professional traders. There are also a number of trends and indicators available for this purpose.
Technical analysis involves the method of memorizing the historical price movement and determines future market behavior.
The charts which assist the traders in analyzing the FX markets are bar charts, line charts, and candlestick charts. Bar and line charts are essential in analyzing technical information on the price from opening to high or low for a particular period. Candlestick charts are more helpful with patterns and their relationship with each other.
After working with charts and suing them efficiently for more productive trading, the next step for traders is to find a way into the world of indicators. Indicators are usually used by professional and advanced level traders to look for opportunities in the market.
Professional traders look for support and resistance in the trade, so they rely mostly on time-based and volume-based indicators. The most popular technical analysis indicators are Moving Averages, Moving Averages Convergence Divergence, and Relative Strength Index. Moving averages are one of the most versatile and popular indicators among a considerable number of traders. Moving Averages or MVAs are mostly used for planning potential market entries and filtering price action. Relative Strength Index or RSI is another popular indicator as it determines the trend and time entries as well as trading overbought and oversold crossovers. Consisting of a Signal line, MACD line, Zero lines, and histogram, MACD helps determine the direction and momentum of the market.
Technical analysis helps traders in the following ways:
- Technical analysis can be applied to all markets at all times.
- It can be used as an independent method.
- It also allows traders to look and analyze and identify trends.
The indicators mainly focus on trends in the market, as trend is one of the most important tools to predict the future. Remember the slogan, Trend is your Friend!.
Money is the most important factor while trading any market. Remember that the art of managing your money determines how good a trader you will become. Some markets offer high returns in a very short span of time. Traders lose control of themselves and get overwhelmed by the winning sentiments, and in the end, lose all the money. Manage your money carefully. Distribute it among the best-tested currency pairs. Don’t stuff a single asset with all your money at the same time, especially when the volatility is high.
Find Your Trading Style
All those strategies and methods discussed above and those which we left were created and introduced by experienced traders over time. Those traders gave their lives to trading, and in the end, found some tricks to make their life and trading experience easier. They were only able to do that because they find their style and stick to it and keep refining it. You should do the same and find your own styles. Don’t ask other traders how to use charts and indicators. Others may find an indicator easier to read, but you may lack their skillset. So play with tools and find your own mojo.
Like any other field of life, discipline is very important for trading. Make your own trading routine and stick to it. Don’t make a habit of leaving Start and End of Day trading. Always control your desire to go big whenever you win. Trust us when we say this, don’t turn a winner into a loser.
Forex trading or trading, in general, is a step-by-step process, and you should let it flow naturally, don’t push it. Be consistent and persistent but not stubborn.
Pros and Challenges of Trading Forex
Here are a brief pro and cons list of forex markets
- It is accessible to most traders 24 hours a day.
- FX offers greater leverage
- FX offers fast and high returns
- Largest liquid market.
- There is not much possibility of insider price manipulation
- Fees and commissions are less with FX trading.
- Technology has made it possible that the trading experience is more convenient and automated.
- Markets are Volatile.
- Small traders may not get as great as experienced and big players.
- Low regulations in this sector leave the possibility of broker manipulation.
Forex Exchange is a lucrative and exotic place to try your skills and earn good money, but you will have to really earn it by learning all the tricks and tactics. The pros and cons of FX are clear, and traders must not fall prey to frauds and misleading agents.
Foreign Exchange can provide you a good living if you do it the right way.