The foreign exchange end of the market has not managed to garner as much attention as other areas, say, stocks and bonds. Nevertheless, it is the biggest fiscal market in the world, averaging trillions worth of activities every trading day. In its simplest form, forex refers to the exchange of currency. In this market, you can actually buy money and trade it with money. There is a possibility that you have unwittingly participated in this trade. For example, if you have travelled abroad at some point, you might have exchanged money at a bank in the country of your destination. If you did, then you have effectively played in this trade.
Forex has no single point of trade, just a network of financial centers, dealers and brokers. The activities in this market run for a full 24 hours, every day, five days a week. The biggest financial hubs in the world are Sydney, New York, Paris, Tokyo, Singapore, Zurich, Hong Kong and Frankfurt. The implication here is that you can trade at any time at any point in the world.
In most cases, transactions in forex go through the hands of large corporations, banks, investors from institutions and hedge funds. This does not mean that you have to own a big company to succeed. Success will depend on how hard you work, how well you watch the market, how dedicated you are as well as how good you are at judging situations. In addition, you will need to have common sense because at times it is all you need to enjoy a good day. If you are to succeed, you will have to take your time to learn everything there is to learn about this market. When you are ready, you have to put in a good shift practicing the concepts you have learned.
A transaction works in two ways; you buy one currency and sell another. As you might have noticed, forex quotes will always show as two units of currencies occurring together. One of the biggest differences between forex and the trade in stocks is that while the former has just a handful of trading options and items, the latter has very few. Traders in this trade have only seven major different pairs. The major ones are USD/JPY, EURO/USD, USD/CHF and GBP/USD. The three commodity pairs include NZD/USD, USD/CAD and AUD/USD. The other existing pairs are merely combinations of the same currency, and go by the tag of cross currencies. Due to the few trade options on forex, it is easier to follow because than stocks. Imagine tracking over 10,000 stocks to narrow down the most viable ones. The only thing a forex trader will need to do is monitor the development in the political and economic fronts of the eight countries who own said currencies. These are actually some of the main factors that can alter the nature of the market.
You are going to realize that the value of one currency pair moves very little. An average distribution shows that a currency pair will shift at only 1% in a trading day. This means that to make money, a trader has to apply leverage and take advantage of combinations of small shifts.
Leverage in Forex Trading
The concept of leverage, the ease of transactions and the sheer size of the market are some of the factors that make this type of trade famous day after day. Market authorities can open and close positions at the same time, at the precise amount of money they have shown to you, and this does not cost you a commission or even a transaction fee. In the stock market, a large trader, may it be a buyer or seller, can move the price of the stock in a way that affects the market in a negative way. However, forex works with a different set of rules, where it is far harder to influence a shift. This is because the market is too big and works hard at ensuring that one player cannot make manipulative moves that affect lesser traders adversely. The major movers of prices are the forces of supply and demand.
Give me a lever and a place to stand and I will move the earth.
Methods of Forex Market Analysis
One of the similarities between currency trade and dealing with stocks is that both markets depend heavily on fundamental and technical analyses. The latter involves taking an analytical look at market indicators as well as graphic charts. Fundamental analysis has a slightly different approach, because it focuses mostly on the nature of each trade. Corporations have a financial statement to look at, while nations have a swath of fiscal reports to pore over as well as indicators that need analysis.
To analyze the value of a country’s currency, you will have to monitor the economic standpoint of the country involved. Look at the economic indicators because they will give you an idea of where the country is going in different areas of its economy. You can access such reports from government institutions or private companies with an interest in said trends. Monitoring the developments in a country is quite complicated as it involves looking at local policies and international decisions, and most of these factors do not have accurate direct mensuration.
Said reports come out at consistent periods, so you can make comparisons on how the future affects the present. Economic reports will also affect the movement of currency in a similar way. Quarterly reports of corporations will have a bearing on the decisions they make in the future. In a forex setup, if a report presents a different scenario to the one that was expected, then there follows a monumental movement in the values of the specific currency.
A weak currency is the sign of a weak economy, and a weak economy leads to a weak nation.
Ross Perot, billionaire
Risks of Forex
The global structure, volatility and size of the forex environment have led to the success of the industry. Investors can make a play for very large trades without necessarily risking a lot. Their activities do not have to affect the market in any major way. These large trades are possible because of the low margins required at the entry level as it is possible for a trader to put up around 7,000 pounds and acquire a position of over 90,000 pounds by simply borrowing the difference from a broker. However, it is not always smooth sailing because many times it means that putting up such a front can result to a high level of loss. These risks notwithstanding, traders find it easier to enter this market than others.
When you look at forex against stocks, you find that the risks are elevated. You have the incentive to invest large, but it also comes as a double-edged knife as the possibility of a high profit value also means that losses can be financially crippling. As a new trader, you need to understand these factors because you do not want to get disappointed when everything unravels at the end of the market day. You will need to understand that large movements cause price shifts and this can happen in a matter of minutes.
Admittedly, you can lose a lot in the foreign exchange market in a matter of minutes. However, the fact that the margins are low creates a unique form of volatility. In the stocks environment, the losses are cushioned against the value of the initial investment. As a heads up, you will have to think through any decision you make because there are consequences involved, and they can be ugly.