Trading The Forex Market

forex market gearsTraditionally, the Forex market (foreign exchange market) has always been exclusive to banks and major financial institutions. That was  until about a decade ago when the internet made it available to individual Forex traders. The Forex market is highly liquid with a daily turnover exceeding $4 trillion, by far the biggest financial market. The market operates on a 24 hour basis except for the weekends; it is geographically dispersed in major dealer centers in Tokyo, Sidney, New York and London.

With respect to account size, high leverage can be used to enhance profit and loss margins. High leverage can be up to 500:1 which means with $1,000 you can control $500,000 of currency! This is obviously not a market for the faint of heart, currency trading comes with the potential of massive reward for successful traders. It can also result in massive losses as each dollar won is balanced by a dollar lost, a zero sum game.

Traders generate profits or losses on a rising or falling currency by buying one currency anticipated to rise against another currency or by selling a currency anticipated to fall against another currency. For example if a trader buys the USD/EUR pair, he is long on the USD and short on the EUR (EURO).

Obviously, there are several approaches to trading currency using fundamental analysis or technical analysis which allows trader to capitalize on currency fluctuations of varying proportions depending on the style of trading. Some traders will try to capture profits from the slightest fluctuations in market prices around economic new releases while others attempt to capitalize on a trend or identify a pattern using a suitable timeframe anywhere from 5 min charts to 4 hour charts or longer.

The value of a currency is connected to its fundamental economic indicators, to the policy set by its central bank and to national and international political events of a country. A bank’s decision to raise, hold or cut the interest rate fuels speculation in the Forex market where the value of a currency or a group of currencies undergoes wild volatility. Important fundamental indicators include statistical data on employment, GDP, trade balance or housing are currency movers as well providing speculators with a chance to capture profits or generate losses from the ensuing volatility.

Unpredictable events such as a natural disaster, terrorist attacks or military action can also cause instability in a certain region of the world and impact the Forex market as these events generate flights to quality. Investors typically move their assets to a currency they perceive as a safe haven like the USD.

Finally, traders need a broker that can provide them with a wide array of tools fitting for multiple strategies. Good Forex brokers like CMC Markets offer charting tools, tight spreads, automated execution, news feeds,  market analysis, webinars and tutorials. Online forums can be a great medium to learn and exchange strategies from other traders. In the end, what really keeps a trader in the game is having realistic expectations, effective risk management (how much are you willing to lose and how fast can you cut your losses), a patient mindset (it takes time for a trade with favorable risk/reward to materialize) and a simple strategy for high probability setups.