Trading In Forex

With over $4 trillion traded daily, currency trading is by far the biggest and most liquid market in the world. The majority of currencies traded are the majors, namely, U.S. Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar, Australian Dollar and New Zealand Dollar. Currencies are traded in pairs with by far the most traded pair being the Euro Dollar (EUR/USD). The currency pair tells the reader how many U.S. dollars (the quote currency) are needed to purchase one euro (the base currency).

Forex or currency trading is extremely popular due to a number of reasons but the main ones being:

  • Liquidity - As the market is so massive you should not ever be requoted or stuck in a trade. This is important for strategic orders.
  • 24 hour market - As it is traded over the counter, the trader does not need to wait for an opening bell
  • Market Size - No individual player could "corner" the EUR/USD market for instance
  • Leverage - due to the trading volume brokers typically offer the highest leverage opportunities in forex
  • Micro Lot Trading Opportunities - You can trade with as little as USD 10 cents per pip creating low individual capital requirements
  • Freely available online resources to support your trading

Furthermore, unlike commodities, indices and shares, forex is not correlated to bull and bear markets meaning that it presents unique trading opportunities i.e. it is not directly correlated to stock indices or commodities.

The major participants in this decentralized over the counter market include major & minor banks, governments, brokers (ECNs and market makers), hedge funds, large commercial companies and retail traders (including you).

When trading currencies the trader needs to understand that there are a wealth of contributing factors contained in the current market price of a particular instrument including:

  • Monetary and Fiscal Policies of the respective countries or currency zones
  • Economic Indicators / Announcements including non-farm payroll (US), consumer price indices, retail sales, manufacturing output and personal consumption
  • Commodities pricing e.g. weak gold can indicate strong USD
  • World economic developments
  • Financial Markets of respective currency
  • Government bond yields

For each currency pair the above factors relate to each of the currencies traded in the pair. Oftentimes, traders will also speculate against safe haven currencies such as the Swiss Franc (CHF) in order to profit from particular economic uncertainty in a particular region.

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