Currency or Foreign Exchange (Forex) Trading is the trading of one global currency against another in order to speculate and profit from their relative strengths and weaknesses.
If a trader thinks that the Euro dollar (Eurozone Currency) will strengthen against the US Dollar (USD) (United States Currency) then that trader has a bullish view of the Euro compared to the USD expressed as the currency pair the EUR/USD. If the trader had an opposite view then they would have a bearish outlook on the EUR/USD currency pair. If bullish then the trader may buy the currency pair, which is also known as taking a Long position and if bearish then they may sell the EUR/USD pair and this is known as taking a short position.
The value of any specific currency is always quoted relative to another currency, so the value of the Euro is always expressed in terms of another currency such as the US dollar (USD). As a result currencies are always traded in pairs and so traders have to consider at least two currencies when trading in the Forex market.
In each currency pair, the first currency is called the ‘base’ currency and the second is called the ‘quote’ currency. So for example, if the current price of the EUR/USD is quoted at 1.3700, this means that 1.3700 USD is equal to 1 EUR which in this case is the base currency.
Similarly, if the USD/JPY was quoted at an exchange rate of 100.00 then that would mean that 1 US Dollar (USD) = 100.00 Japanese Yen (JPY) at that moment in time.
When a trader Buys (goes long) a currency pair, they are in effect buying the base currency and selling (going short) the quote currency and vice versa.
The relative value of a currency in the Forex market varies due to the market forces of Supply and Demand. If the demand for a currency is greater than the supply at a certain currency value then an imbalance occurs and the value or price of that currency rises until the forces of Supply and Demand reach a balance or equilibrium, and vice versa.
This tussle between Supply and Demand forces is ever present in the Forex market and is just a reflection of the Buy and Sell orders at any moment in time at a particular currency price. So Demand = Buy Orders and Supply = Sell Orders. The next thing is to consider is why those Buy and Sell orders are there? There are many different players in the Forex market such as national banks, investment banks, large multi-national corporations and hedge funds, proprietary and retail traders to name a few. Some people trade based upon economic or Fundamental views and others based upon a Technical Analysis (TA) view and some use a bit of both and some, the ones that consistently lose have no quantifiable view whatsoever and don’t have a trade trade plan, these are often the novice traders and are ‘lambs to the slaughter’. To be successful at trading you need to have a proven edge in the market which mostly comes with a decent Forex trading education.
So the Buy and Sell orders in the Forex market are due to a myriad of reasons.
On the Fundamental side causal reasons could be different global macro-economic reasons, multi-national corporations business reasons, geo-political factors, some examples are Interest Rates; Inflation; Gross Domestic Product (GDP); trade balances; employment and unemployment figures; the economic cycles in differing countries and normal day to day currency transactions that need to happen around the globe. Fundamental traders take positions in the market based upon their analysis of all the above.
On the Technical Analysis side professional TA traders use Currency Price Charts, with differing timeframes views, along with a set of trading tools, techniques and mathematical indicators plus historic price action to find opportunistic points to enter the Forex market in order to profit from predicted future price movements.
A third way is to have a general Fundamental view and use TA to take advantage of any perceived Fundamental bias, with precise TA entries into the market.
Currencies can trend over prolonged periods of time both up and down in price value and the TA traders try and take advantage of these trending and counter trending moves or waves.
Some typical TA tools and techniques are Price Action; Trends; Support and Resistance; Common repeating Chart Patterns; Moving Averages; Oscillators; Pivots and a myriad of other indicators; Fibonacci tools and Candlestick Patterns.
Aspiring Forex traders can start off their learning relatively easily by opening a practice or Demonstration (Demo) account with a suitable Forex Broker and start to ‘paper trade’ whilst they gain in experience gain a trading education. Once they have a sustained track record of profitable paper trading, they can then move onto a ‘Live’ small Micro-account without risking too much money. Once consistently profitable in a Micro-account, then they can start to scale up to a Mini or Standard account, or if a UK resident then they could opt for a Spread Betting Forex trading account where all gains are tax free. Profits in all other accounts are of course liable to Capital Gains Tax if the CGT allowance is exceeded for their portfolio of investments etc.
If you would like to know learn more about Forex trading and would like help in achieving consistent profits in the Forex markets then send an e-mail to [email protected] or visit our Personal Mentorship Programme on our website. Also you can get some more free Forex trading e-books here.
Please Note: Any information provided in this document is purely for educational purposes only and does NOT constitute investment advice. Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an Independent Financial Advisor or Tax Advisor if you have any doubts. ForexTradingLondon.com, or any of its employees, will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. We highly recommend that all novice Forex Traders begin by trading in a Demo Account until they have a proven track record of ‘paper’ profitability before trading in the live Forex market.