The Mega Guide To Forex Markets

In the Foreign Exchange market (also known as Forex or FX) currencies are traded against one another. Foreign currency trading occurs between individuals, between large banks, central banks, currency speculators, multinational corporations, governments, and many other institutions. Individual traders are only a small percentage of the market and often participate indirectly in the market via banks or brokers.

The Foreign Exchange market is the largest financial market in the world and it is estimated that the average daily trade in it is over USD $3 trillion.

Foreign currency trading is available to all, but not everyone can trade in it directly. The Forex market is divided into levels of access. The inter-bank market (which is top level) consists of the largest investment banking firms. Those who are top level have access to different spreads to better ones, of course, where the difference between bid and ask prices is small. The lower level of access, the wider the difference between the bid and the ask prices.

The top level, the inter-bank market accounts for 53% of all transactions. These are followed by smaller investment banks, which are followed by large multi-national corporations, large hedge funds, and even some retail Forex market makers. The top 10 currency traders are (listed in an order that is based on their ranking): Deutsche Bank, UBS AG, Citi, Royal Bank of Scotland, Barclays Capital, Bank of America, HSBC, Goldman Sachs, JPMorgan, Morgan Stanley.

Currency is traded everywhere. While there are major trading centers in North America, Europe and Asia, currencies are traded around the globe and also, around the clock. The most prominent currencies are: United States dollar, Eurozone euro, Japanese yen, British pound sterling, Swiss franc, Australian dollar, Canadian dollar, Swedish krona, Hong Kong dollar, Norwegian krone.

So What Moves The Forex Market?

Many factors affect Forex. Or rather, many factors affect supply and demand forces, which then affect the Foreign Exchange market. Current events (political, social, governmental, behavioral trends, etc) shift the supply and demand factors constantly, which in return cause the price of one currency in relation to another to shift as well. Since many factors influence the supply and demand for a certain currency, that currency’s value is also not influenced by a single factor, but rather by many.

The general public can become aware of economic factors through economic reports, and other economic indicators. Economic factors that influence the supply and demand include: economic policies (government fiscal policy; monetary policy), disseminated by government agencies and central banks. Also economic conditions, which include government budget deficits or surpluses influence the market. For example, the market usually reacts negatively to widening government deficits, and positively to narrowing deficits. Inflation levels and trends is also a factor—inflation decreases a demand for a particular currency. And so is Economic growth and health—the more a nation is healthy, the better its currency will perform. Indicators include: gross domestic product (GDP), employment levels, retail sales, and capacity utilization.

Political conditions also play a major part in the way the Forex market acts. Domestic as well as international political conditions have an effect on currencies. Political instability can have a negative impact on a nation's economy and its currency and it may also have a negative impact on its neighboring countries and on their currencies.

Psychology has also an affect on the Forex market. The power that traders’ perceptions have on the market is immense. If people think that a certain trend exists in which much of one currency is sold and much of another’s is purchased—it will have an impact on that currency’s price (it works both ways—an increase and a decrease in prices). Sometimes numbers—the way number sounds has an immediate impact on short-term market moves as well. Also, international events will cause people to speculate how currencies will react to these events, which in return will have an affect on the currencies.

To sum up, the Foreign Exchange market and hence Forex trading is complex—psychology, politics, government, math are only few of the many disciplines that are a part of it.

What Time Is The Forex Market Open?

The Forex market is open 24 hours a day except for weekend and bank holidays. Main trading centers are to be found in New York, London, Tokyo, Singapore, and Sydney.

Below are Market Hours in Eastern Standard Time (EST)

Trading is continuous and hardly ever stops because of the trading centers that are spread on the globe and function in different time zones. As trading in Asia ends, the trading day in Europe begins. As trading in Europe nears an end, the trading day in North America begins, and as North America’s trading day is about to end, trading in Asia is about to begin.

Even though the marker is open almost non-stop, it is recommended that you trade when the market is most active, which is typically between 8:00 am and 4:00 pm (local time zone of each financial center).

Financial Instruments for Trading Forex

Before going into Forex financial instruments in particular, it is helpful to understand the concept of financial instruments in general. Financial instruments most frequently refer to a funding medium that can be traded. Financial instruments are commonly categorized into two categories: cash instruments and derivative instruments.

Cash instruments are financial instruments in which both borrower and lender have to agree on a transfer. Examples for such financial instruments are securities, loans, and deposits. These are readily transferable and their value is determined directly by the market.

Derivative instruments derive their value from other financial instrument or variable. They are commonly divided into two further categories: Over the counter (OTC) derivatives and exchange-traded derivatives.

Financial instruments can also be categorized by 'asset class'. Such categorization depends on whether they are equity based or debt based. Equity based means that the investor has ownership of the asset, whereas debt based means that the investor needs to take out a loan.

Foreign Exchange instruments and transactions are neither debt nor equity based. They have their own category in which: standard derivatives are Foreign Exchange futures; OTC Derivative are Foreign Exchange Options, Foreign Exchange Forwards, Currency Future; and cash instruments are spot, Foreign Exchange.

Let’s have a look at some specific Forex financial instruments:

Foreign Exchange Forwards is a transaction in which money does not actually change hands until a specific (and a previously agreed-upon) future date. In this case, the exchange rate is one upon which the buyer and the seller have agreed, and it is not necessarily based on current market rates. The most common type of a Foreign Exchange Forwards transaction is Currency Swap. In a Currency Swap, currencies are exchanged for a certain (previously agreed-upon) amount of time. At the end of which the transaction is reversed. Currency Swap is not traded via an exchange.

Currency Future is a transaction with contract and a maturity date (usually of three months). Futures are standardized and are traded via an exchange and usually include an interest amount.

Spot is a two-day “maturity” transaction. Two currencies are traded in the shortest timeframe, with cash (rather than a contract) and without an interest.

Forecasts and Analysis of the Market

Market summaries are available daily. They show movements in major currencies and are open to be analyzed by everyone—expert and amateur traders alike. Traders can use these summaries for stop losses and trailing stops, or as guides for entry and exit points (based on the daily high/low). Traders can use these summaries on a day-to-day basis, or on a weekly basis. With the summaries, traders can select future potential trades that offer the most rewards.

There are two basic Forex forecast methods with which the market can be analyzed and from which predications can be made. The two methods are technical analysis and fundamental analysis. Both are used to forecast the behavior of the Foreign Exchange market; both aim to predict a price or a movement. Technical analysis studies the effects of movements while fundamental analysis studies the cause of such movements. The most successful forecasts combine both approaches.

Technical analysis uses Forex historical data; it uses charts and past market movements in order to predict future ones. It is built on the principle that apparent facts, such as charts (charts are based on market actions involving prices) are best reflection of everything that could affect the market and that is known to it. From this it can be inferred that technical analysis is used to identify patterns of market behavior that have long been recognized as significant, and that such patterns produce the expected results as they repeat themselves on a regular basis. I.e. patterns that have been recognized in the past will repeat themselves; Forex historical data will become Forex future data.

Individual speculators, trading funds, corporate hedgers, and institutions—all benefit from having access to data using an online forex trading system. With high/low currency predictions in both daily and weekly time frames and/or with prices of closing or opening times, predictions can be made and risks can be measured. Every forex trading system shows it all.

Fundamental analysis on the other hand forecasts future price movements based on other relevant factors such as, for example, economic, political, and environmental factors that will affect the basic supply and demand.

Technical analysis follows many markets and market instruments, whereas the fundamental analyst needs to know the ins-and-outs of a particular market. Any successful Forex forecast needs to use both approaches into consideration. BUT, to predict the Foreign Exchange market flawlessly is impossible. No system is immune to the market—sometimes it simply fluctuates in ways that are not predictable. Forex forecast is always risky so whatever you do, make sure that you manage your funds in a wise way.

Access to the Market and Trading with Brokers

Trading methods are varied. You can choose to trade online using an online trading platform, via banks, via brokers; you can get consultation, use methods to forecast movements of the market, or seek trading advice as to market dynamics.

Your level of knowledge, and/or confidence, your understanding of the Forex market, your awareness of world economics and world news will determine the way you trade currencies. Furthermore, your understanding of psychology and your ability to predict the ways the market shifts will also determine how you trade Forex.

When you choose a Forex broker or dealer to trade with, make sure that you choose one that is most compatible with your own trading style. Make sure that you and s/he see eye to eye in terms of your requirements, strategies, and goals. You should always research the market and see what is available out there and only then decide on which broker, dealer, firm to go with. Do not hesitate to ask as many questions as you need before you open an account. In fact, a good broker should encourage you to do so.

Know if your Forex broker/Forex dealer is regulated. Know in which country s/he is regulated. Choose a broker that is based in a country where your trading activities take place as to be certain that s/he is being monitored by a regulatory agency. You should always know your broker or dealer’s regulatory status and you should always understand the regulatory body that governs the Forex activity under which your broker/deal operate.

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