Introduction to Currency Trading
The foreign exchange market (forex or FX for short) is one of the most exciting, fast-paced markets around. Until recently, forex trading in the currency market had been the domain of large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals. The emergence of the internet has changed all of this, and now it is possible for average investors to buy and sell currencies easily with the click of a mouse through online brokerage accounts.
Daily currency fluctuations are usually very small. Most currency pairs move less than one cent per day, representing a less than 1% change in the value of the currency. This makes foreign exchange one of the least volatile financial markets around. Therefore, many currency speculators rely on the availability of enormous leverage to increase the value of potential movements. In the retail forex market, leverage can be as much as 250:1. Higher leverage can be extremely risky, but because of round-the-clock trading and deep liquidity, foreign exchange brokers have been able to make high leverage an industry standard in order to make the movements meaningful for currency traders.
Extreme liquidity and the availability of high leverage have helped to spur the market’s rapid growth and made it the ideal place for many traders. Positions can be opened and closed within minutes or can be held for months. Currency prices are based on objective considerations of supply and demand and cannot be manipulated easily because the size of the market does not allow even the largest players, such as central banks, to move prices at will.
The forex market provides plenty of opportunity for investors. However, in order to be successful, a currency trader has to understand the basics behind currency movements.
The goal of this forex tutorial is to provide a foundation for investors or traders who are new to the foreign currency markets. We’ll cover the basics of exchange rates, the market’s history and the key concepts you need to understand in order to be able to participate in this market. We’ll also venture into how to start trading foreign currencies and the different types of strategies that can be employed.
The Table of Contents
- 1Introduction to Currency Trading
- 1.1Contributors include:
- 2What is Forex Trading?
- 2.1What Is Forex?
- 2.2Spot Market and the Forwards and Futures Markets
- 2.3What is the spot market?
- 2.4What are the forwards and futures markets?
- 3Reading a Forex Quote and Understanding the Jargon
- 3.1Direct Currency Quote vs. Indirect Currency Quote
- 3.2Cross Currency
- 3.3Bid and Ask
- 3.4Spreads and Pips
- 3.6Currency Pairs in the Forwards and Futures Markets
- 4Foreign Exchange Risk and Benefits
- 4.1The Good and the Bad
- 4.2Differences Between Forex and Equities
- 5Forex History and Market Participants
- 5.1The History of the Forex
- 5.2Current Exchange Rates
- 6Economic Theories, Models, Feeds & Data
- 6.1Major Theories: Purchasing Power Parity
- 6.2Interest Rate Parity
- 6.3International Fisher Effect
- 6.4Asset Market Model
- 6.5Monetary Model
- 6.6Economic Data
- 6.7Employment Data
- 6.8Interest Rates
- 6.10Gross Domestic Product
- 6.11Retail Sales
- 6.12Durable Goods
- 6.13Trade and Capital Flows
- 6.14Macroeconomic and Geopolitical Events
- 7Fundamental Analysis & Fundamentals Trading Strategies
- 7.1A Breakdown of the Forex Carry Trade
- 8Technical Analysis & TechnicaI Indicators
- 8.1Technical Analysis Discounts Everything; Especially in Forex
- 8.1.1Minimal Rate Inconsistency
- 8.1.2Trend or Range
- 9How To Trade & Open A Forex Account
- 9.1Opening A Forex Brokerage Account
- 9.3Commissions and Fees
- 9.4Other Factors
- 9.5How to Trade Forex
- 9.6Types of Orders
- 10Currency Trading Summary