1.    Introduction to the Forex Market

The forex markets have steadily evolved over the past several years and have become incredibly user-friendly. With advantages like these, it pays the novice investor to take the time to appreciate the vast opportunity available in the forex market and to do it with a little education behind them. Trading is easy, but it’s not a game for the uninformed. The forex market is full of myths that can potentially damage a trader’s chances ofof success. By understanding these myths, a trader might have a much better chance at success when trading the forex market. If you are thinking about getting your feet wet in this arena, the first step will be developing a clear understanding of how the forex market operates. Trading forex online is performed 24 hours per day,day, every business day,, in a highly liquid financial market. In the forex market, currency trading always involves one currency being exchanged for another.

Established in 1971, the forex market is the largest and most accessible financial market in the world. Estimates put the amount of money traded on the forex market each day as high as $1.6 trillion, making it over 16 times larger than all the world’s stock markets combined. Forex is the foreign exchange market. This has many advantages, namely that it is open 24 hours a day from 5 p.m.p.m. EST on Sunday until 4 p.m.p.m.EST EST on Friday for the major pairs. This means that a trader can work odd hours, whether early in the morning or late at night, should they have another job. Also, consistent volatility——just the market condition traders need to make short-term profits——tends to be the norm in the currency markets. Most importantly, forex allows virtually anyone to trade a large majority of other countries’ currencies.

2.    Key Concepts and Terminology

Currency Pair The quotation and pricing structure of the currencies traded in the forex market: the value of the currency is determined by its comparison to another currency. The first currency of a currency pair is called the “base currency,currency,” and the second currency is called the “quote currency.” currency.” The currency pair shows how much of the quotedquoted currency is needed to purchase one unit of the base currency. For example, if the pair is USDCAD,USDCAD, it shows how many Canadian dollarsdollars (the quote currency) are needed to purchase one US dollardollar (the base currency).

Cross-currencyCross-currency pairs Cross-currency pairs (cross pairs) are currency pairs that don’t include the USD. Cross pairs are often used to trade the Euro, Australian Dollar, British Pound, and the Yen.

Bid (sell) Price Is the price your broker is willing to buy from you the base currency in exchange for the quoted currency? The trader is interested in selling the base currency and expects it to fall.

Base Currency: The first currency in the pair. It shows the value of the currency when compared to the second currency. For example, if the EUR is the base currency, suppose it is quoted at 1.2800 and that you need to pay 1.2800 USD in order to buy a single unit of the EUR (the base currency).

Before you consider trading currencies, you should know the terminology used by the market. Here are the basic terms you need to know:.

2.1.   Currency Pairs

Most traders are familiar with the major dollar pairs like EUR/USD, GBP/USD, USD/JPY, USD/CHF, etc. These pairs are fairly straightforward and easy to understand. However, the proliferation of online forex brokers and the marketing of their trading platforms have led to another situation. Suddenly, the vast majority of people (including, I might add, “speakers” at some seminars) have found these rather esoteric and mysterious-sounding currency cross pairs and have now convinced the rest of us that they are an absolute necessity of life. The marketing teams at some forex brokers are particularly guilty of misleading you about this. The result is that most traders tend to steer clear of cross-pairs, and even risk managers do not usually use them. In my experience, as well as my research into this little understood microcosm of the forex universe, I would say that the direct relationships are the most important. However, these cross-pairs are not to be ignored. That is why they are included in this discussion.

It is important to understand the relationship between currency pairs because currency movements are expressed in terms of currency pairs. Consider the EUR/USD. If you are buying the EUR, you will receive the USD. If these two currencies are not moving in tandem, how can you note your substantial profit if you do not understand and appreciate the direct relationship between the two? As you are about to discover, that phrase “what goes up must come down” refers to currency movements in this market exactly. They all move in pairs. I should also add that the costs of doing business are far better in this market than in any other.

2.2.   Bid and Ask Price

The first price is called the bid price, and the other one is called the ask price. These terms come from the two-way costs of making a transaction. If you want to sell EUR/USD and the current price is 1.333, then you can sell it for 1.332. This becomes your bid price. However, if you want to buy or purchase EUR/USD and the current price is 1.333, you have to pay 1.334. This becomes your asking price. In the currency market, the bid price is always lower than the ask price. They are just like Celsius and Fahrenheit; one is greater than zero, the other is less than zero. That’s how they reflect the commission of the dealer, who is the FPS, and always quote or give the bid price to sell to the customer and the ask price to buy currency from the customer.

Just like in other markets, forex prices are driven by supply and demand. The way to gauge the supply of one currency relative to other currencies. In very basic terms, if the demand for the currency is greater than the available supply, the price of the currency will increase. Conversely, and of course, if demand is less than supply, the price will decrease. If the price of the EUR/USD increases from 1.222 to 1.333, the euro has gained value relative to the dollar. Everyone wants euros, while dollars are no good. However, if the price is decreased and you reach 1.111, the euro is equivalent to the dollar. Everyone wants dollars, and euros aren’t looking so hot.

2.3.   Pip

Conversely, whenever the exchange rate is, for instance, GBP/USD, the pip value is usually in sterling, i.e., the currency in the numerator. Conversely, if the exchange rate is USD/JPY, the pip value is usually found in US dollars, i.e., the currency in the numerator. This is so if trading the forex market or trading the currency market, as it is also known. The necessary convention holds for most currency pairs, meaning that the pip value for exchanging the base currency with any other currency always holds the base currency in the numerator. Market convention also holds for quoting when buying some currency, selling the other currency for the purchase, expressing the exchange rate as a business ratio (GBP/USD), and using the firm’s home currency (GBP) in the numerator.

A pip, short for percentage in point or price interest point, is known to be the smallest price move that a given exchange rate can make based on market convention. Most currency pairs are priced to four decimal places, and the smallest change is the last (fourth) decimal point. A common exception is for Japanese yen pairs, which are quoted to the second decimal point. For example, GBP/JPY is quoted with two decimal points, just like other cross rates. Pairs that involve the yuan have their own set of pip calculations, as the fourth decimal place is also known as the pip when trading the USD/CNY pair. This is because the pip is usually the 4th decimal place in most currency pairs. However, it can be different as it specifically depends on the market convention of the currency pair and the definition of the price interest point.

3.    Market Participants

The retail forex market caters to the needs of individual speculators as well as currency pairs. In the past, smaller players were not able to participate in the forex market due to the large deposit required. With the advent of the Internet and growing competition, it is now easily within the reach of most traders. That increase in turnover allows for greater price stability. Central banks move forex markets dramatically through monetary policy, exchange regime setting, and, in rare cases, currency intervention. Corporations trade currency for global business operations and to hedge risk. Foreign exchange fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixed time and exchange rate to evaluate the behavior of their currency. In fact, the foreign exchange rate is the daily level at which the national bank can buy and/or sell its currency.

3.1.   Retail Traders

Retail traders are the small fish that share the water for which the forex giants make waves. We are talking about individual investors, proprietary trading firms, and other forms of non-bank, non-governmental organizations that engage in the trading of their funds. Nowadays, retail traders utilize the forex market to speculate and invest because of the same reasons that attract hedgers and speculators. They want to protect themselves from adverse moves in foreign exchange rates or profit from them by taking opposite positions or using spot, forward, or futures contracts. The liquidity and speed of execution that the forex market provides amaze traders who have experienced the relative depth and speed of the equity market.

Nowadays, the forex market is available to retail traders 24/5, providing them with a mediumto long-term speculation opportunity that is difficult or impossible to beat by investing in the equity market. But results are not easy to attain. Retail traders need to devote both time and effort to learning about the forex market and building algorithms that transform their acquired insights into successful trading models. Are you ready to take on the challenge of becoming a forex trader?

3.2.   Institutional Investors

Mutual funds are organizations that, in an effort to obtain reasonable diversification, use public funds to invest in various securities. Other institutional investors that operate in foreign exchange markets include commercial and investment banks. These banks, acting on behalf of their clients, buy and sell currency on a large scale. They quote bid and ask prices for major currencies in very large amounts only. Commercial and industrial companies also buy and sell foreign currency, but they do so on a much smaller scale than institutional investors. A major reason for the unstable nature of a smaller transaction is that, with a larger transaction, the investor can afford to search for and find a much better going rate than is available for a much smaller transaction.

Institutional investors are large financial institutions such as investment banks, pension funds, and mutual funds. An investment bank, such as Citibank’s Citicorp Investment Bank, operates for its clients in, for example, the money and securities markets, the foreign exchange markets, and the commodities futures markets. Investment banks also underwrite new issues of bonds and securities for their corporate clients. When a corporation needs funds, it sells securities to an investment bank, which then sells them to investors. Pension funds are largely involved in the general stock and corporate debenture issues of the corporation and government bond markets.

4.    Factors Influencing Exchange Rates

The growth rate of an economy affects the exchange rate of its currency. In other words, a country’s currency unit is likely to be devalued because of its supply and trade balance. Exchange rate records also indicate that there are periods before governments actually devalue or revalue (the government may also just change exchange rates), when the currency is at very weak or strong rates. In other words, devaluation tends to be unexpected, but not always. It is appropriate to consider the release of important economic data in isolation of a major market move, especially direction. The worker may well anticipate just such an event, not only in major figures but in regular monthly or quarterly figures.

As with any market, the forces of supply and demand determine the rates at which currencies trade. Usually, it is international investments or trade balances that are the more important factors, but international money supplies should not be overlooked. Trade balances are threatened by inflation, and the activity of the currency is affected to the extent that the first people call for the second. Investment decisions are affected similarly by inflation and by changes in interest rates, so economic views and policies are important. Currency rates, like stock market rates on the major carriers, occupy an unstable field, and what held a year ago is not guaranteed today.

5.    Basic Trading Strategies

The Japanese yen is the odd one out, with the pip located two decimal places from the right, as is normal for the stock market. This means if oil moves from $65.50 to $65.55 in the stock market, the move can be referenced as 5 cents. However, in the forex market, every move is worth 1 cent. This would be a pip. For the Japanese currency, every move is 1/100th of a yen.

First of all, what is a pip? A pip is the smallest increment in price movement a currency can make. To most people, it is easy to understand a pip in the stock market. Moves are quoted in cents, and to find the pip, you add or subtract 1 from the price movement.

One Pip at a Time

The forex market is open to trading 24 hours a day. Some articles and analysts will make you believe the market is open from Sunday at 5 p.m. Eastern Standard Time to Friday at 5

p.m. Eastern Standard Time. However, keep in mind that Friday at 5 p.m. Eastern Standard Time does not mean the market is closing for the weekend. In fact, after 5 p.m. on Friday, trading closed, but it is reopening. Remember, it is 24 hours. The market moves throughout different time zones, and liquidity is quite thin but still available. You can trade the Sunday open using CFD (Contracts for Difference) brokers, which will allow for a trade. Be careful; there is usually a large spread on Sunday, and it is possible you will get some slippage.