The stock market has traditionally received the
lion's share of attention in the trading industry, but foreign currency
(Forex) trading has surged in recent years. Inter-bank forex market,
also called Over the Counter Forex — OTC market and Spot market, is
world's largest market, its daily turnover is over 1.5 trillion US
dollars daily, even greater than all other trading markets put together.
Forex or FX stands for Foreign Exchange, the foreign
exchange market owes its existence to the 1971 abandonment of the
Bretton Woods accord and the subsequent unwinding of the regime of
universal fixed exchange rates. According to the 2001 triennial survey
by the Bank of International Settlements (BIS), global foreign exchange
turnover amounts to more than $1,200 billion per day.
Although currency trading is inherently governmental
(central banks) and institutional (commercial and investment banks), the
foreign exchange market is also the province of non-banking
international corporations, hedge funds and individual private investors
and speculators. However, technological innovations like the Internet
have made it possible for individual investors to trade via
Forex trading offer endless short-term and long-term
cashing opportunities simultaneously it exposes traders to higher levels
of risks and therefore it should not be undertaken without proper
training and knowledge.
Forex trading is still relatively fresh territory for
private investors, having really only been rendered feasible by the
advent of the Internet. Like any financial discipline, the best
investment is a sound and practical education and experience.
The growth in this area of the trading industry has
been very rapid, especially as equity and futures traders realize the
approaches they've been using for years in their respective markets,
particularly price-based techniques based on technical and quantitative
analysis are equally applicable to Forex.
From a price-action perspective, currencies rarely
spend much time in tight trading ranges and tend to develop strong
trends. More than 80 percent of currency trading volume is speculative
in nature and, as a result, the market frequently overshoots and then
WHO REGULATE THE MARKET?
Forex Market is not regulated by any authority,
Central banks such as the Federal Reserve Bank of the US, provide to
some degree oversight. But in general, the currency markets are much
more lightly regulated than stock or bond trading.
Typically Internet is used as the medium of trading,
investors have to open their account with an intermediary called Broker
(Market Maker) and send their funds via wire transfer or demand draft to
their Brokers to open a live trading account. They can start trading as
soon as the amount is credited into their accounts.
A Broker is a firm which provides the infrastructure
to individual investors to trade in inter-bank forex market. These are
typically very large companies with huge trading turn over by their
clients. They charge no commission and their interest is limited to the
spread. Spread is the difference between the buying and selling price of
a currency pair. Suppose the spread on a currency pair in the inter-bank
market is 2 pips (a pip is the smallest unit of a lot, if the rate
buying rate of a pair is 1.8243, the last digit "3" is a pip)
the Broker may charge 3 or 5 pips on each roundabout trade and it has to
be given to the Broker regardless of the outcome of a trade.
ADVANTAGES OF FOREX TRADING:
Since FX traders directly deal in
real money, they do not have to wait for long time to cash their
HIGHLY LEVERAGED: Here
in the FX market you have the leverage of 1:100 and some brokers even
offer 1:200, that is, in order to buy and benefit from a lot of US$
10,000 you only have to commit your US$ 100, rest of the amount is
leveraged by the Market Maker/Broker.
SERVICE TO THE NATION: Earning
US dollars by trading in forex market and bringing the same back home is
a service to the nation, it would help build stronger foreign exchange
reserves which strengthens the economy.
24 HOURS MARKET: FX
market is a truly 24 hours and 5 days a week market with highest volume
trading occurs at London time and New York.
PROFITING EITHER WAY:
In FX market you can profit in both
directions, when a currency pair is increasing in value and also when it
is going the other way round.
TOTAL CONTROL: You
have the total control, at the time of taking a position, you can
precisely define how much you want to profit from the trade and how much
you are willing to loose, if the market goes against you. Doing so
relieves you from the burden of watching the computer screen during that
ZERO COMMISSION: The
intermediary, called Market Maker/Broker typically charges no
DISADVANTAGES OF TRADING FOREX:
HIGH VOLATILITY: It
is a highly volatile market, which on one hand offer the opportunities
to capitalize and on the other hand it has the potential of great
Leverage is a 2 way weapon, on one hand it lets traders to profit on a
lot size of 100 times larger than their investments. On the other hand
it exposes them to the losses of equal magnitude.
HOW DO TRADERS TRADE FOREX?
Forex trading requires analysis of market conditions
and forecasting the future on the basis of historical data (in case of
technical trading) and different macro economic indicators (in case of
fundamental trading). There are two schools of thought in the area of
Market Analysis for decision making, these are:
Fundamental analysis focuses on the macro-economic,
social and geo-political forces that drive supply and demand.
Fundamental analysts look at various macroeconomic indicators such as
economic growth rates, interest rates, inflation, and unemployment, etc.
Changes in all such macro-economic indicators of countries whose
currencies are being traded have impact on the forex market. Important
macro-economic figures of are released on weekly, monthly, and quarterly
basis and there lie the opportunities to cash on. As soon as the figures
are released traders take positions in the direction of the prevailing
trend and ride the trend, till it bends. Since, most of the time, on
such occasions market first over-shoots and then corrects, traders can
capitalize on both way movements.
Technical analysis focuses on the study of future
price movements on the basis of historical data. Historical currency
data is used to forecast the direction of future prices. The premise of
technical analysis is that all current market information is already
reflected in the price of that currency; therefore, studying price
action is all that is required to make informed trading decisions. The
primary tools of the technical analyst are charts. Charts are used to
identify trends and patterns in order to find profit opportunities. The
most basic concept of technical analysis is that markets have a tendency
to trend. Being able to identify trends in their earliest stage of
development is the key to successful technical trading. FX market moves
in any of the three directions, that are, upward, downward or sideways.
When the market of a specific currency pair is upward or downward it is
called to be in a trending market and money can be made both ways.
However, if it is sideways, it is called a range-bound market. There is
a large variety to technical indicators which are used on charts to pin
point the entry and exit points as well as strength of the trend.
Charting software connect to their server to update charts in the real
time. Most widely used technical indicators are Moving Averages,
Bollinger Bands, Parabolic SAR, ADX, RSI, Fibonacci Retracement, MACD
TECHNICAL ANALYSIS OR FUNDAMENTAL ANALYSIS?
Most traders abide by technical analysis because it
does not require hours of study and reading news and macro-economic
indicators on daily basis. Technical analysts can follow many currencies
at one time. Fundamental analysts, however, tend to specialize due to
the overwhelming amount of data in the market. Technical analysis works
well because the currency market tends to develop strong trends. Once
technical analysis is mastered, it can be applied with equal ease to any
time frame or currency traded.
In my opinion, a good trader is one who masters both,
a technical trader who trades only with the help of charts is not aware
of the intricacies of the underlying macro-economic factors which are
the foundation of movements in the market and therefore may a position
which will turn disastrous after the release of a key macro-economic
Forex trading, on one hand, offers spectacular
opportunities to capitalize on, on the other hand it is quite risky for
those who do not fully understand and employ:
These topics will be discussed in upcoming articles
of the series. It is therefore advised not to trade without sound
knowledge and experience of the above mentioned pre-requisites and
practice a lot on a demo account, employing the strategies pertaining to
these requisites, till the time you are able to make consistent monthly
SELECTING A BROKERS OR MARKET MAKERS:
In order to trade forex, one has to open an account
with a Broker/market maker, as told earlier a broker provides the
infrastructure to trade. Although brokerage firms are spread across the
globe one may select a broker/market maker on the basis of the size of
its spread (difference b/w buy/sell price), quality of trade execution,
including anti-slippage guarantee, efficiency to handle trades during
highly volatile periods, wire transfer cost to bring profits back home
and minimum account size requirements.
Most of the forex brokers offer two types of
accounts, mini and regular. Mini account can be opened from as low as
US$300 and regular account can be opened from US$2000.
The size of the account is less important, more
important is the minimum lot size, in mini account typically a lot size
can not be lower than US$ 10,000 and US$ 100,000 per lot for a regular
Taking the advantage of 1:100 leverage, a mini trader
can open a position by committing only US$ 100 to open a position worth
US$10,000 (10K) and a regular with regular account holder can open a
position worth US$100,000 (100K) by committing only US$1,000 from his
Currencies are traded in pairs; most heavily traded
pairs are EUR/USD, GBP/USD, USD/CHF and USD/JPY. Each pair represents 2
currencies a base currency and a quoted currency, the first currency in
a pair is called base currency and the second one is called quote
currency. Example, EUR/USD means number of United States Dollars that
can be purchased in 1 EURO, the pair will increase in its value if EURO
tends to strengthen or US Dollar starts to weaken.
Foreign Exchange trading in the International Forex
Market is a fairly new field for individual investors, even in United
States not many people know about it. It offers great opportunities and
risks. If you are interested to play in this arena, you should, like any
other business, do some homework and acquire reasonable amount of
knowledge and experience.
The good thing about forex trading is that, you can
evaluate your strategies and skill, by trading on a mini or regular demo
account, without you need not invest a penny. Most of the brokers allow
downloading their real trading platform software with a free demo
account. No matter how long it takes, but before switching to real
account you must be able to make consistent profits on the demo account.
Whether you are a technical trader or a fundamental
one or both, you must never undermine the importance indispensable
pre-requisites of any successful forex trading strategy; these
pre-requisites are money management, discipline and emotional control.