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Introduction to the Foreign Exchange Market -Forex Trading Guide

The Foreign Exchange (Forex) Market is the largest Financial Market in the world with daily volumes of about 4 trillion USD. The Forex Market is a purely decentralized global market where world currencies are traded one against another in a 24-hour basis, from Monday to Friday (24/5)The Foreign Exchange (Forex) Market is the largest Financial Market in the world with daily volumes of about 4 trillion USD. The Forex Market is a purely decentralized global market where world currencies are traded one against another in a 24-hour basis, from Monday to Friday (24/5).

 

Short History of the Foreign Exchange Market (Forex)

After the end of world war two, the Bretton Woods Agreement (1944) became a global rule. According to that agreement, the exchange value of a country’s currency was fixed and equal to a particular quantity of gold. As the Bretton Woods Agreement ended during the 70s, the current Floating Currency System was introduced. According to the Floating System, the value of every currency rises or falls according to the market demand and supply. In 1971, the CME (Chicago Mercantile Exchange) was the first exchange offering currency trading within the International Monetary Market (IMM). After 1990, the revolution in Informational Technology provided the framework of a new Forex Market, the Online Forex Market. Today there are many hundreds of Online Brokers in the world. Forex Brokers are divided into three main categories:

(1) ECN Brokers

(2) STP Brokers

(3) Market Makers 

The Interbank Currency Market

The Interbank market is a large market where large banks are executing currency transactions. Other participants than large banks are obligated in paying high fees in order to trade currencies. The Interbank market is also called as the Institutional Forex Market.

Most Traded Forex Currencies

The most traded Forex currencies are the USD (United States dollar), EUR (Euro), JPY (Japanese yen), GBP (Pound Sterling), AUD (Australian dollar), CHF (Swiss Franc), CAD (Canadian dollar) and NZD (New Zealand dollar).

Forex Market Participants

Forex incorporates many different types of participants like large and small banks, central banks, retail and institutional traders and Forex brokers.

 

Advantages when Trading Forex

As it is already mentioned Forex is a huge market and huge markets are usually incorporate unique benefits for the participants:

(1) Forex Trading can take place anywhere in the world using a simple PC (desktop or mobile) and an internet connection

(2) There are many participants in the Forex market and that means high liquidity and low transaction cost

(3) High market liquidity leads also to narrow spreads between the ask and the bid price (especially as concerns the majors)

(4) Forex Trading offers the opportunity for high Capital Leverage (up to 1000:1) which enables traders to open positions by depositing only a small portion of the total value of their trades

(5) There are many innovative tools and trading methods today exclusively for trading the Forex Market (Platforms, Automated Trading, Expert Advisors, Trading Systems etc)

(6) The Foreign Exchange Market enjoys perfect information

GKFX -London-Based ECN Forex Broker

 

Factors Affecting the Exchange Value of a Currency

Many different factors can cause fluctuations in the Currency Market:

(1) Macroeconomic factors, such is Inflation, Unemployment, and Growth

(2) Central Bank Policies, such is an Interest Rate Cut or money supply measures

(3) Political factors, like the increase of political risk within an economic zone

(4) Psychological factors and market expectations

(5) The Demand and the Supply for other competitive Currencies

 

Forex Trading Strategies

There are many different Forex Trading Strategies designed to fit the different trading profiles:

(1) Forex Scalping Strategies

Scalpers are executing tens of trades on daily basis in order to benefit from tiny movements of the exchange rates. They buy and the sell currencies in a matter of minutes or even seconds.

(2) Indicator-Based Strategies

Trades within these strategies are following the forecast produced by a particular Forex Indicator.

(3) Automated Forex Trading

Automated trading using Expert Advisors has become very popular nowadays. This type of trading is based on specialized software script without human intervention.

(4) Price Action Strategies

This kind of strategies analyzes clean charts (non-indicator charts). Price action strategies aim to use the core price data of a Forex market.

(5) Trading-News Strategies

These strategies are focusing exclusively on news and aim to exploit market inefficiencies based on news and recent developments in the currency market.

» Compare Forex System Providers

 

Forex Currency Quotation

Forex trading means trading a pair of two different currencies. All currencies in the Forex Market are traded one against another. For example, the Euro against the US Dollar forms the EURUSD currency pair. The first currency of any currency pair is called the Base Currency and the second currency pair is called the Quote Currency.

◙ EURUSD pair (Euro is the Base Currency and the US Dollar is the Quote Currency)

At any currency quote, the value of the base currency is always 1, for example in EURUSD 1 Euro is quoted against one US Dollar.

Bid and Ask

The ASK is the price at which you can purchase the Base Currency and the BID is the price at which you can sell the base currency. The ASK price is found always higher than the BID price. The difference between the bid and ask it is called the SPREAD.

Major Forex Currency Pairs

The major pairs are those pairs with the highest trading activity in the Forex Market.

Currency Paiir

Countries

Typical Market
Spread

Forex Slang

EURUSD

Euro against the United States Dollar

1.4 pip

Euro-dollar

USDJPY

United States Dollar against the Japanese Yen

1.8 pip

Dollar-yen

GBPUSD

British Pound against
the United States Dollar

2.0 pip

Cable

USDCAD

United States Dollar against the
Canadian Dollar

2.5 pip

Loonie

USDCHF

United States Dollar against the Swiss Franc

2.5 pip

Swissy

AUDUSD

Australian Dollar against the
United States Dollar

3.0 pip

Aussie

NZDUSD

New Zealand Dollar against the
United States Dollar

3.5 pip

Kiwi

 

Forex Crosses

Forex crosses are currency pairs that do not include the United States Dollar.

(1) European Currency (Euro) Crosses

Currency Paiir

Forex Currencies

Typical Market
Spread

EURCHF

Euro-Swiss Franc

3.0 pip

EURGBP

Euro-British Sterling

2.5 pip

EURCAD

Euro-Canadian Dollar

3.0 pip

EURAUD

Euro- Australian Dollar

3.5 pip

EURNZD

Euro-New Zealand Dollar

5.0 pip

(2) British Pound Crosses

Currency Paiir

Forex Currencies

Typical Market
Spread

GBPCHF

British Sterling-Swiss Franc

4.0 pip

GBPAUD

British Sterling- Australian Dollar

4.0 pip

GBPCAD

British Sterling-Canadian Dollar

5.0 pip

GBPNZD

British Sterling-New Zealand Dollar

8.0 pip

(3) Japanese Yen Crosses

Currency Paiir

Forex Currencies

Typical Market
Spread

EURJPY

Euro-Japanese Yen

2.5 pip

GBPJPY

British Sterling- Japanese Yen

4.0 pip

AUDJPY

Australian Dollar - Japanese Yen

2.8 pip

NZDJPY

New Zealand Dollar - Japanese Yen

3.0 pip

CADJPY

Canadian Dollar - Japanese Yen

3.0 pip

CHFJPY

Swiss Franc- Japanese Yen

3.0 pip

 

Exotic Forex Pairs

Exotic currencies are currencies consisting the US Dollar or the European Euro against the currency of a developing country.

Hotforex Benefits

 

Choosing Forex Brokers

Today there are many hundreds of Forex Brokers providing online trading. A trader should choose a broker based on many criteria:

(1) The safety of his money (therefore choose only high regulated brokers) -Major Forex Regulators: ► More on Forex Market Regulation

(2) The Magnitude of the Trading Spread (choose brokers that offer the narrowest spread and the lowest commissions)

(3) Trading Options Available (such is automated trading, many available platforms etc)

(4) Technological Factors (technological inefficiencies like delays on execution may cause many problems to traders, especially to intraday traders)

All the above factors were combined in a formula published on TradingCenter in order to rate World Forex Brokers:

Learn about the Forex Broker Rating Formula

 

Forex Brokers List & Promotions

Here is a list of Forex Brokers and the welcome bonus policy they offer:

FOREX BROKER

COMPANY INFO

ACCOUNT INFO

BONUS AND HOME PAGE

XM (XE MARKETS)

STP Broker

Regulated by: CySEC

US: No

Deposit Minimum: $5

» Review XM (XeMarkets)

» Visit XM

Bonus: 30-50%

FXCC

ECN Broker

Regulated by: FCA UK, CySEC

US: No

Deposit Minimum: $100

» Review FXCC

» Visit FXCC

Bonus: 25%

HOTFOREX

ECN / STP Broker

Regulated by: FSC, CySEC

US: No

Deposit Minimum: $100

» Review HotForex

» Visit HotForex

Bonus: 50-100%

INSTAFOREX

ECN Broker

Regulated by: RAFMM (Russia)

US: No

Deposit Minimum: $1

» Review InstaForex

» Visit InstaForex

Bonus: 30%

 

Forex Trading Guide

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