PARTICIPANTS OF FX MARKET
FOREX MARKET BASICS
CURRENCY IS THE PRODUCT TRADED
In the forex market the product traded is currency, one currency is used to buy another and so in every trade a pair of currencies is involved, there are over 100 such possible pairs. Although any currency used somewhere on the globe may be traded there are several currencies which play major roles in forex trading. Among these are the U.S dollar (USD), Euro (EU), Japanese yen (JPY), Swiss franc (CHF), British pound (GBP), Canadian dollar (CAD), Australian dollar (AUD) and the Chinese yuan (CNY). (Read more on currency pairs)
SPECULATIVE TRADING FOR PROFIT
The enormous activity on the forex market is generated mostly by traders looking to buy and sell currencies in order to make a profit. You may be surprised to learn that only five percent of forex trading is conducted for commercial purposes, such as tourism and industry. Speculative traders are responsible for the remaining 95%.
The Forex market is a decentralized market;
You can’t trade Forex on any exchange (Centralized trading venue where standardized instruments are traded, such as stocks, futures, options, ADRs/GDRs etc.) However, there are a lot of financial service providers(such as brokers) who will happily facilitate Forex transactions (All providing different price feed, however only slightly different as competition between brokers is fierce). The fact that there is no single place where forex transactions happen makes the Forex market – an OTC market (Over-the-Counter), The important part is to understand that a certain standardized instrument (such as stock, futures contract, options contract, ADRs/GDRs etc.) can only be bought in essentially one place (a certain exchange) and all other financial service providers who want to purchase that instrument will have to reach out to that certain exchange through a link of partner brokers/banks(liquidity providers) to purchase that standardized instrument. In easy words, If You take stocks of Apple Inc, they can only be purchased at NASDAQ (Exchange for tech companies in US) and anybody who’d like to have Apple stocks in his/her portfolio would have to find a broker who can reach NASDAQ through a link of partner brokers and put an order through.
Unlike the standardized instruments market(bought on different centralized exchanges), Forex transactions can be facilitated by different financial service providers on different levels (Institutional, retail etc.) (That’s why there will always be a slight difference in price for any given currency pair from broker to broker, however the competition between them is so fierce that for most currency pairs the difference in price will be so small – it can be neglected)
As the main players in this market are banks, large brokerage firms and large multinational companies, the price movement is dictated on this level.
WHAT AFFECTS EXCHANGE RATES
In order to make a profit through forex trading a trader must choose a pair of currencies to trade on, pick the right time in which to begin the trade and know when to end it. It all boils down to identifying attractive exchange rates (how much the quoted currency is worth in terms of the base currency). Things which may affect the value of a particular currency are related to the economy in which the currency is used. Generally speaking the currency of a booming economy will maintain its value well. Events such as large scale natural disasters, wars, political unrest and release of worrying macroeconomic data may cause the currency involved to depreciate in value. This will immediately show on exchange rates against other currencies, most importantly the USD. It is also worth mentioning that some traders use solely graphs to analyze the market and as You will see below, some chart patterns on the chart of the currency pair can affect traders’ decision to BUY or SELL therefore affecting the exchange rate.
The foundation of successful forex trading is the ability of the investor to properly analyze market conditions.
Methods of Forecasting on the Forex Market:
Technical analysis is a method of dissecting price movements using various financial tools. This strategy’s main idea is that all factors affecting the buyers’ and sellers’ decision to buy and sell are eventually in one way or another represented in the price movement on the chart. Traders that implemented technical analysis learn from previous market movement as well as common chart formations in order to predict future market direction and trends! Read more on Technical Analyisis
Traders engaged in fundamental analysis will take into account economic, political and other external factors such as various financial reports, statements, news etc. that affect market conditions. Read more on Fundamental Analyisis