Introduction to Forex
Find out what Forex is & the summary of how you can trade it.
6th March • 6 min read
Table of Contents
Introduction
Forex trading is an alternative & passive way to make money. Those who take the time to patiently learn it, may realise that trading can be a exciting income source. Many beginners who are new to trading generally speaking get confused as to where they should start. There is an insane amount of courses & information about forex on the internet available now that many people have difficulties figuring out what is right for them. This article is written to educate readers on a basic guide to trading the foreign exchange markets that will also take them through some tips as well as some helpful guides that will benefit them.
History of Forex
Forex, also known as the foreign exchange, is the one of the largest financial market in the world, with a daily trading volume of over $6 trillion USD. The huge volume is one of the reasons that make Forex such a rewarding market to trade, especially since “Forex dealers” invest their own capital to trade for a profit. In other words, Forex is basically a non-ethical way of earning income, where one party’s profit is another party’s loss.
In the past century, the first major transformation the forex market underwent occurred in the decades following World War II. The Bretton Woods Agreement between 44 nations fixed the exchange rate of national currencies against the US dollar, while the exchange rate of the US dollar was set against gold. This agreement was an attempt to stabilize the global economy which had been volatile in the previous decades due to the increase of speculative trading. The agreement led to a standard with which international commerce could operate.
In the early days of currency exchange, the process was very slow because of the time involved with international transactions. In the 1980s, currency trading became more of a 24-hour-a-day operation due to the development of telephone and electronic communication. Due to the advancement in technology, the price of a currency could be determined on the spot instantly.
Current Climate
The forex markets are heavily dominated by Big Financial Institutes (BFIs). The forex market is open 24 Hours, 5 days a week, and currencies are ONLY traded in pairs. The forex market is an international market that influences the global economy in a great way, and it is a great source of revenue for both individual investors and major corporations. On the other hand, it is one of the most Volatile markets in the world, where a news release can heavily affect the rates which in turn leads to a significant loss for traders.
Currency pairs
Currency trading is simply the buying and selling of one currency against another. For example, a trader might sell the EUR/USD , which would mean they are selling EUROS and buying DOLLARS, simultaneously. There are upward of 200 currency pairs available to trade and exotic pairs are some of the more difficult to grasp.
There are a few main currency pairs that are heavily traded:
EURUSD
GBPUSD
AUDUSD
Exotic currency pairs are typically pairs that do not include the heavily traded pairs such as EURUSD. These are pairs that are not commonly traded on the market & typically have a higher spread as well. There are about 15 currency pairs that are commonly traded & the rest are considered as an exotic pair.
Analysis Types
There are 2 primary types of Analysis that exists in the market, Fundamental Analysis & Technical Analysis:
Fundamental Analysis: Fundamental analysis is an observation of the economic factors that may negatively or positively affect the market. In the Foreign Exchange market, fundamental analysis focuses on a few main factors such as Unemployment Rate, GBP, Inflation, Speeches & many other schedules news releases.
Technical Analysis: Technical Analysis is the study of patterns that frequently form on the markets, by identifying this patterns that form over and over again, we are able to use that to our advantage and trade those patterns. Most technical traders utilise indicators, trendlines or patterns to name a few. However, a distinct few use Supply & Demand by following the footprints of BFIs left behind.
What Affects the Forex Markets?
Logically speaking Currencies are likely affected by economic news releases that are usually released by the respective countries involved. Many of the news releases usually impact a currency pair. For example, if the US reports a lower than expected value on their GDP (Gross Domestic Product), the currency pair is likely going to move to the downside.
Factors that affect the Forex Market:
Currency Forecasts
Financial Health of Countries
Interest Rates
External Events (War, Market Crash)
How does SMT FX Trade?
At SMT FX, we follow the footprints left by the BFIs. We do not trade like the banks as no retail trader would have the capabilities to do so considering how banks trade. However, we are able to follow orderflow & move with the market enabling us to profit from the creation of the impulses. To learn how we trade join our Monthly Plan & we’ll see you on the inside!