What is forex trading?

Forex is an international financial market founded in 1976. It is a platform for an interbank exchange of different currencies at free prices. Quotes are formed without restrictions and fixed values. Forex participants are not only private traders. The key figures are central banks of different countries, commercial financial organizations, as well as various investment and other funds. Today, Forex market traders make a profit on exchange rate differences. By concluding speculative agreements, they can count on a fairly large income. Everyone who has an analytical mind and knows how to conduct large-scale monitoring can get a profit. You don't need to have a degree in economics to succeed. But you need to know the main tendencies on the market. If the trend is up, it is a bull market. If the trend is down it is a bear market.

The principle of operation is simple - Forex trading is carried out in currency pairs, which the trader chooses independently. One currency acts as a commodity, and the other is considered as a means of payment. The main task of a market participant is to buy cheap and sell more expensively.

It is important to know that Forex transactions are usually concluded for quite large sums of money, which may not be at the personal disposal of traders. In such situations, they resort to the help of an intermediary company - a broker who provides leverage. In this case, before concluding a deal, the trader will need to agree with the broker.

Popular currency pairs
Popular currency pairs

 A distinctive feature of the Forex market is its huge volume. Every 3 years the Bank for International Settlements publishes market data. According to such a report, the daily turnover of Forex exceeds 6 trillion US dollars.

 Currency pairs

Forex main trading instrument is currency pairs. These are the ratio of two national currencies in the Forex market. Any currency pair consists of a base currency that comes first and a quote currency. The base currency is either sold or bought for the second currency in the pair. Currency pairs are marked by the traditional names of different money.

How to read a currency pair? For example, in the pair EUR / USD, the European currency is a commodity and the US dollar is money. The value of the currency pair is the same amount as you need to pay in US dollars for one euro. All other pairs are interpreted in the same way.

Major currency pairs are EUR / USD, USD / JPY, GBP / USD and USD / CHF.

The most liquid pairs usually contain the US dollar. This pair type makes nearly three quarters of all transactions. Currency pairs without the participation of the US dollar are called cross courses. They are characterized by large differences between buying and selling (spread), because in such currency pairs, the first currency is first converted into dollars, and then dollars are converted into the second currency.  There are four trading sessions on the Forex market and each has its top currency. The most active currencies in terms of buying and selling are:

  •         the Pacific session- AUD, NZD,
  •         the Asian session - JPY,
  •         the European session - EUR, GBP, CHF,
  •         the American session - USD, CAD.
USD/CHF currency pair price chart
USD/CHF currency pair price chart

 Types of forex trading analysis

All operations in the Forex currency market are based on the analysis. With this approach, traders correctly use the information obtained from the news. But in order to be able to predict the future direction of currency quotations, you have to get acquainted with the fundamental and technical analysis.

 Fundamental analysis

Fundamental analysis is based on political and economic news that have an indirect effect on exchange rate changes. In essence, the analytical work is to predict what exactly is the value of a particular item for the currency of the country. But this is the whole complexity of fundamental analysis, because it is one thing to find out the direction of exchange rates, and quite another - to determine how much these rates will rise or fall. Here it is necessary not only to find out how the news affects the economic situation but also how it will be compensated by other news items that constantly emerge in the media.

Therefore, if you intend to succeed in trading using the principles of fundamental analysis, you will need to have a clear understanding of how its components affect the state of the foreign exchange market.

Fundamental analysis data must be used with extra care because they are constantly re-evaluated and reviewed. To evaluate the situation properly, we have to compare the current values ​​of indices with the value in the past, to analyze economic processes and dynamics over long periods of time. However, not everyone has access to the necessary data. So you need to have well-developed analytical skills to compare information and the consequences that it may bring.

 Technical analysis

Graphs and technical indicators are used for technical analysis. It is worth noting that this method of forecasting has proven itself best in the forex online market and has been used successfully by most traders in recent decades. It is with the help of numerous tools that traders are able to determine the further direction of quotations and possible currency prices in the near future with high accuracy.

The main advantage of technical analysis is its versatility. That is, you can use the same principles, both in the short and medium term, up to several weeks.

The trader must also install special software. It will help in the future monitor graphs, analyze them, and place orders. Most often, brokers provide software to their clients absolutely free of charge.

 List of the main technical indicators for Forex

Technical indicators are tools that allow predicting possible price movements and the formation of a competent and ideal strategy of behavior in the market. On the graph, the indicator is represented by a curve that is superimposed on the trend graph. There are many financial market indicators, but there are several basic ones.

The Moving average (MA). This indicator is used to determine the direction of the trend and show the turning points in the movement of the foreign exchange market. The moving average traders call the average price for a certain period of time at the value at the time of opening/closing positions.

The Moving Average indicator
The Moving Average indicator

The Exponential moving average (EMA). Due to its acute reaction to recent price changes, this indicator is often used in various trading strategies. The Exponential Moving Average formula is calculated so that the last price of an asset represents the reliable positioning of the exchange traders. The latest price is more significant because the previous data is no longer relevant.

The Bollinger Bands indicator is a classic trend indicator used to determine the position of the price in relation to its standard trading range. Unlike other instruments based on similar principles, it can measure not only the direction of price movements but also its speed. If you look at the Y-axis, it will be three moving averages, one of which is the main, and the other two are offset. The price is determined by the lower and upper graphs. We can say with confidence that the price will be placed inside the axis. But stop signals will go beyond it – these are orders stop loss and take profit.

Bollinger Bands
Bollinger Bands

Relative strength index (RSI). It is represented by a graph with a rate of fluctuation from zero to one hundred. This indicator allows you to determine which areas on the exchange are overcrowded and which are empty. If the line reaches 70 points or more, it is a signal of overcrowding and soon everything will start to sell orders. If it drops below 30, the curve will go up and soon everyone will start to buy orders.

The direction of the trend is shown by Moving Average Convergence Divergence (MACD). The graph shows several moving averages (in the ideal imaginary model there are three, in practice, only two are used), where you can see the turning point. If a purchase has been made: a signal appears when a fast line crosses a slow line from top to bottom; if there was a sale - the lines are cut from the bottom to the top.

Moving Average Convergence Divergence (MACD)
Moving Average Convergence Divergence (MACD)

The Stochastic oscillator indicator is using the probability theory to determine the situation on the stock exchange. There are common features with RSI, but the difference is the use of 2 lines - fast and slow. The minimum value is 0, and the maximum is 100. If you want to assess the situation in the foreign exchange market, then find the crossing point. If it is beyond 80 and 20, respectively, such a market is considered crowded.

Stochastic Oscillator
Stochastic Oscillator

Average directional index (ADX). When the ADX grows, the market is in trend. If it reaches the point of 40 and above, it is steady growth. The decline in foreign exchange transactions is reflected if the line is deployed in the opposite direction and reached the mark of 20 units and below.

The Ichimoku Cloud indicator is a universal technical analysis tool that can help you determine the direction of the trend, support and resistance levels and find the best place to enter the market.

Ichimoku Cloud
Ichimoku Cloud

The Fibonacci Retracement indicator is available in almost all terminals and is a popular tool of technical analysis. Fibonacci lines can be confidently called the most important graphical levels of support and resistance. These values allow you to analyze any asset, as well as predict the further dynamics of its movement.

 Basic Forex trading strategies

Choosing a Forex trading strategy is one of the most important steps for a successful trader's work. Strategies help you remain in the profit zone and not to lose your deposit. It allows you to identify favorable moments for entering the market and exit unprofitable trades with minimal losses. The simplest strategies can also be profitable if they perfectly match the trader's experience and work style.

The most general active trading strategy types are:

Day Trading It is perhaps the most famous type of active trading. Forex day trading, as the name suggests, involves buying and selling securities on the same day. Positions are closed on the same day, none of the positions will be held overnight. This method is usually used by professional traders, but electronic trading has made it available for beginners as well.

Swing trading. This trading style is based on cyclical price movements. The main idea of this method is the early recognition of the beginning of the cycle and the most effective use of its dynamics. The success of a trader using this style depends on how subtly he senses the start and end points of a particular trend movement to catch the best strike price. Swing trading is fundamentally different from all other trading systems as it involves predicting market conditions, rather than reacting to events that have occurred.

EUR/USD price movement
EUR/USD price movement

Scalping. This strategy belongs to short term trading and is one of the fastest strategies used by active traders. It lasts from a few seconds to several minutes with a large number of trades per day. The main idea is to earn on the price difference between sell limit and buy limit. Scalpers try to keep positions open for a short time, thereby reducing the risk associated with the strategy. Besides, scalpers do not try to make money on significant spot price changes or buying / selling large volumes of assets. Since the level of profit per trade is small, scalpers tend to increase the frequency of trades and look for more liquid markets. Unlike swing traders, scalpers love calm markets that are not subject to sudden sharp fluctuations, so they have the opportunity to repeat trades many times at the same prices.

It is also important to mention a popular passive investment strategy:

Positional trading. This approach belongs to long term trading that sometimes requires large time frames. Fundamental and technical analysis are often used here. The trading position is suitable for all types of markets: stocks, commodities, Forex. This strategy requires analysis of daily, weekly and monthly timeframes, holding an open position for at least several days to a month.

Buy and Hold. It is the easiest way to start working on the exchange market. This strategy involves long-term investment. Its main principle is to make the investment period in a particular asset as long as possible. A trader holds assets for a long time with the expectation of its value growth in the distant future. This tactic works exclusively on assets or that have significant prospects in the future.

Recently, trading robots are becoming increasingly popular. But they operate only on the principles of cyclicality or the use of indicators. However, professional traders understand that market cycles change regularly, and indicators operate solely within the underlying logic. That’s why they independently analyze the market situation alongside auto trading.

US dollar buying at the month-end fix
US dollar buying at the month-end fix

 Create a Forex trading strategy

Every trader must understand that strategy development is an individual process. Beginners may work on a suitable trading plan for a long time. Professionals recommend to start with simple strategies, then move on to more complex, gradually adding something of yourself and changing them. Only if you make the right choice and upgrade it for yourself, you can succeed. To make the selection process the simplest and most comfortable, you should understand the key features of a trading strategy:

  •         Each strategy is based on the principles of analysis. The system can be based on mathematical, technical tools, and fundamental financial forecasting.
  •         A trading system defines the order of actions of a trader, excluding the influence of a psychological factor.
  •         Forex strategy contains a mechanism for using technical and graphical tools, suitable for use during a certain time frame.
  •         There are trading systems of a universal type that can be used in different market situations, and trading systems that are effective for specific trading conditions.
  •         The user can develop his own Forex strategy. If it brings a stable profit, you should not give it up, just add new elements to improve it.

To create your own strategy, you need to keep to the following algorithm:

  •         analyze the pattern of changes in exchange rates of different currency pairs;
  •         compare the price movements with the work of indicators;
  •         study the combination of different types of analysis;
  •         identify recurring market situations.

The development of your own trading plan will make you independent from the opinion of other traders. The disadvantage is the need for a serious amount of time, effort and money.

Thus, a beginner should start with ready-made trading plans, as there is not enough experience and knowledge. But it is important to continuously develop during trading. It will allow you to gradually come to create your own strategy for effective financial management.

 FAQ:

What is a Forex trading strategy?

Forex trading strategy is a certain system of rules that must be strictly followed if you want to make money in the Forex market. Actually, the strategy is a trading plan. It allows you to confidently start and close the deals rather than carry out a chaotic activity in the market. A properly chosen strategy allows you to avoid financial risk. Trading strategies support beginners and allow them to understand the market and predict its movement. Without it, the trader inevitably makes mistakes, suffers losses and does not see where to go next.

There are no 100 % profitable algorithms of work. Each trading strategy has a certain level of risk and probable profit. One and the same system can be an effective tool in the hands of one trader, but it will bring good income to another user.

Only the trader himself can determine the most suitable time frame. But, in order for the choice to be justified, it is worth trying to trade for some time at various intervals and only then make a decision. Note, that your strategy can be periodically changed depending on the market situation, trading platform and your own preferences. The main thing is to clearly understand all the advantages and disadvantages of the chosen style. Though, day trading remains the most popular among most of the Forex market participants. According to it, deals are made within a few minutes or hours, but within one trading day.

The Forex market is open 24 hours a day, five days a week. So you can trade day and night, which is very convenient. In this case, you are not limited by the time zone. This mode of operation of the foreign exchange market is possible, as there are simultaneously working traders from around the world, and all trading time is divided into four trading sessions: 
· Pacific;
· Asian;
· European;
· American.

There are many powerful technical indicators that will boost your trading. But you should select the ones that will suit you best. Then you should thoroughly test them for performance and only then implement them into your trading strategy.

A beginner should start with day trading. There are many strategies here, you just need to test them on a demo account before investing real money.

A pip is a minimum change in price movement. In simple terms, it is a standard unit for measuring how much the exchange rate has changed in value.

The trend is the general direction of a market on an asset price. You will need to study all tools of technical and fundamental analysis and be able to apply their main tools to predict the market direction.

The best way to identify trends is to use simple price action. Higher highs and higher lows signal an uptrend, while lower highs and lower lows represent a downtrend.

According to statistics, day trading is the most popular and profitable type of trading. Its main benefit is the possibility to conclude multiple deals within one day.

If you are involved in day trading, experts suggest paying attention to candlestick and bar charts as they are more informative than simple line charts.

It is very difficult for a beginner to understand all the nuances of the Forex market. It requires a lot of time and effort. But there are simple trading strategies for inexperienced traders. It is recommended not to stop on them. A successful investor should constantly learn and test new ways of trading in the Forex market for higher profits.

Everyone has his own approach to trading, but it is important to follow some clear-cut action plan:
· Develop your trading plan;
· Choose a trading strategy;
· Learn to read indicators;
· Train well on a demo account.

You can start trading with even less sum than $10. A lot of brokers allow opening an account with such a small amount as $5. Besides, many platforms offer generous welcome bonuses.

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