Online Forex Trading Introduction

The online Forex market, also known simply as Forex, FX or the foreign exchange market is the biggest trading market in the world, with daily Forex trading that exceed $2 trillion.

Even tough we are talking about a huge market, Forex trading is quite simply - the buying of one currency while at the same time selling of another currency. If the trader can predict correctly which currencies will drop and which will rise - he will benefit from his investment.

There are a lot of benefits in Forex investing over other investment markets.

Why is Online Forex Trading Profitable?

The online Forex market has existed since the early 70's. Only in the past few years though, it has become accessible to millions of people through the development of the internet. Because the Forex market is available 24 hours a day, it's the only market that allows you to trade at your convenient time.

Today, because the economy is much more dynamic than it used to be, and the world has become a global village, economic conditions in various countries are also constantly changing, according to such factors as production rate, inflation and unemployment.

As a result, the rate of a specific currency changes and moves up and down in comparison to other currencies. This is the main reason of the process of rate fluctuations in the online Forex market.

In order to evaluate and predict these Forex market changes a trader can use fundamental analysis or technical analysis as a tool for investment. Where as fundamental analysis is a more broad exploration into the economic factors influencing the online Forex, technical analysis uses charts and other indicators to asses price patterns taht re-occur over time and can help predict the forex market.

Foreign Currency exchange rate

Currency exchange rate is the ratio of one currency valued against another. For example, "EUR/USD exchange rate is 1.2505" means that one euro is traded for 1.2505 dollars. If you've already invested in other markets before, you'll find the Forex trading system quite similar, and the transaction to online Forex trading smooth. An example of a Forex trade: During October 2006 you buy 10,000 BRP when the BRP/USD rate was 0.56. A month later, the exchange rate grew to 0.58. This means a profit of $350 in less than a month time.

Online Forex Trading Profits

Another example of an online Forex trade: If you buy EUR/USD, this means you are buying euros, and simultaneously are selling dollars. Your expectation therefore is that the euro will appreciate (go up) relative to the US dollar.

If you believe that the US economy will weaken and this will hurt the US dollar, you would execute a buy EUR/USD order. By doing so you will buy euros in the expectation that the currency will appreciate against the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a sell EUR/USD order. By doing so you have sold euros in the expectation that they will depreciate against the US dollar. More information concerning online Forex trading is available at Forex Floor.

 

Forex trading History Explained

The modern online Forex history begins in 1973, even though currency trading has been around since the times of ancient Egypt. At that time the market was extremely primitive, and there were no advance trading tools as today's fundamental analysis, for example.

The first currency coins were used at the times of the pharos, and the first paper notes were then introduced by the Babylonians. Later on, the roman coin called aureus was used, which was followed by the denarius. Both coins had worldwide use, making them the first global foreign currency coins.

The Bretton Woods System (1944-1973), came after the great instability of World War II. England and other European countries were left in ruins, after the war ended, while the US's economy was left relatively stable and strong.

The USD became the prominent currency after WWII, mainly because of the war. The Dollar also became the new global reserve currency, and remained so throughout the rest of the Forex history. This was agreed upon in the Bretton Woods conference, when all of the other foreign currencies were pegged to the USD, and a new international financial network was formed.

In 1971, the Smithsonian Agreement was signed by ten of the major financial powers, but it's attempt to improve stability to the current Forex history failed.

Free Floating exchange rates came into use when the Bretton Woods agreement ended. This occurred after this international financial system was in operation for three decades in the Forex history.

During 1973, the UK, facing financial problems, floated it's currency. Other currencies began to lose value, and this led the European economies to also float their currencies.

1994 saw the first online currency trading introduced to Forex history. This had a large impact on the development of the Euro currency, and introduced a new major contendor to the control of the USD in the Forex history. By 2002 the Euro became the official currency for 12 European nations, and in the past few years more nations have joined this agreement. The modern online forex history offered new options for the online trader, such as the use of margin account to leverage investments, and this is all thanks to the contribution of the internet to the forex history.

 

Why Forex Trading

If you want to know why the Forex trading market is superiors to other investor options such as Equities or the futures market, then you can rest assure that you'll find the answer in this page.

The best way to clarify the advantages of the Forex market is through a real example. In 1929, the stock market collapsed, causing many people and businesses from around the world to go broke. This also happened when the high tech bubble burst. The fear of a market crash is a concern that constantly dwells in the minds of investors, both professional and beginner ones.

In the online Forex trading market, There is no way for the market to crash. If you have read about what is the Forex trading market, then you know that when you buy a certain currency, you are at the same time selling another currency. When some currencies' price false, others' price rise.

So this is the most important advantage of Forex day trading. Unlike other markets, where in some cases all traders lose money, with Forex trading there are always traders that make a profit, at any given time.

Here are some other advantages of the Forex trading market:

·                      No commissions. Only in the Forex trading market are there no government fees, brokerage commissions, exchange fees and other unnecessary losses of cash. There are also low transaction costs between the bid and ask price.

·                      No middlemen. In this market there are no investors that take a percentage of the investment or the profit, and you transact directly with the pricing market agent.

·                      You can choose the size of your investment. The Forex trading lot is dynamic, and is set according to your preference. This lot can vary between large lots worth $10,000 to mini lots worth $25.

·                      High liquidity. In the Forex trading market you can buy and sell your currency at any time and place, regardless of the currency position, when the trade itself is done almost instantaneously.

·                      Trading in the margin. Forex trading consists of margin investments that increase your chances for higher profits by increasing your money's worth.

·                      Opened 24 hours a day. Because it's worldwide and operates in several time zones, the Forex trading market is the only market that you can trade in 24 hours a day.

With all of these wonderful advantages, there is no wonder more and more investors choose Forex trading as there main fund for investment. Because all transactions can be done online, you don't even have to leave your house!

 

Forex Vs Currency Futures

If you have read our article comparing forex to equities you already know why forex is a superior market in measuring up to the equities market. In this article we will evaluate the forex market in conjunction with the currency futures market. Of course the are various points of distinction between each of this markets – historical, philosophical and technical to name a few. In this article we will review some significant differences between the two markets that reflect the way you trade and make money in each of them.

One of the biggest advantages the forex market has to offer is its unparalleled volume. In fact, the amount of money traded every day on the forex market is more than 50 times bigger than the volume on the futures market. If you have read our previous forex trading articles you probably already know that the forex market is the biggest financial market in the world. Fact is that this size does not only indicate the popularity of the market but most of all it shows the amount of trading opportunities you can find on this market. The forex market offers a place for any trader, from the smallest pastime traders to the professional, high-rollers.

Margin accounts and leveraging in the forex market is quite different from the currency futures market. Currency futures brokers give different margin and take different commissions for 'day trade' and 'overnight' positions. Also, the margin rates that the futures brokers give usually depend on the size of the deal. On the other hand, forex brokers offer the same leverage and the same margin rates at all times, day or night and with no concern to the size of the trade.

The learning curve of a new trader in the forex market is not as steep as the one in the futures market. The methodology and quotes used in the forex market are very easily understood and are quite intuitive, even to new traders. The futures market on the other hand is completely different. The price quotes of currency futures are inversions of regular prices that are used only in this market. Furthermore, the futures market demands many complicated adjustments. To name a few, the futures prices include time factors, interest rates and discrepancies between interest rates of different currencies. This turns the futures market into a much less intuitive and friendly market.

In summary, the forex market has many significant advantages over the currency futures market that turn it into the natural choice for any entrepreneur or smart investor.

 

Forex Vs Equities

Any novice forex trader questions himself sooner or later – "Why did I choose the forex market, is it definitely the best financial market for me?" Usually this question arises from curiosity and nothing else, but curiosity to needs to be satisfied.

In the next two articles our team will point the evident advantages the forex market has over other well-known financial markets, starting with the famous US equities market. Any person with a feel for economics and trading experiences some sensation to the sound of Wall Street, but does it truly measure up to the colossal forex market?

First, the key benefit that the forex market offers is its 24-hour accessibility. When you are trading forex it doesn’t matter at all whether it is 5am or 5pm. Time differences and market dynamics make sure there will always be an eager trader somewhere around the globe looking for a deal. This feature gives you the privilege to respond to any financial developments, as soon as they transpire. Furthermore, the prices of forex can not be affected from after-hours trade.

An additional key aspect of the forex market is its unmatched liquidity. This legendary liquidity is derived from the market's immense size, more than 50 times larger than the total trade in the US stock exchange. None the less, it's seemingly impossible size, which sometimes creates certain repulsion, and its liquidity creates stability like in no other market. The forex market is one of the most solid financial markets throughout the modern financial history.

Online forex has many advantages that the equities market can't even dream of. The leveraging that online forex brokers present is significantly better than any possible offer you can find on the equities market. The margin that the online forex firms can offer is extremely larger than the standard 2:1 you'll get from your equity broker. The margin you get while trading forex can go even up to 100:1, and in some cases even 200:1. You are welcome to learn more about margin and leveraging in our "Margin trading overview.

Read more about other advantages in the next article that will compare the forex market to the equities market.

 

Understanding and Trading Forex Currency Pairs

Any Forex trading transaction is made of the buying of one currency and the simultaneous selling of another currency. The two Forex trading currencies being traded are called the currency pair. A currency quote is made of these two pairs of Forex trading currencies, situated together and divided by a line (for example, EUR/USD).

There are various Forex currency pairs to choose from. These are divided into major and minor currencies. Major currencies are the seven most frequently traded currencies, which include the USD, EUR, JPY, GBP, CHF, CAD and AUD. All other currencies are called minor currencies, and include the NZD (the new Zealand dollar) and the ZAR (the south African rand).

Cross currencies are types of Forex trading currency pairs that both do not consist of the USD. For example, the pair CHF/JPY, worth 84.50. This means that one Swiss franc is equal to 84.50 Japanese yen. Sometimes not all of the currencies are available for you to buy and sell, so you should check this factor out when choosing an online Forex trading site.

The first currency in a pair is called the base currency. In most Forex trading options this is the USD. The main exceptions for this are the EUR, GBP and the AUD currencies, which appear before the USD in a quote. The base currency will also appear before the quote currency when you use technical analysis with charts of different sorts.

The second currency in a pair is called the quote currency. This currency shows your profits and loses for the Forex trading transaction.

Following are example of major currency pairs:

·                      EUR/USD – Here the base currency is the EUR, and the quote is the USD.

·                      USD/JPY

·                      GBP/USD

·                      USD/CHF

·                      EUR/CHF – This is an example of a cross currency.

·                      AUD/USD

·                      USD/CAD

·                      NZD/USD

·                      EUR/GBP

·                      EUR/JPY

·                      BP/JPY

·                      CHF/JPY

·                      GBP/CHF

·                      EUR/AUD

 

Major Currencies and Major Participants of the Forex Trading Market

In the Forex trading market, you have several currencies to choose from. Most Forex trading deals are done using the major currencies. These are the seven most frequently traded currencies.

The major currencies include:

·                      USD – United States Dollar

·                      EUR – The European union Euro

·                      JPY – The Japanese Yen

·                      GBP – The UK Pound

·                      CHF – The Swiss Franc

·                      CAD – The Canadian Dollar

·                      AUD – The Australian Dollar

·                      All other currencies other than the major currencies are called minors

Trading these major currencies are banks, companies, investment firms, hedge funds and Forex trading brokers.

Banks do a lot of the trading themselves. These include trades that are done for the bank's clients and ones that are done for the bank itself. Banks can trade huge amounts of major currencies, depending on the size and funding of the bank.

Central bank can influence and change the Forex trading market by increasing interest rates, for example, or manipulating with other economic factors.

Companies are also important contenders in the Forex trading market, trading goods and services between countries and nations. With the some deals made of large companies, the Forex trading market is liable for rapid change and fluctuation. This is why it is important to stay updated with economic factors.

The behavior of companies in the Forex trading market is analyzed through fundamental analysis, so changes can be predicted.

The private investors, trading major currencies from all around the world, consist of only a small portion of Forex traders. Nonetheless, these traders can take an active part in the Forex trading market whenever they want to, and in doing so join other banks and large companies. Using margin Forex trading also allows you to participate in Forex trading of major currencies for larger sums of cash.

 

Fundamental Analysis Versus Technical Analysis in the Forex Trading Market

The main difference between fundamental versus technical analysis of the Forex trading market is that, while fundamental analysis uses economic, political, social and other factors that affect supply and demand of the trading Forex market to foresee price movements, technical analysis uses mathematical and graphical charts of previous market action, in order to analyze the Forex trading market.

The basic difference between Forex fundamental and technical analysis is therefore that:

·                      Forex Fundamental analysis uses various factors that influence supply and demand to predict the currency change.

·                      Technical analysis uses charts of previous currency change to predict the currency change.

Cause and Effect of Market Price - Forex Fundamental analysis looks at causes of currency change. Forex Technical analysis looks at effects. Fundamental analysis causes, such as government policy, can later be seen in the technical analysis charts that constitutes the effects of the certain policy.

Types of Analysts - Fundamental investors would research a currency from top to bottom, looking at interest rates, balance of trade, the gross domestic product, unemployment and other economic factors, in order to see if a certain currency is about to rise or drop in value. Technical investors, on the other hand, would look at the price action of the Forex trading market, and view chart details such as open, high, low, close, volume and open interest for the currency price of a certain time to notice changes in the currency. This is why fundamental analysis is more suited for long term Forex forecasting, while technical analysis foresees short term changes in the Forex trading market.

Combination analysis - The most recommended method of Forex trading is to use both fundamental and technical analysis together. This way, you study fundamental analysis of a currency, and find out what are it's economic factors and what is it's future direction. After this you turn into technical analysis, and study that currencies charts, trying to see the right timing to step in, and buy/sell the certain currency.

After you use both types of analysis you can be sure you are covered both ways, and you can now turn to invest in Forex trading, with the confidence that you know what currency to trade with, and when to trade as well.

 

Fundamental Analysis Introduction

Fundamental analysis is the second major method that was developed as a system to predict future currency prices. When one says fundamental analysis he means to the study of the foundation elements that affect a certain economical system. When speaking about currency prices it usually means the study of various economical indicators, social trends and governmental policies, among many other factors. A fundamental analyst can tell you more than just the future price but also how it came to be and what will affect this price in the future.

There are several problems with pure fundamental trade. When dealing with the forex market, you need to delve into complexities of each countries economy, including its policy and social influences. Maintaining a flowing and stable fundamental representation of the global forex market with its immense size and dynamicity can be extremely hard. None the less, your understanding of global economy and the flow of the forex trading market will increase greatly as you dig dipper into the complexities of the fundamental analysis.

Now days it is really hard to state that one is a pure fundamentalist or a technician. Although both groups are indisputably different and place their focus on their chosen systems, some balance is still needed. A technician will still have to take into account some crucial economical data, while a fundamentalist will still need the assist of data generated charts. In general you can say that fundamental analysis helps to produce a solid trading strategy while technical analysis helps you to select the exact entry and exit points. The fundamental trader approaches each trade with the knowledge id the underlying process that make an economy work.

 

Forex Economic Indicators

The execution of fundamental analysis in the Forex market is done through the use of economic indicators. These are indicators that point to the state of some economical factor in the country whose currency you wish to trade.

Economic indicators are published by various sections of the government and private companies. These statistics are analyzed by market investors to predict the direction of the Forex trading market. Forex economic indicators are published at fixed time intervals, and are followed by any serious online Forex trader.

Because so many people are tuned to use them, Forex economic indicators have a large impact on prices of currencies of the Forex trading market. Most traders do not use fundamental analysis because economic indicators seem difficult. This however is false because following simple guides can help you stay updated with the important Forex economic indicators easily.

Starting to use Forex economic indicators

To get started, you should first keep a log of all the important Forex economic indicators' release dates. Keep a log or make a subscription to one of the economic journals, so you'll know the most important factors of that time. If you are trading in JPY, the Forex economic indicators need to be relevant to the currency type, of course.

Each economic indicator tells you about a different aspect of the economy, and this should be translated in turn into the predicted movement of the currency price. Make sure you understand which aspect the indicator is about. For example, know that the GDP measures the growth of the economy while the PPI measures inflation. Don't worry, with some experience this will come natural.

Different indicators have changing importance, according to the country's currency. Some currencies might have inflation indicators as key economic indicators while others will have employment rates as key indicators. This is also something you should find out and read about at various books and online guides.

There are leading economic indicators, which change before a particular Forex trend is set, and lagging indicators, that change after the economy had begun to follow a certain pattern. Both indicators should be used, depending on the currency's situation.

Major Forex Economic Indicators

·                      The Gross Domestic Product (GDP) - The sum of goods and services produced by domestic or foreign companies.

·                      Industrial Production - A measure of the production change, industrial capacity and resources of a country's factories, mines and utilities.

·                      Purchasing Managers Index (PMI) - A monthly index of a country's manufacturing conditions, including new orders, supplier delivery times, inventories, prices, employment, export orders, and import orders.

·                      Producer Price Index (PPI) - A measure of price changes in the manufacturing sector.

·                      Consumer Price Index (CPI) - A measure of the average price level paid by urban consumers for a fixed basket of goods and services.

·                      Employment Cost Index (ECI) - A measure of the number of jobs in more than 500 industries in all states and 255 metropolitan areas.