Forex Trading 101 (part 1/2)
We are delighted to welcome you to Traders academy’s Currency Trading 101.
This is the first of many courses expressly designed to teach you about currency trading.
The upside potential of the foreign exchange market is huge for investors across the spectrum. Whether you are a newbie or a professional trader, there is always something to be gained from our foreign exchange courses.
We will go into detail about how the currency market operates, and what you should know about trading online.
Forex Trading 101 (part 2/2)
Once you have completed our series of foreign exchange courses, you will have gained a sound understanding of precisely how currency market mechanisms operate.
With that knowledge, you will be able to confidently trade foreign exchange online, exploring the endless opportunities available in the currency markets, and applying traditional theory to practical trading situations.
The Most Heavily Traded Market in the World (part 1/2)
We know that it can be a little overwhelming when you hear all the financial jargon associated with currency trading. Terms like FX, Forex, currency pairs, currency trading, FX markets and others essentially all refer to the same thing. You are trading currencies – buying one currency and selling another currency in the same pair.
Did you know that the currency market is the biggest, most liquid marketplace in the world?
The average daily trading volume exceeds US$6.6 trillion in turnover. No other financial assets even come close.
Everyone at every level of society participates in the currency markets every day. Whenever you make a purchase, transact online, or travel abroad, you are interacting with the market mechanism. Every action involving goods and services impacts the global currency markets.
The Most Heavily Traded Market in the World (part 2/2)
The fact that there is so much liquidity in the currency trading arena means that you will rarely be left with a hanging trade. Currencies are readily bought and sold all the time.
Many players have entered the lucrative currency trading arena, including institutional investors, banks, governments, and everyday people.
The Federal Reserve Bank, the European Central Bank (ECB) and the Bank of England (BoE) are among many institutions that engage in foreign exchange transactions vis-a-vis monetary policy. At the opposite end of the spectrum, speculators and high net-worth traders are in it for generating huge profits.
The Foreign Exchange Market Never Sleeps
While the foreign exchange market is not quite a 24/7 market, it runs Monday through Friday around the clock, across various time zones.
The main financial centres for currency transactions include London, New York, Hong Kong, Tokyo, Sydney, Zürich, Frankfurt and Singapore.
The currency market is a decentralized market, and trading is via the interbank market. Anyone can transact from anywhere via the Internet.
Equities, on the other hand, can only be traded at traditional exchanges like the New York Stock Exchange, the London Stock Exchange or the Johannesburg Stock Exchange.
Owing to the decentralized nature of the foreign exchange market, banks quote cross-currency rates that will differ from other bank rates.
At Traders academy we offer currency traders live currency feeds from big banks.
A Quick History of the Foreign Exchange Market (Part 1/2)
The Gold Standard was established by major world powers back in 1876.
The rationale behind The Gold Standard was to back currencies (coins and paper) with an equal value in gold. Gold is still widely considered a store of value.
The Gold Standard remained in effect as an exchange medium for quite some time, but it ultimately lost favour owing to the cyclical peaks and troughs associated with the precious metal.
When World War II broke out, major European countries did not have sufficient gold reserves to back up the fiat currencies they were printing to support the war effort. It should be noted that gold largely retains its appeal as a store of value, especially during times of economic uncertainty, unrest and stock market volatility.
A Quick History of the Foreign Exchange Market (Part 2/2)
Just before the end of World War II at the Bretton Woods conference in 1944, it was decided that the Gold Standard would only be applicable to the U.S. Dollar. This solidified the dollar as the world’s reserve currency.
By 1971, the U.S. had announced that the Bretton Woods system would cease and gold would no longer be exchanged for U.S. dollars. Soon thereafter the idea of floating exchange rates gained ground over fixed exchange rates.
In the mid-1970s the floating exchange rate system spurred currency trading, but it was not until the advent of the internet boom in the 1990s that this phenomenon had truly taken off.
What is Foreign Exchange Trading All About?
At its heart, foreign exchange trading is about speculation regarding which currencies will rise and which will fall. If you believe that the euro is going to decrease in value against the dollar, you would sell euros and buy dollars.
You would ideally like to close the position at a price point that is lower in order to generate a profit.
Conversely, if the euro is expected to increase in value against the dollar, you would buy euros and sell dollars. You will make money if your prediction is correct.
The major currencies in the foreign exchange trading arena include the following:
The Euro – EUR
The U.S. Dollar – USD
The Swiss Franc – CHF
The Japanese Yen – JPY
The British Pound – GBP
The Canadian Dollar – CAD
The Australian Dollar – AUD
In terms of trading volume and liquidity, the most heavily-traded currency pairs include the EURUSD, GBPUSD, USDJPY, USDCHF, AUDUSD, USDCAD.
The currency markets are affected by myriad factors including geopolitical, economic, social and others. Remember that the markets are interconnected at all times, and seemingly isolated shocks can have repercussions throughout the foreign exchange arena.
It is especially important that traders follow the news and events in economic calendars. These include Central Bank announcements, key economic indicators, geopolitical events, and policy decisions.
Why is Foreign Exchange Trading So Popular?
The convenience and cost effectiveness of trading currency pairs online far outstrips those of traditional forms of trading. Provided you have access to the internet, and you are trading with a reputable broker, the sky is the limit.
Traders quickly learn that foreign exchange trading is not without its risks, and is inherently difficult. However with the right education, the right attitude and the right amount of discipline, success is possible.
During times of high volatility, currency traders can use leverage to make substantial profits. By the same token, high volatility and leverage can lead to dramatic losses. Volatility describes the swings in relative currency prices owing to the uncertainty in the markets. When currency pairs are volatile, there is substantial opportunity for both profits and losses. Stable currency pairs do not present traders with as many tradable opportunities, since there is limited fluctuation in their prices.
Leverage allows you to put very little money down and take out a position that is substantially larger than the money you have.
How to be Successful in the Foreign Exchange Market?
Knowledge is power – do your research before you trade with real money. Know which currency pairs you want to trade and study them.
Exercise restraint at all times: do not over capitalise your positions, do not over commit, and do not make rash, emotionally-based trading decisions. It is ill-advised to chase your losses – rather wait for another potential opportunity to present itself.
Remember that strategy and intuition trump all else. Stick to your guns and wait for the market to move in the direction you believe it will go.
Having said that, success in currency trading is also a long-term commitment. Your foreign exchange trading strategies should be flexible and adaptive, and you are always encouraged to formulate a workable plan with a long-term strategic approach. At times you will need to change course to dovetail with what the market is doing. Never be too rigid when it comes to the foreign exchange market – anything can happen at any time.
Overnight success in currency trading is a pipedream; rather, focus your energy on developing a long-term strategy for success in the foreign exchange arena.
Who Trades Foreign Exchange and Why? (Part 1/2)
There are many key players in the foreign exchange markets. These include central banks, governments, banks, businesses, hedge funds, investment corporations, and retail traders.
Central Banks and Governments
Market stabilization is a core responsibility of Central Banks and Governments, and they do this by using their Forex reserves. However, by involving themselves in the Forex markets, Central Banks and Governments can orchestrate currency appreciation/depreciation vis-a-vis money supply, influence inflation rates and interest rates etc.
Central Banks have a responsibility to determine monetary policy for countries by using exchange rates and other tools to influence inflation, employment, and in some cases currency rates. Fiscal policy is determined by the Government and includes budgeting, taxation and also investment measures.
Monetary policy and fiscal policy do broadly impact exchange rates and these institutions sometimes choose to intervene in foreign exchange markets to influence the value of the local currency.
To avoid the devastating effects of currency speculation, Central Banks utilize monetary policy measures.
Who Trades Foreign Exchange and Why? (Part 2/2)
Hedging –investment portfolios.
Banks facilitate the exchange of currency between clients.
Banks generate profits through speculation in foreign exchange markets.
The Private Sector
Big businesses and small businesses are actively engaged in foreign exchange transactions for buyingand selling goods and services from other countries
Businesses hedge their foreign-based assets, such as customer receivables, with foreign exchange transactions.
Investment Companies & Hedge Funds
These entities are largely involved in speculation in the currency markets. They seek to profit from changes in exchange rates.
Everyday Forex Traders
Retail foreign exchange traders, like yourself, participate in foreign exchange trading for the purposes of financial gain.
These types of traders open brokerage accounts to buy and sell currency pairs in the currency markets.