Forex, is commonly known as currency trading, foreign exchange or FX. It relates to buying and selling currencies with the purpose of making profit off the differences in their value. As the world’s biggest and most liquid financial market, the daily trading turnover of FX market is over $5 trillion. All of the world’s combined stock markets do not even come close to this.

Economic and political stability as well as interest rates, inflation, public debt, unemployment and terms of trade can affect the strength of a currency. Factors like this can cause price movements, as the stronger a country is, the stronger the currency will be against the other side of the pair. For example, if a country’s current or future economic picture is strong, their currency should strengthen. A strong economy attracts foreign investment and businesses, and this means foreigners must purchase a country’s currency to invest or start a business there. If a country is politically unstable, the currency of that country will be negatively affected because it offers more risks to investors and will make them deviate from investing in that country, making the currency weaker.

Traders are always looking to see the impact of economic indicators throughout the world as these developments can cause an impact to a country’s economy. For example, if interest rates in a country are higher, it means lenders can get a better return for their money than ones in a country with lower interest rates, causing investors to invest foreign capital into that country and allowing the exchange rate to rise. This is one of the reasons why traders often look at the economic news or announcements of central banks such as the Bank of England or the US Federal Reserve.

Leverage involves borrowing capital in order to gain greater exposure to a particular market, with a small amount of money. In the forex, that money is usually borrowed from a broker. Forex trading does offer high leverage in the sense that for an initial margin requirement, a trader can build up and control a huge amount of money. In the foreign exchange markets, leverage could be as high as 100:1.

As the forex market is so liquid (there are a great number of buyers and sellers) and highly tradeable, the majority of its products offer some of the highest leverage (low margin rates) that investors like to trade in, making it extremely attractive for traders to try and capitalise in.

The danger with forex trading is that investors are trading based on the full value of the trade and not solely the deposit amount. This means you can lose more than your initial deposit if the trade goes against your position, however, at the same time if the position does go in your favour, you can generate great profits. For example, if you are trading a currency pair which has a margin rate of 1% (or a leverage of 100:1), as an investor you are able to open a trade worth up to 100 times its value.

FX Trading comprises the simultaneous buying of one currency and selling of another, with the purpose of profiting from fluctuations in the exchange rate. When you execute a trade in the forex market, it is called an ‘order’. There are different order types and they can vary between brokers. Some common orders include market order, pending order, stop loss order, take profit order, trailing stop, good till cancelled order.

The majority of FX trading is performed in large volumes between banks and financial institutions on an over-the-counter (OTC) basis. It is not based in a central location so there are no central exchanges or clearing houses with physical funds being moved around. This allows the forex market to be opened 24/7 meaning prices are constantly moving.

Companies, individuals and organisations like to use the Forex market to exchange currencies for one another in order to benefit from rate fluctuations.

Forex trading always involves two currencies, which are the base currency and the quote or counter currency. For example, in the pair of EUR/USD, the EUR will be the base currency and the USD will be the quote currency. With FX trading you are speculating on whether the value of one currency will rise or fall against the other. For example, if you believe the price on the EUR will rise against the USD, you will BUY the currency pair. If alternatively, you believe the price of the EUR will fall, then you will SELL the pair.

Example of a Forex trade

Going Short – Outcome A: Losing Trade In this example let’s say the current price of the EUR/USD is 1.1025 / 1.1028 and you believe the Dollar will become stronger than the Euro and opt to sell the currency pair for 1 lot (€100,000). Unfortunately, the price of EUR/USD rose to 1.1040 /1.1042, a difference of 17 points (1.1042 – 1.1025) has gone against you and if you were to close the trade at this time you would be lose $170 ([€100,000 x 1.1042] – [€100,000 x 1.1025]).

Going Short – Outcome B: Winning Trade

In this instance, the price of the EUR/USD fell to 1.1010 / 1.1012, meaning your prediction was right and wish to close the trade at this point. You will close the trade at the current ASK price of 1.1012 meaning you would have incurred a profit of $130 ([€100,000 x 1.1025] – [€100,000 x 1.1012] due to the fall of 13 points (1.1025 – 1.1012).

Risks of Forex

When trading, please be aware that there are risks associated with Forex Trading. You can lose more than your initial deposit. You are using leverage meaning you are trading with more than your initial margin. This can amplify profits but can conversely amplify losses.

- Trade 24 hours, 5 days a week from Sunday to Friday

- Large number of currency pairs available to trade in

- Profit in both upward and downward trending markets

- Low entry and transaction costs

- High leverage, liquidity and volatility

- Instant execution

- Forex as an asset

Due to the interest rate obligations on the relevant instruments, any positions still open at the end of the trading day may be subject to a charge called a ‘holding cost’ (or swap fee/overnignt interest).

The cost will either be positive or negative depending on the direction of your position and the applicable holding rate.

Fundamental analysis is the research on how global economic or political news and events affect financial markets. It includes any news event, social force, economic announcement, Federal policy change, and a country’s interest rates and interest rate policy.

If a country’s current or future economic picture is strong, their currency should strengthen. A strong economy attracts foreign investment and businesses. A country with a strong and growing economy will experience stronger demand for their currency, which will work to lessen supply and drive up the value of the currency.

1 Gross Domestic Product (GDP)

The GDP report is the biggest measure of the overall state of the economy in a period of time, often annually or quarterly. The GDP is the aggregate (total) monetary value of all the goods and services produced by the entire economy during the quarter or year being measured. The growth rate of GDP is the important number to look for. It is commonly used to determine the economic performance of a whole country or region, and to make international comparisons.

2 Balance Of Trade – BOT

BOT is a measure of the difference between imports and exports of tangible goods and services for a given period. The level of a country’s trade balance and changes in exports vs. imports is widely followed and an important indicator of a country’s overall economic strength. It’s better to have more exports than imports, as exports help grow a country’s economy and reflect the overall health of its manufacturing sector.

3 Consumer Price Index (CPI)

The CPI report is the most widely used measure of inflation. CPI measures the change in the cost of a bundle of consumer goods and services from month to month.

4 The Producer Price Index (PPI)

The PPI is another important measures of inflation. The producer price index measures the price of goods at the wholesale level. So contrary to CPI, the PPI measures how much producers are receiving for the goods while CPI measures the cost paid by consumers for goods.

5 Employment Indicators

Employment Indicators, released by the U.S. Bureau of Labor Statistics, is the most widely cited statistic on unemployment. This announcement includes the unemployment rate, the number of new jobs created, the average hours worked per week, and average hourly earnings. This report often results in significant market movement.

6 Non-farms Payroll Report (NFP)

It is the monthly release of data on the 80% of the US workforce employed in manufacturing, construction and goods. As the name suggests, it does not include those who work on farms, and also excludes private households, non-profit workers and government employees. The non-farm payroll release gives an invaluable insight into the state of the world’s biggest economy, showing how US business is performing and offering an indication of where the Federal Reserve might take interest rates in the near future.

7 Apart from the NFP, here are plenty of other components that can be just as important to watch out for.

The unemployment rate as a percentage of the overall workforce.
Which sectors the increases and decreases in jobs came from.
Average hourly earnings.
Revisions to previous non-farm payroll releases.

8 Durable Goods Orders

The durable goods orders report gives a measurement of how much people are spending on longer-term purchases that are expected to last more than three years. The report is released monthly by the Bureau of Census and is believed to provide some insight into the future of the manufacturing and machienary industry.

9 Retail Sales Index

The Retail Sales Index measures goods sold within the retail industry, from large chains to smaller local stores. It takes a sampling of a set of retail stores across the country. It reflects data from the previous month. This report is often revised fairly significantly after the final numbers come out.

10 Housing Data

Housing data includes the number of new homes that a country began building that month as well as existing home sales. Residential construction activity is a major cause of economic stimulus for a country and so it’s widely followed by Forex participants. Existing home sales are a good measure of economic strength of a country as well; low existing home sales and low new home starts are typically a sign of a sluggish or weak economy.

11 Interest Rates

Interest rates are the main driver in Forex markets. All of the above mentioned economic indicators are closely watched by the Federal Open Market Committee in order to gauge the overall health of the economy. The Fed can use the tools at its disposable to lower, raise, or leave interest rates unchanged, depending on the evidence it has gathered on the health of the economy. So while interest rates are the main driver of Forex price action, all of the above economic indicators are also very important.

Technical analysis (TA) studies the price movement on a chart of a particular Forex currency pair or other market.

The primary reason that traders use T.A. is to make predictions about future price movement based on past price movement.

Technical analysts believe that all current market variables are reflected via the price movement or price action on a price chart.

Technical analysts look for patterns on the chart that tend to repeat themselves. They do this to develop their trading edge from. The underlying logic here is that since most price movement is driven by human beings, certain patterns will repeat themselves in the market as human beings tend to be repetitive in their emotion and interaction with the market.

Technical analysis also encompasses learning to analyze the market structure, find trends, support and resistance levels and generally learn to ‘read’ the ebbs and flows of a market.

Moving Average Convergence Divergence (MACD)

It is a trading indicator used in technical analysis of stock prices, created by Gerald Appel in the late 1970s. It is supposed to reveal changes in the strength, direction, momentum, and duration of a trend in a stock's price. The MACD is a popular tool that assesses the strength and direction of an underlying trend and helps flag a potential change in price ahead.

How to use the MACD indicator?

The MACD takes the difference between two exponential moving averages (using closing prices) – the 12-day EMA and the 26-day are the most commonly used. Then the “signal line” (a 9-day SMA of the MACD itself) is placed over the MACD. It’s called the ‘signal line’. Because when the MACD line crosses it, it’s a signal to either buy or sell.

Crossovers – when the MACD line goes above the signal line, it suggests an upward trend, which means it may be time to buy. When it crosses below, it suggests a downward trend and it may be time to sell. Similarly, when MACD crosses above the base line, an upward direction is assumed and hence a signal to buy. On the other hand, when the MACD falls below the base line, a downward direction is assumed and hence a sell signal is generated.

Divergence – this is when the price line goes in a different direction from the MACD. It suggests that a trend might be about to reverse and therefore can help traders catch opportunities.

Dramatic rise – when there’s a stark difference between the slow and fast EMAs (meaning a steep incline in the MACD line) , it’s a signal of overbuying.

The Parabolic SAR, developed by Welles Wilder, refers to a price-and-time-based trading system. SAR stands for “stop and reverse,” which is the actual indicator used in the system. SAR trails price as the trend extends over time.

It helps you buy when a trend is up and sell when it’s down. It is displayed as a series of dots either below or above the price bars (depending on the direction of the trend) and is calculated using the most recent highest and lowest prices and an acceleration factor.

How to use Parabolic SAR

Essentially the Parabolic SAR makes it easier to see uptrends (when dots are below the price) and downtrends (when dots are above the price). This indicator is useful for making the current price direction clear and suggesting potential exit and entry points. Signals are generated when the dots swap from above to below the price. It’s best for gauging momentum in the short term only and therefore likely to be most helpful for day traders.

It is a momentum indicator comparing the closing price of a product to the range of its prices over a certain period of time.

The stochastic oscillator consists of two lines (called %K and %D) and measures an asset’s closing price against the high and low ranges of its price over an adjustable period of time. The typical period of time is usually 14 periods, but you can alter this to reduce or increase the indicator’s sensitivity to the market.

How to use the Stochastic Oscillator?

It was originally designed to help track the momentum and speed of price, but it is more often used now to alert traders to overbought or oversold conditions. When the lines are above 80, an asset is thought to be overbought (and the trend likely to reverse so traders should sell) and when they are below 20, an asset is thought to be oversold (so traders should buy).

It is a momentum indicator that measures the magnitude of recent price changes to analyze overbought or oversold conditions. It is primarily used to attempt to identify overbought or oversold conditions in the trading of an asset.

Like the stochastic oscillator, the relative strength index is another range-bound indicator that can help traders pinpoint overbought and oversold conditions. It analyses the price of an asset over time by comparing average gain to average loss over a set lookback period. Patterns can be spotted using the RSI that won’t appear on the actual price chart.

How to use the Relative Strength Index (RSI)?

If an asset’s price goes above 70, it is considered overbought. If the RSI goes under 30, it is considered oversold. The 50 mark is also generally used to confirm a trend (over for a bullish trajectory and under for bearish).

Bollinger Bands is a powerful technical indicator created by John Bollinger. Bollinger Bands, at their simplest, measure a market’s volatility.

This indicator is made up of two lines (which track standard deviations) that enclose the price bars, and a simple moving average line in the middle. The outer lines expand and contract according to how volatile close prices are.

How to use Bollinger Bands?

There are several patterns that some traders find helpful for forecasting market movements. In a steady market, the upper and lower bands tend to act as support and resistance levels, encouraging prices back towards the middle in a phenomenon known as the ‘Bollinger Bounce’. When prices ‘walk the band’ (rising or falling to the upper or lower band and continuing to stay there), it can be taken as a sign that the trend has strong momentum and is likely to continue in the short term.

The Ichimoku Kinko Hyo is designed to be an all-in-one indicator and is supposed to give traders all the information they need in one glance. Because it is made up of five lines, it can be hard for novice traders to read at first. It measures momentum as well as forecasting zones of support and resistance.

How to use Ichimoku Kinko Hyo?

There are five lines in Ichimoku Kinko Hyo, namely enkan-sen, kijun-sen, senkou span A, senkou span B and chikou span. They are calculated using the highest high prices and the lowest low prices of different lookback periods. The lines show different key levels of support and resistance, as well as signals for reversals and tactical places to plot your stop loss points. Despite its design as an all-in-one indicator, most experts recommend using other forms of technical analysis with it.