Market Forex Guide for Investors
Positions in Forex: Forex is a market where currency is a bought and sold everyday. Trading of more than 1.5 trillion US Dollars everyday makes Foreign Exchange one of the largest financial markets in the world. The main aim for everyone trading Forex is to make profit from their position.
Now, the most important question here is that, what is a position?
A Position can be defined as the netted total holdings of a given currency. A position can also be termed as a trading view expressed through the pattern of buying or selling. It can denote the size of a currency either being possessed or payable by a trader. A position can be categorized into 3 types:
Flat or Square trade or position has no exposure in the market.
Short trade or position is where more currency is sold than being bought.
Long trade or position is the one where more currency is bought than being sold.
Open trade or position is the one where an investor has either bought or sold a currency but is yet to sell or buy back the corresponding amount to successfully close the position.
Currencies are always valued in pairs in a Foreign Exchange market. That is the reason why all trades bring about an instantaneous or real time buying and selling of currencies, where one currency is bought as the other is being sold.
This is the main reason why Forex is known as Foreign Exchange or a Crossing Currencies market. The main aim of all the traders while trading Forex is to exchange one currency with another, with the anticipation and probability that the market prices will change. And if that happens, then the currency you bought has the chances to increase its price as compared to the currency that you sold.
If the currency that you buy increases in its value as compared to the value on which you bought it, then you must instantly sell it back to gain the profits and secure them.
Other terms such as “Going Long” and “Going Short” in a market are also frequently used. “Going Long” is used when you are buying a currency and are therefore, said to be “long” in that currency.
Similarly, when you are selling a currency, you are said to be “Going Short” in that currency.
Because the Forex market goes by the exchange system, traders can be seen buying and selling currencies simultaneously, hence “Going Long” in one currency and “Going Short” in the other.
An Open position is one which is current and ongoing. Here, the trade is still going on. In order to Close a position, a trader has to conduct an equal exchange deal with the same currency pair.
If a currency is bought by you, which has suddenly appreciated in its value, then have the chances of making profits making the deal and by closing your position. This means that you will have to sell that particular currency, just to buy the counter in the pair.
Risky Forex Along with the Profits, which is the main reason for the traders to trade Forex, it is extremely important to be conversant with the Losses as well, which one can encounter while trading. While it can be easily said that all financial investments are capable of offering some risk or another, the risk involved while trading foreign exchange deals and trades can be extensive at times. Forex does have the capacity to make its traders go into tremendous loss or low with their deals, because of it being a highly volatile market.
Hence, if you are taking into consideration, the idea of trading with Foreign Exchange market, it is important for you to think about the risks or at times, the frauds connected to the trading market, to help you in making more sensible and conversant decisions.
It should be made clear to all who are willing to dive into this Forex trading market, that Foreign Exchange is not a place suited for each and everyone who have money to invest. Carrying along with it a substantial amount of risk, trading with Forex should be done rather cautiously. For instance, a specific amount of “Risk Capital” should be kept aside for trading. These should be the only funds to be used while dealing in highly speculative foreign currency trading. “Risk Capital” represents the funds which one can manage to bear a loss with, without upsetting his/her home financial conditions.
There are many reasons due to which a trader might suffer losses in his Forex trade. The most important one being, that in this speculative yet volatile market, no one knows when the markets will turn against you. And while investing huge amounts of money, although everyone is hoping for the market to go in their favor, there are really chances for market to go along favoring all of them together.
Everyone takes the risks, but while some have to bear the loss, others win profits. Not much can be done with the risk percentage involved while trading, but yes, there are some aspects of market trading which if kept in mind, can prepare a trader for worse, as well as alert him to make wiser trading decisions. Some of these aspects are mentioned below.
Your trading platform could crash If you are trading Forex using an electronic platform like computer, internet or telephone, then there are chances for your system to crash at any hour. This may unable you to get the current and latest of what’s going on the market for a while, till your system gets repaired.
Such a situation may result in making you inaccessible in the market for some while, hence you may not be able to place new orders, carry out existing orders, or close the previously entered orders. Such a situation may result in a loss of orders and the opportunities to close the deals, if any.
Opting for Off exchange
If you plan to opt for trading Forex through Off exchange methods, then you are totally relying on your dealer and his honesty. Off-exchange Forex trades are not backed by any clearing group or firm. So, if your dealer goes bankrupt, there are chances that no organization will be willing to back you up as here, you chose to trade with a dealer, out of the market trading. And since no market norms were followed while fixing the price of the currencies to be exchanged, your money is likely to get no insurance cover too.
Since there is no central place for Off exchange trading, it likely, that the trading you do with your dealer outside the Forex market, is not regulated. This is because the dealer is the one here, who is determining the effecting price, so you are solely banking on his honesty for a correct price and fair deal.
The market could go in opposition to you
Forex is a highly volatile market and predicting its movements can be impossible at times. No one can predict entirely how the market will move? That is the main reason why it has a high speculation rate to it.
Definitely if you go buy studying the past trends and patterns of the market, you can still make out roughly about the market movements, but certainty is not possible. Fluctuations in the currency exchange prices or rates can affect your trade or deals. The market can move in favor or against you any time, resulting in possible profit or loss.
Frauds or Scams
Forex is a highly potential market for frauds and scam artists. Although the market is significantly safer and cleaner to trade now, than it was a few years ago, care should still be taken while dealing with a broker. Always check the documents before signing any contract and read the terms and conditions fully. Being vigilant is the key to safe trading. Also, always prefer to deal with professional brokers who are attached to reputed financial firms and banks. Also, registered brokers such as those listed with the Commodities Futures Trading Commission or the National Futures Association should be preferred.
Also, beware of any brokers or financial firms offering too good schemes or deals, with very low or no risk trading guarantees. The brokers claiming to offer higher returns should also be thoroughly checked before signing up with them and starting to trade.
All the above mentioned risks can be avoided by keeping into consideration that any of this can happen to you while trading. Keeping this in mind will keep you prepared about the consequences that you can face and hence, help you make wiser and informed trading decisions.
Although we know by now that Forex is a risky business, there are a few measures, which have been created to limit, if not completely stop, a trader’s financial risks.
Firstly, every investor should try and develop his/her own trading strategy. Be it technical, fundamental, or both, every trader needs to follow a strategy which logically backs the trading decisions that he is making. All the market trading should be done using the money which you can afford to lose, not affecting your home finances, in case the market decides to go against you. Also clearly mark your entry and exit points with every deal you make.
Along with the entry and exit points, a trader also needs to posses thorough knowledge about the past trends of the market. How to make graphs, how to study the financial graphs and how to read, understand and aptly interpret the indicators and chart movements correctly is very important.
There is a huge amount of information available easily these days on this 24 hour market, but what needs to be taken into consideration is the information which is relevant, to our trade.
Benefits of SPOT
SPOT or Single Payment Options Trading is one of the two options available to Forex traders for trading purposes, the other one being the “Traditional” option.
SPOT can be known as more of a trader oriented option, where in he predicts what he feels with be the movement in the market on a particular day or date. And if the trader is successful in predicting it correctly, then the potential profit to be earned can be very high. And if what the trader has predicted goes wrong, and the SPOT option is not the right hit, the trader will not be suffering a huge loss for it. Only the premium given to him by the broker is lost.
For example, if a trader predicts a scenario where the market with EUR/USD will break 1.5000 in 15 days, he will then attain a premium quote. And in case the predicted scenario actually occurs in the market, then the trader will receive a payout with the premium quote.
Moreover, SPOT options are much easier to trade. It’s all about having thorough knowledge about the market and its trends, because that is the only way by which a trader can be able to predict correctly, the movement of the market.
And if you are accurate, you can receive instant profit which will be transferred directly to your account. And if you are wrong, the only loss that you’ll have to bear is the loss of the premium that you were paid by the broker.
Another great benefit of SPOT options is that it presents its traders with a vast choice of unique scenarios to choose from, enabling the trader to select precisely what he/she believes might happen in the market.
SPOT options allow its traders with many choices, such as Standard options like:
Digital SPOT This option allows you to receive a payout in case the currency price is goes above or below a certain level.
One-touch SPOT
This option allows you to receive a payout once the currency price reaches a certain level.
Double one-touch SPOT
This option allows you to receive a payout in the situations when the price reaches either of the two set levels.
No-touch SPOT
This option allows you to receive a payout in the situations when the price does not reach a certain level.
Double no-touch SPOT This option allows you to receive a payout in case the currency price does not reach either of the two set levels.
Types of Forex brokers Brokers are one of the most important elements of the Forex market. Be it individual traders or trading or financial firms, everyone prefers to opt for a professional and well experienced broker, who is aware of the nitty-gritty’s of the market and its trading trends.
Forex brokers can be easily divided into four categories, such as Market operators, Small brokers, Market makers and Kitchens.
Market-makers These are the somewhat bigger financial firms which provide for smaller broker firms. They also offer tentative Forex trading prospects but only for those individual Forex traders who are willing to invest a trading capital of or more than $50,000 or so.
Although as compared to the multi national big financial companies, these firms are comparatively not that big and also offer a lesser cost of Forex market trading.
But as compared to the individual brokers, they generally have solid financial background and can be trusted for their credibility more often than not. Nevertheless, with their policy of offering their services only to those traders which are willing to invest a minimum amount of $50,000, makes them inaccessible to the greater part individual Forex market traders.
Market Operators Market Operators is a group which comprises of big commercial banks and sizable financial companies which are accustomed to the bank policies and laws. The biggest advantage offered by these companies is that they offer their clients or traders with the maximum level of dependability.
However, as the Market Makers, Market Operators like huge financial firms and banks also demand an equally huge bill amount size. Such bills and huge amounts can only come from big international businesses or companies, thus making these huge banks inaccessible to the individual investor. The minimum amount required by these banks can go up to about 1 000, 000 US dollars.
Small brokers These are small or individual broker firms which attract the new or individual traders. Since they themselves are not such big financial firms, they are willing to deal with individual investors keen on investing a little sum of money in Forex trading.
They accept to work with the traders willing to invest money from a few hundreds up to some thousand dollars. After taking quotations from a number of individual traders, these brokers then work with the market-makers further, to clear the orders of their clients.
This is because the market-makers have a minimum investment requirement of $50,000 or so. So to meet this amount, the local broker unites the funds from all his clients into one bill, addressing it to the market-maker. This way, individual market brokers deal with the market-makers and take the orders of the individual traders forward.
With all these type of broker organizations available to a trader to choose from, what the trader now needs to know is which type of broker suits him. One of the major factors to be taken into consideration for this would be the amount of money he is willing to invest into Forex trading market. And based on this criterion would he then come to know which broker or broker organization can he deal with.
Once a broker has been short listed, now left are the other factors like credibility, honesty, experience, skill, reputation and professional attitude on which the selected broker needs to be tested, before handing him over the initial investment money.
Managing Forex Losses
One of the key principal of successful Forex trading is to keep your losses minimized and limited. When the trends of the Forex market are going against you, turning you towards losses, it is ideal to go in for small loss limits so that you can pass this phase safely, without turning bankrupt.
Small Forex losses can sometimes help you survive that period of the market, when it is moving against you, and also help you to still be placed firmly in the market, when the trend finally turns in your favor.
The easiest and proven way to limit your Forex losses to minimum is by fixing beforehand, the highest acceptable loss per trade keeping in mind your total Forex budget for trading, prior to even opening a Forex position.
The highest amount of capital loss is what you can afford losing easily on a trade or deal.
In other words, this can also be known as a “Stop Loss” order, which is considered significant amongst the many techniques of good money management strategies.
Making sensible use of this money management technique will make you stand apart from the several other traders out in the Forex market, who have been losing all their trading cash to the market just because they didn’t feel the need to adhere to efficient money management strategies to their Forex trading system.
If a trader does not follow the correct money management rules while trading Forex, there are chances of him losing more money than he can afford to. For example, if a Forex trader, with a total trading budget of $1000, starts to trade and makes a deal worth a $100, it would then perhaps be tolerable for the trader to suffer a loss once.
He would then go ahead and trade another $200 for another deal, and this time again he loses, perhaps a little low with luck and thinking this, he again, for the third time, tries to trade another $200 on a deal, just to suffer another loss.
Now, he had a total of $1000, out of which he has already lost $500 straight, and is now left with only another $500. but instead of stopping and quitting here, he might still carry on to trade again, thinking that after three consecutive losses, he is bound to be lucky this time, and thinking this, puts in another trading offer for $200 more.
After betting $200 on this next trade, his capital could be reduced to $300. The probability of making profit now is virtually none, because, just to get back almost three-fourth of the total amount that he has lost, he would have to gain at least 3 consecutive profits trading, for which, he is left with not much money now.
With his finances finished, even if he is actually getting lucky with trading this time, he really doesn’t have any more money to play and recover at least all that he has lost, let alone making profits.
This situation would not have occurred if the trader had preset the maximum loss amount which he could afford, and stuck to it.
The reason for this disappointment was that the trader jeopardized too much of his trading money, without thinking once of applying good money management techniques to the trade. Trading the whole Forex trading funds just for losses no way makes a good trading strategy.
In fact this can lead a trader to a position where he does not even have enough funds left to make a wiser deal and recover what he has lost!
Always keep in mind, that a significant rule of money management is to keep your losses to a minimum so as to limit your losses and increases your profit with retaining your funds for a better deal.
Types of Forex Traders
Foreign Investments Companies Foreign investment companies are basically the investment organizations which are carrying out foreign currency trading operations in the market. These companies show great requirements for a particular foreign currency. For example, if we talk about foreign investment companies like importers of certain products, that these firms would like to buy in bulk, a particular foreign currency for trading and business purposes.
Same is the case with other investment firms like exporters of certain products, who would like to sell a particular type of currency more. These firms do not have a direct admission to Forex market. They operate their conversion and depository processes via commercial banks only.
Commercial Firms Commercial Firms make for a sizable part of the Forex trading market and a significant part of the market gets its way from the economic activities of such firms which are looking for foreign currency to pay for all the goods and services they employ.
As compared to the big financial companies and huge banks, these commercial firms often trade a rather small amount of money, and their trading mostly has a slight temporary effect on the overall market rates.
Trade flows, in terms of internationally big companies, becomes a central issue in the lasting direction of a currency's Forex rate. Some of these global giants are also capable of having an impulsive impact on the market rates, especially when very large positions are filled, of which, not many retail or individual traders are aware.
Commercial banks In the world of Foreign exchange market, the maximum control is in the hands of huge multinational banks and organizations. This is because of the fact that their everyday degree of actions of trading and market cross over billions of dollars.
With such a huge figure in their hands, it would not be wrong to say that these commercial banks use up an indispensable amount of exchange transactions. The banks can be said to gather through all their clients, the growing and collective wants of the market for currency exchange. Also, in addition to agreement of clients’ purposes, the banks can sometimes trade for their own operations for their own means too.
Some of the well known international banks which are successfully involved with Foreign Exchange are Chase Manhattan Bank, Deutsche Bank, Citibank, Standard Chartered Bank and Barclays Bank to name a few. Their huge quantities of transactions can lead to noteworthy alterations in the currency rates. Mostly these big commercial banks are divided into Bulls and Bears.
Bulls Bulls are those Forex market members who are concerned with the escalating of currency rates.
Bears Bears are those Forex market members who are concerned with the depression of the currency rates.
By and large, the market is in a position where balance can be maintained between bulls and bears.
Asset Management Companies Asset Management companies are the ones which basically handle big money accounts on behalf of their clients, like pension funds etc. Such companies employ Foreign currency market to assist dealings in foreign investments.
While such companies are into Forex market and trading currencies, they take these transactions as secondary to their real investment business, and hence, are not intended for revenue-maximization.
According to the BIS study of Triennial Central Bank Survey, year 2004, 14% were between a dealer and a non-financial company, 33% concerned a dealer (ie a bank) and a finance manager and a major 53% of transactions were totally interbank.
Investing Blunders made in Forex
Whenever you decide to step into the Forex market by investing into this trading business, you should prepare yourself for entering into the market, somewhat blind.
This because you or anyone else, who is just stepping in, can not entirely know what position of the investing trend is currently going on, in which you are entering at.
Or, you might invest in the Forex market just before the market trend changes.
Smart and planned investments are the ones which protect your trading flow and help you put up a stop loss order on all your trades. And yes, this exit point of your trade has to be decided beforehand, that is before you enter the trade.
Once in the market or trade, you won’t have much time to think and last minute uncertainty can give room to blunders.
A stop loss order can plainly be defined as a trade exit point decided beforehand, which helps a trader in keeping a track of the right point at which to exit the position he is trading at.
A predefined exit point shields your investing plan for trading purposes by cutting your losses, and also guards against all your emotional or gut feelings which might tell you that you may get lucky with this deal or that.
Hence making you go ahead and bet in a deal without thinking much about your position and whether you will be able to bear its results if the market moves against you.
Another important fact about the history of investment blunders is that all the giant investing losses had once begun as a series of small losses. And this is exactly the reason why predefining a stop-loss order is so vital before you begin with a trade.
There is however a very common doubt which seems to be appearing in every trader’s mind while deciding the stop-loss order, “How wide should I set my stop?”
And although there are no standard answers to this doubt, it can still be cleared with some help.
Firstly, the width of your stop-loss order totally depends on the time frame for which you are planning to invest.
If investing short-term, you will have to set a stop loss order which is closely set to the currency price. But if you are investing long-term, you will have to give your currency price some more room to shift or move about and therefore, set your stop-loss order a little lesser.
Secondly, once it is clear to you what time structure you will be trading for, you are now required to eradicate the typical market disturbance in terms of instability, in that specific time structure.
Setting very tight or limited stop-loss orders can have some serious drawbacks to it, some of which are as follows:
• Firstly, setting tight stop-loss orders will actually minimize the consistency of your trading system because due to a tight order, you will get stopped out of the trade a little too often.
• Secondly, since your trading transaction costs add up for a key share of your company expenses, you considerably amplify your transaction costs
Therefore, it is always advisable for the Forex traders to develop a trading system that is operational for a somewhat extended time structure.
With a smart and planned trading system employed, stop-loss limit set to minimize investing risk, and a well structured money management strategy in place, any trader can be well positioned to get the most out of their market trading and profits.
FOREX Trading History The FOREX trading system was originated centuries ago. Since the era of Babylonians, the need to own and exchange different countries for trading purposes existed. Although, during that time, it was more known as the Barter System, which we call Trading, today!
More like a give and take situation, Barter system involved weighing the worth of one good in terms of the other. But with time and extensive use of this Barter system, lots of apparent limitations also came on the surface slowly, hence convincing the people to seriously think on the lines of establishing some more well-known and recognized mediums of exchange.
When extensive trading started happening between the people of various countries like Africa and Asia with the help of this system, another main issue of concern came into existence. Where in some economies, goods such as feathers, stones and teeth provided as base economies, in others, other goods were given more importance.
Soon, it became very important for all the people to demand for a establishing a common base of value. And shortly, assorted metals like gold, silver and bronze began to ascertain themselves as the established payment methods. Further more, they also established themselves as a consistent storage of value.
With the invention of the Coins in the Middle Ages, which were originally cast in the chosen metal, the creation of a papered structure of governmental I.O.U. also achieved approval and recognition under the steady political administration. Though earlier when introduced, it was not easily accepted by people, and so establishing it through force had proved more effective than through advising. And today, this papered form is the basis of our modern day currencies.
Along with being credited with the first use of paper notes, they also initiated the use of papered receipts. During that time, speculation in trade was hardly experienced by people, and if we compare that market situation to the one we have today, the huge speculative movement in the exchange markets nowadays, would not have been appreciated at all.
The elimination of the gold standard in the year 1931 along with a big decline in the market created some severe stillness in the Forex trading activities. From 1931 to 1973, the Forex market underwent a lot many modifications and alterations. So, with the aim of guarding the nationwide interests, improved foreign exchange controls were set up to stop market forces from demanding economic inconsistency.
The Bretton Woods contract was achieved on the proposal of USA in July 1944, nearing the conclusion of World War II. The conference being held in Bretton Woods, New Hampshire for this agreement discarded John Maynard Keynes proposal for a new world reserve exchange in support of a structure built on the US Dollar.
As a result to the Bretton Woods agreement, a method of fixed exchange rates was decided upon, which partially re-established the Gold Standard, setting up the USD price at $35.00 per ounce of Gold. While this was how a USD was priced, other main currencies were set up against the dollar.
During the early 1980’s, London became the main hub of the Euro-dollar market. What contributed to this situation were the British banks, which began loaning dollars as an option to pounds. They took this step just to retain and continue their primary position in worldwide economics, and till today, London successfully remains the key offshore market.
Since the time of Babylonians to the present era, we have seen a vast development in the foreign exchange trading, slowly escalating amongst the other exchange markets, just to reach the top to become the world’s biggest trading market.
Limitations on currency flows have since been eliminated in nearly all countries, thus allowing the market forces to be free to regulate foreign exchange prices in agreement to their apparent values.
Are you an “obsessed to win” trader?
Traders of all kinds have always been attracted towards Forex trading with the basic motive to make profits, and to win as much as they can. The thrill to enter the market, the adventure to bid the money, and the attempt to predict the unpredictable drives investors to this largest Foreign Exchange market in the world.
But what we as traders do not realize is that unknowingly, our emotions can make us trade incorrectly.
There is no doubt that entering Forex market can open a lot many avenues for you as a trader to explore large money making prospects easily accessible with the Forex trading these days. People from various genres, class and gender enter the Forex world on a daily basis, just for the hope of winning it all and experiencing the great style and life of a money-making Forex trader.
But, while get easily floored by the profits and winnings of a successful Forex trader, what is easily forgotten is the fact that while there are quiet a few traders who are winning at the Forex market one day, they can always be the ones who can lose all their winnings the very next day!
What needs to be understood is that Forex trading market is just like a war front, where you have every possibility to lose the battle as much as you have to win it. It is a war where you can easily lose all your capital and confidence if you do not act sensibly in your wars in opposition to the Forex market
Forex market can often act as a clever, frightening and a somewhat wicked enemy at times too. This is exactly why every move in the Forex trading market should be a planned and organized move. You, as a trader should never be unprepared when inside the trading system once. With such a volatile market as the Forex, anything can happen anytime. In the world of Forex market, the first thing that can go against you while trading is your over confidence to win.
An obsession to win for a trader, can become a benefit for the market, making it easier for your enemy to defeat you, as you become overpowered by your emotions.
A lot many traders and investors believe in the strategy of never to close a trade until or unless it is turning into a profitable one. An approach which can surely lead them to a series of losses. Also, many investors think that the assumptions and predictions they have made on a particular trade, based on some trading indicator and industrial analysis will always churn out accurate and right results for them.
Believing that the Forex market will begin performing in the exact same way in which they had predicted, even if the trading graphs and charts clearly indicate the opposite, is foolishness. An attempt which can make traders lose all their money on false anticipations. No wise Forex trader will trade with such illusions in his mind. In reality, the market can any moment, move against or with you. Such a behavior while trading will only lead you to continuously pouring in your money into losses, which will obviously be market’s gains.
You will be easily defeated by your own obsession of wining which will at the end of the day, turn into a loss for you instead of being profitable.
So, always keep in mind never to be obsessed with emotions and trade Forex.
Essentials in Forex There are quite a few basic essentials which a trader should learn well, when it comes to trading Forex. These are some of the tools that the trader will need at various stages of Forex trading.
Evaluating Profit and Loss If you are trading through an efficient online trading platform, it is likely that you will be provided with an automated calculation of your Profit and Loss vis-à-vis your open positions in the Forex market. This facilitates the trader, making it easier for him to keep track of his position and movement in the market automatically.
Nevertheless, it is still helpful for every Forex trader to know and comprehend the calculation through which, these results are derived.
Knowing all about Margins Advantages are many, when it comes to getting good margins for trading. Margin can be known as the minimum amount required to be deposited before an investor starts trading. This can also be known as the initial amount with which the Forex trading account can be opened.
With bigger margins, you can get more buying power in your hands. For example, if you have $5,000 worth money in your margin account which also provides 100:1 leverage, then you can easily buy about $500,000 of exchange.
This is for the reason that you only have to position 1% of the buying price as security in your account. Thus, in other words, you have a $500,000 worth of buying power in your hands.
This is exactly why trading exchange with a margin account facilitates you to raise your buying power. Margin accounts can also allow you to enhance your overall return on investment with less capital pay out.
But what needs to be kept in mind always is that, while trading on margins can increase your profits, there is an equal and opposite possibility that it can amplify your losses as well.
Making use of a Margin account for Forex trading can definitely turn out to be a profitable investment strategy, but only if you manage your account wisely. Along with the profits, what also should be considered seriously are the risks which are involved by getting more buying power with lesser cash outlay, as this may also lead you to lose more than you have at times too.
Also, always make sure that you thoroughly read the margin agreement which occurs between your payment firm and you. Talk to your account representative if you have any questions.
In the cases where the margin available in your account drops below a preset boundary, there are 99% chances of your account positions being partly or completely shut down.
Also, there is a possibility that you might not even get a margin call before closing down your positions.
To avoid such a risky situation, it is always advisable that you supervise your margin account stability regularly to keep a check that your money does not stoop as low as the margin set.
Also, make appropriate use of correct stop-loss orders along with every open position. Setting a stop-loss order will help you limit your risks and fix a safe point for exiting the market.
Price chart patterns There are a range of charts available, which can help you study the Forex market patters and price actions. Although many types of chart forms are used to represent the market movements, the Bar charts are the most commonly used charts to describe the patters simply and clearly.
In these Bar charts, each bar or slab usually signifies a period of time ranging from a minute to a number of years. The significance of these charts is that they show diverse price patterns that have been established so far.
Some other types of price chart patterns are: Point and figure patterns The point that differentiates the Bar chart patterns from the Point and figure patterns is that, the latter does not employ time scales to specify a specific day or month related with a particular price action.
Yet, they are basically the similar to the patterns created through the Bar charts.
Candlestick patterns Candlestick patterns are also employed to forecast the market, just like the Point and figure patterns and Bar charts patterns. But Candlestick patterns are more visually appealing, detailed and clearer than the other patterns, because of their tinted bodies.
Types of Forex Analysis
There are two types of analysis which are generally used by the Forex traders to keep a track of the Exchange market. These are:
• Fundamental Analysis
• Technical Analysis
Fundamental analysis includes a detailed study of the basic and primary elements which have and can potentially manipulate the financial system of a certain thing. This type of technique is often used to study and forecast the various trends like price action and market trends. These predictions are done mainly through evaluating fiscal indicators, public factors within a company and administration policies.
When it comes to financial markets, fundamentals are the key. Fundamentalists can easily tell you how did any particular market trends occur and what will they be at the current hour or minute and further significantly, at what time and at which price will they be in the near future.
Market traders are divided into the two; they are either Fundamentalists, or Technicians. But the fact is that it is kind of difficult to survive in the Forex market with one of the two techniques. What is needed is the right blend of the two to form a perfect picture of the current market and price trends.
A Forex trader should always be aware of the fact that any financial market is influenced by many factors apart from its past trends and movements. Many issues such as political and financial pressures, national issues and social order define to a great extent, the way most of the financial markets move.
While Fundamental analysis is a very successful technique to predict monetary conditions of the market, it can somewhat lack in determining the exact market rates and prices. For example, just by studying a financial forecast of the political and fiscal reports, it cannot be guaranteed that you will be benefiting from them. What is important is to know the right and accurate way to utilize the information by setting up accurate entry and exit points for a particular trading position.
Fundamental analysis is mostly studied using a multitude of empirical data to devise a strategy with an effort to predict the current market movement as well as future prices.
Technical analysts are of the opinion that factors like market fundamentals, hopes and fears of the people need not be studied in detail to understand the market well.
According to them, market moves in a rather predictable manner and these moves can be predicted by studying various past patterns and trends. Technicians believe that markets move in trends and that history repast itself. And therefore, they are not as unpredictable as they seem.
Technical analysts use systematic methods to predict market movements such as price charts, volume charts, and other studies to estimate future market values.
After doing so mush of analysis of the past trends and flows, it becomes very difficult for the technical analysts to not rely on their findings a 100%. After using technical analysis to foresee the market trends, it is necessary for the traders to set up strict entry and exit levels, and stay with their pre planned strategies rather than deviating from it at the last moment.
Technical Analysis - Indicators Technical Analysts believe that all the financial markets move by trends. They are of the opinion that Forex trading market is not that unpredictable as it seems to some. If the past movements and price trends of the market are thoroughly studied, then according to the technical analysts, current as well as future movements of the market prices can be easily estimated.
And for sighting these past trends and movements and representing them clearly and orderly, Technical indicators are used. These indicators are basically figures and data of past market records based on diverse statistical calculations. These indicators facilitate the traders using technical analysis, to predict if there are any continuations or turnarounds in the market trends.
There are many different types of technical indicators which are used in technical analysis, a few of which are given below:
Trend indicators The continuances or reversals of a price movement in any particular direction over a period of time can be defined as a Trend or a Pattern. It is believed by the technical analysts that trends seem to move in three directions, either up, or down or sideways.
Trend indicators are used to even out inconsistent price records and stats to produce a combination of market trends. They also reflect the direction and the momentum of the current trend. The most common Trend indicator is Moving Averages.
Flux indicators Flux or volatility indicators are used to reflect the degree, or magnitude, of everyday rate variations with or without describing its direction. These indicators are important as it is seen that variations in volatility can be liable to show traders a way to price changes. The most common Flux indicator is Bollinger Bands.
Support / resistance indicators Support and resistance indicators are used to reflect orderly, the effect of the basic process of demand and supply on the price levels due to which the markets ascend or descend time and again. The most common Support / resistance indicator is Trend Lines
Oscillators/ Momentum indicators Oscillators/ Momentum indicators are used to reflect systematically, the momentum at which rates or prices move about in a specified period of time. They help the analysts in establishing the advantage or disadvantage of a trend or pattern as it develops over a time period.
It is believed that strength of a trend or a pattern is maximum at the initiation of a trend and minimum at crossroads or transition phase of a trend. The most common Oscillators/ Momentum indicators are RSI, Stochastic and MACD.
Sequence indicators Sequence indicators are those which are used to signify recurring trends in any market movements, related to repeated patterns or events such as specific time of the year, wars, elections etc.
Due to such events and happenings, many financial markets have a trend of moving in cyclic patterns. The most common Sequence indicator is Elliott Wave.
Strength indicators These indicators are used to reflect market strength and the power of market opinions relating to an outlay by studying the market situations obtained by different market traders and investors.
Being the fundamental elements of this indicator, Volume or open interest generate signs that are immediate or driving the market. The most common Strength indicator is Volume.
These days, nearly all charting packages contain some of the above mentioned technical indicators. Traders while choosing a charting package can easily add their preferred technical indicators to their charts.
What moves the currency rates? A lot of reasons can have their hands behind the fluctuating market and currency rates, and not one or two can be blamed for any sort of rise or fall in them. Although it would not be entirely wrong to say that the Forex market business is more or less based on these fluctuations only. Traders trade in this market, purchase and sell various currencies with the expectation of making gains if the value of the exchange moves in their favor. Now this sudden movement in the market can be caused by either market news or current events all over the world, which have an effect on the demand and supply of these currencies.
This law of demand and supply is what works well in this Forex market too. When the demand of a particular currency goes up, its market price also escalates as compared to the other currencies in the market.
Similarly, if the demand of a particular currency goes down, traders are no longer interested in holding it back with them, and so the market price of the currency also decreases.
Economic development It is quiet obvious that the traders trading in currencies and interested in exchange markets, will be equally keen and interested in knowing about the overall economic development of the countries whose currencies they hold, or are interested in buying. Every trader wants to be convinced that they economy they are about to invest in is developing with a solid and steady growth, which can be known by studying various factors such as unemployment, import and export, and the GDP statistics of a particular country.
Rise in Unemployment experienced by any particular country is considered as a negative factor, whereas a fall in Unemployment is always measured as a positive aspect.
Similarly, an increase in the GDP figures of a particular country is considered as a positive feature, whereas a decrease in GDP figures is always measured as a negative aspect.
Also, a mount in the Exports numbers of a particular country are always considered as a positive trait as compared to the decrease in Exports numbers which is looked upon as a negative aspect.
Political strength Lots of factors are responsible for determining the political stability of a particular country. These factors can be any kinds of alterations in government or by the government, rising unemployment rates, elections or international and political conflicts.
Every investor is cautious enough and considers all these factors in his mind before going in for investing in a particular economy.
Any kind of Political conflicts, natural calamity or terrorism attacks or wars are major contributors in making or marring the economy of a country.
Interest Rates Around the world, interest rates are always followed by money. If the interest rates of a particular country rise up, investors big and small from all over the world would want to invest their money with it in order to gain higher returns on their investments.
Mostly it can be said that if you want to capitalize on higher investments, then you have to keep an eye on the rise and fall of the interest rates in a particular country. And the factors which will help you determine this rise and fall are mostly the financial rise indicators in addition to the speeches of the current leading, dominating and significant figures like big politicians, iron and steel magnets and businessmen.
The interest rate movements generally take place during the programmed meetings by the central banks like BOE, FED, ECB, and BOJ.
An increase in the Interest Rates is always considered as a positive factor for a particular country as compared to the decreased in Interest Rates.
