Educating Yourself About the Forex Market

The forex market is the biggest financial marketplace in the world. A huge number of forex trades take place every single day and prices change constantly. The typical participants in this market are experienced investors who have a thorough understanding of how currencies fluctuate and how best they can manage their investing strategy to make gains from these price movements.

In order to become a successful Forex trader, you must be seriously committed to your investment and be able to put sufficient time and effort into it. The right combination of skills and knowledge can yield significant gains in the Forex market.

Table of Contents
Chapter 1: Educating Yourself About the Forex Market
Chapter 2: Identifying Good Forex Trading Opportunities
Chapter 3: Developing Your Forex Trading Strategy
Chapter 4: Managing Forex Trading Risk
Chapter 5: Become a Successful Forex Trader

Navigate This Page
Chapter 1: Educating Yourself About the Forex Market
Forex Trading Terms
Understanding Fundamentals
Learning to Observe Trends with Technical Analysis
Staying Focused
Choosing the Right Broker

Chapter 1: Educating Yourself

The most important requirement is for the trader to have a good basic understanding of the concepts and methods involved in forex trading. Forex trading education should cover several aspects:

Differences from other investment options – Forex transactions are unique and it is critical for you to understand the basic differences between these and other investment options.

Forex Trading Terms

The basic terminology used in forex transactions is a good place for you to start your education. Once you have a fair understanding of what a simple forex transaction involves it is time to move on to strategies.

New investors should understand how different strategies affect the outcome of a forex deal. They should be able to gauge the effects of a short or long position on their transactions accurately in order to make a correct decision quickly. To do this they can use historical data to run a ‘mock’ investment to see how different positions could have resulted in gains or losses.

Many online forex trading brokers offer demos or training modules on their websites. These applications let you try your strategies in a simulated market environment without actually risking any capital. Think of these as practice sessions for the real time trading.

You can afford to make as many mistakes as possible and comprehend how wrong decisions will affect your capital with these demos. It is not unusual for traders to test their skills for months with such demos before they actually start investing.

Practice is critical for successful forex trading especially because the volatile prices can throw up any number of new scenarios in this market. The more practice you have on demo markets, the better equipped you are to deal with sudden changes during real life investing.

Pricing Information
Some large brokers list the prices of currencies throughout the day, every day of the week. Watching these prices and testing yourself to see if you can out guess the market is another good way to train yourself without actual investment.
Online forex traders often have a research section offering useful information. Other than this, there are many sources where you can find information on factors that affect currency prices globally. This includes GDP figures, news on political affairs, outlines of fiscal policies and import export policies. Factors that are likely to influence forex prices are called fundamental factors.

Understanding Fundamentals

A good grasp of the fundamentals of the forex market is an important part of your investment education. Knowing what these are and how they influence forex helps predict price movements. Here are some of these factors:

  • Political conditions: The economy and currency of any country hinge on its political stability. A war torn country is not likely to be flourishing because of the immense uncertainty. Instability in a government will subdue the value of their currency. Conversely, a dynamic leader can bolster market sentiments and help the currency rally against that of other countries. It is important to understand the political scenario of the country whose currency you want to trade in.
  • Fiscal policies: Quite often, the government of a country resorts to fiscal policies aimed at bringing about a specific economic change. During periods of high inflation, the government’s fiscal regulator will hike interest rates to keep the inflation in check. When inflation is controlled, the currency gains stability.
  • Economic indicators: These figures indicate the state of the country’s economy and the size of its debt. For example, GDP shows how much an economy has grown over a year. A good GDP growth keeps the currency trading at higher exchange rates because the economy is seen as stable and expanding. A huge trade deficit, on the other hand, shows that the country owes substantial debts to others and this drives down currency value.

The effects of a combination of different economic indicators can be assessed from past data. To gain an idea of the impact of the fundamental factors on currency prices, investors can look up the past price movement of the EUR/USD currency pair. During the years 2008 to 2009, the initial boom and the subsequent crash affected the prices in a significant way.

Learning to Observe Trends with Technical Analysis

A strong understanding of technical analysis is essential for success in forex trading. Technical analysis is a tool used by most forex traders to predict future prices. It involves using past data to project trends so that the investor can make the right investment decision.

It is important to remember that price movements alone cannot be used to predict the course that a currency pair will take. For example, it is incorrect to predict that the USD/JPY pair will rise in the first half of the year and fall in second because this trend was followed last year.

The combination of factors and circumstances that developed during the time caused the price change. The fundamentals tell you what causes the price to change while the technicals tell you how the price will change or to what extent and in what pattern.

A combination of strong knowledge of fundamental and accurate technical analysis holds the key to success in forex trading.

Staying Focused

A great deal of information will need to be assimilated before you can begin trading in forex. For beginners, it is advisable to start with one or two currencies that they have sound basic knowledge about and restrict their investments to these. Different currencies react to different factors and what subdues one may actually hike the value of another. It is easier for the novice forex trader to keep his focus on those currencies where he can predict price movements in relation to specific circumstances.

Choosing the Right Broker and Understanding Your Options in Case of a Dispute

The forex market is one that is not regulated by the government directly. Individual investors depend on brokers who function as dealers of forex in the market. It is very important for investors to know how to safeguard themselves from unethical brokers.

The spread offered (difference between bid and ask price) varies from one broker to another. This is how the broker makes his profit because he does not charge any commission or fee for your forex transactions. This spread has a direct impact on what you stand to gain from each trade. High spreads leave you with limited gains.

The absence of an exchange makes it difficult to identify the best price, leaving investors at the mercy of brokers to a large extent. But online quotes and other internet resources providing broker reviews and analyses are a great help in finding brokers with the right kind of spreads.

As there is no clearing house to settle the transactions and act as arbitrator, investors end up with heavy losses if they partner with an unscrupulous broker who fails to fulfill his obligations. The Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) are the bodies empowered to oversee and regulate the forex market.

Look for brokers who are registered as Futures Commission Merchants (FCM) with the CFTC. Most reputed brokers or brokerage firms also opt for a voluntary membership with the NFA, which offers arbitration in disputes among members. NFA membership comes with its own requirements and a registered broker will need to fulfill these.

Look for registered brokers who can offer all the services that you think you require. Consider the leverage levels offered and see if they match what you need. Go with those who let you practice your trading skills with a Demo application.

Many brokers also offer research, analysis and other tools that will help you trade effectively and successfully. Signing up with established brokers can not only get you the best possible tools to succeed in forex trading but also protect you from unethical and dishonest practices.

Next Chapter: Identifying Good Forex Trading Opportunities