Learn Forex Trading - The 4 Fundamentals Of A Good Trading Market

Whether you are trading stocks, bonds, futures, foreign exchange or just about anything else you care to mention the conditions that make a market suitable as a trading ground for the investor remain the same. In essence, there are four characteristics which are always present in a good investment market - liquidity, transparency, low trading costs and the existence of trends in the market.

Liquidity

All trading consists of two elements, a purchase and a sale, and liquidity in its simplest form refers to the ease with which traders can buy and sell. I say 'in its simplest form' because for a market to be truly liquid traders must also be able to buy and sell in substantial volume without any marked effect on prices.

The problem with a market that is not liquid is that traders will often find that there are delays in filling orders to buy, resulting in often substantial differences between the price at the time the order is placed and when it is actually executed. In addition, it can often be difficult to sell in a market that lacks liquidity.

The Forex market is an extremely liquid market with a huge number of trades being conducted daily and with a trading volume that is second to none.

Transparency

The transparency of a market is best defined as the ability of traders to access accurate information at all stages of the trading process.

Information is the key to most things in life and this is certainly true in many of the world markets. Indeed there are many examples, especially across the world stock markets, of companies and individuals running into difficulty because all of the parties involved in a trade did not have access to accurate information, or were given inaccurate information.

The Forex market is without doubt the most transparent of all of the world trading markets and this is especially true when it comes to pricing.

Low Trading Costs

All markets carry trading costs and the higher these costs the lower the trader's profit or the greater his loss. Any market therefore that can keep its trading costs low will be attractive to traders and will encourage greater trading volume.

The lack of commission and similar trading costs and the tight spread of prices in foreign exchange trading mean that trading costs in the Forex market are kept very low compared to other markets.

Trends in the market

One of the most difficult things in many markets is knowing just when to enter the market, or buy, and when to exit the market, or sell. For this reason it is important to have some mechanism which traders can use to assess the current state of the market and to predict its future course.

In the case of the Forex market this essentially means employing various different forms of technical analysis which rely on studying the past performance of the market and identifying trends which can then be used to predict the future.

Most markets will display some form of trend, but some markets have far more clearly defined and marked trends than others, making it far easier for traders to enter and exit trading positions. Fortunately, the Forex market is one market with a particularly strong trending characteristic.

Forex Trading: Calculating Profits and Losses

The foreign exchange market, or Forex market, is an around-the-clock cash market where the currencies of nations are bought and sold. Forex trading is always done in currency pairs. For example, you buy Euros, paying with U.S. Dollars, or you sell Canadian Dollars for Japanese Yen. The value of your Forex investment increases or decreases because of changes in the currency exchange rate or Forex rate. These changes can occur at any time, and often result from economic and political events. Using a hypothetical Forex investment, this article shows you how to calculate profit and loss in Forex trading.

To understand how the exchange rate can affect the value of your Forex investment, you need to learn how to read a Forex quote. Forex quotes are always expressed in pairs. In the following example, your pair of currencies are the U.S. Dollar (USD) and the Canadian Dollar (CAD). The Forex quote, USD/CAD = 170.50, means that one U.S. Dollar is equal to 170.50 Canadian Dollars. The currency to the left of the "/" (USD in this example) is referred to as base currency and its value is always 1. The currency to the right of the "/" (CAD in this example) is referred to as the counter currency. In this example, one USD can buy 170.50 CAD, because it is the stronger of the two currencies. The U.S. Dollar is regarded as the central currency of the Forex market, and it is always treated as the base currency in any Forex quote where it is one of the pairs.

Let's go now to our hypothetical Forex investment to show how you can profit or come up short in Forex trading. In this example, your pair of currencies are the U.S. Dollar and the Euro. The Forex rate of EUR/USD on August 26, 2003 was 1.0857, which means that one U.S. Dollar was equal to 1.0857 Euros, and was the weaker of the two currencies. If you had bought 1,000 Euros on that date, you would have paid $1,085.70.

One year later, the Forex rate of EUR/USD was 1.2083, which means that the value of the Euro increased in relation to the USD. If you had sold the 1,000 Euros one year later, you would have received $1,208.30, which is $122.60 more than what you had started with one year earlier.

Conversely, if the Forex rate one year later had been EUR/USD = 1.0576, the value of the Euro would have weakened in relation to the U.S. Dollar. If you had sold the 1,000 Euros at this Forex rate, you would have received $1,057.60, which is $28.10 less than what you had started out with one year earlier.

As with stocks and mutual funds, there is risk in Forex trading. The risk results from fluctuations in the currency exchange market. Investments with a low level of risk (for example, long-term government bonds) often have a low return. Investments with a higher level of risk (for example, Forex trading) can have a higher return. To achieve your short-term and long-term financial goals, you need to balance security and risk to the comfort level that works best for you.

FOREX Trading-Not Just for the Big Boys

It seems that almost everyone is familiar with the stock market and many employees are actually invested in it because of their company's 401k. Everyday as part of the news report, we are always given the latest report on the Dow Jones or New York Stock Exchange. Yes, it has its ups and downs and we all know someone who has made large profits as well as devastating losses. The stock market can be very volatile. If there was a market you could trade in without as much of this volatility had easy access and low cost, what would it be? FOREX.

FOREX (FOReign EXchange market) is the largest financial market in the world with almost $1.5 trillion traded daily. Compare that to $200 billion in the equity market. Basically, FOREX is the exchange where you can sell one country's currency for another. Let's say that you purchase British pounds and then after the pounds/dollar ratio goes up, you sell the pounds and buy more dollars. Until recently this market was only accessible by the major banks, large corporations and those with very large investments. Due to federal regulations, the Foreign Exchange market is no longer a monopoly which means you and I can also profit in this huge market. Let's look at some of the benefits of FOREX trading.

Accessibility. 24 hours a day, 5.5 days a week. The currency exchange market is an over the counter market which means that there is not one specific location where buyers and sellers meet to exchange currencies. Transactions can be easily handled through websites designed for this purpose.

No exchange or commission fees. Unlike other markets where brokerage fees are incurred, the FOREX market is a worldwide inter-bank market. Trades can be made between the buyer and seller in an instant.

Low minimum Investment. For an initial investment of $300, you can start your FOREX account. This market requires less money to begin trading than any other market. This keeps your risk low.

These are just a few of the many advantages of the FOREX trading. Are you ready to jump into an exciting new adventure that can be very profitable? Can you imagine getting into this market and having someone train you for free? There are several free courses currently being offered that will teach both beginners and experienced currency traders how to profit in this market. If any of this sounds like the opportunity that you have been waiting for, check out the main page of this web site for a listing of free forex stuff. The free ebook, Forex Freedom is an excellent start. It will guide you every step of the way.

Forex Trading - Understanding Forex Charts

For the majority of Forex traders their trading strategy will be based very largely on technical analysis. This means, amongst other things, that the Forex trader must have a sound knowledge of technical analysis and, in particular, an ability to read charts.

Price charts are used to convey information about Forex prices at specific time intervals, which can range from as little as one minute up to several years. Prices can either be plotted as simple line charts or price variations can be plotted for each time interval to produce a bar or candlestick pattern.

Line charts are particularly suitable for giving a broad overview of price movements. They are normally plotted to show the closing price at each chosen time interval and they are easy to read and clearly define patterns in price movements.

Although not quite as easy to read, bar charts provide far more information. The length of each bar is used to indicate the price spread for a given period, with long bars indicating a large variation between high and low prices. Opening prices will be shown on the left tab of a bar and closing prices on the right tab so that you can see at a glance whether the price has risen or fallen and just what the variation in price was. When printed out bar charts can be difficult to read but most software charts will have a zoom function which makes reading closely spaced bars much easier.

Candlestick charts, which were invented by the Japanese to analyze rice contracts, are similar to bar charts but are easier to read as they are color-coded. Green candlesticks are used to show rising prices and red candlesticks to show falling prices.

When reading candlestick charts the candlestick shapes viewed in relation to one another form various patterns according to the price spread and the proximity are opening to closing prices. Many of these patterns have been given names such as ‘Morning Star' and ‘Dark Cloud Cover' and once you become familiar with these patterns it is easy to pick them out on a chart and to identify trends in the market.

To supplement the information provided by charts a number of technical indicators are also used. These include trend indicators, strength indicators, volatility indicators and cycle indicators and all of these are used to anticipate movements in the market and market volume.

The most commonly used Forex technical indicators include:

Average Directional Movement (ADX). ADX is used to determine whether or not a market is entering an upward or downward trend and just how strong the trend is.

Moving Average Convergence/Divergence (MACD). MACD shows the momentum of a market and the relationship between two moving averages. When, for example, the MACD line crossings of the signal line it indicates a strong market.

Stochastic Oscillator. The stochastic oscillator indicates the strength or weakness of a market by comparing a closing price to a price range over a period of time. A high stochastic indicates a currency that is overbought while a low stochastic points to a currency which is oversold.

Relative Strength Indicator (RSI). RSI is a scale from 0 to 100 which indicates the highest and lowest prices over a given time. When prices rise above 70 the currency is considered to be overbought while a price below 30 would indicate a currency which is oversold.

Moving Average. Moving average is the average price for a given time when compared to other prices during similar time periods. For example, the closing prices over a 7 day time period would have a moving average equal to the sum of the 7 closing prices divided by 7.

Bollinger Bands. Bollinger bands are bands that contain the majority of a currency's price. Each band consists of three lines - the upper and lower lines indicate the price movement with the middle line showing the average price. In conditions of high volatility the gap between the upper and lower bands will widen. If a bar or candlestick touches one of the bands then it will indicate either an overbought or an oversold condition.

Forex Trading - An Introduction To Technical Analysis

There are two types of analysis used in Forex trading - fundamental analysis and technical analysis. Fundamental analysis examines current political and economic events in order to predict movements in currencies, while technical analysis uses historical economic data to predict movements in the Forex market.

There are three underlying assumptions to technical analysis:

1. Movements in price are the result of a combination of all the forces is in the market. While currency prices can be affected by all sorts of things including political events, economic conditions, supply and demand and even the weather, technical analysis is not concerned with the reasons for movements in the market but is solely concerned with the movements themselves.

2. Currency prices follow trends. Over the years a number of market patterns have been recognized and technical analysis assumes that these have predictable consequences.

3. Movements in price follow historical trends. Forex data has been collected from more than 100 years and, over time, a number of patterns have emerged. These patterns are indicative of human psychology and the way in which people react to certain circumstances.

Although most Forex traders will use fundamental analysis to support their trading strategy, they will also rely heavily on technical analysis. The major problem with fundamental analysis is that it requires a detailed knowledge of the political and economic conditions of a large number of countries and, for most traders, this is simply impractical. Technical analysis, on the other hand, can be applied across many different markets and currencies at the same time.

If you are new to Forex trading then you may well find the complexity of technical analysis off-putting and wonder if it is really necessary. As with almost any form of investment, you must have a strategy for trading and of that strategy must be based upon a prediction of movements in the market. Technical analysis has shown itself over time to be a sound tool for predicting such movements and is fairly accurate. Nothing of course will provide one hundred percent accuracy and currency prices are affected by a variety of different factors. It is for this reason that, while many traders use technical analysis, they also backup their trading strategy with fundamental analysis.

Every Forex broker will provide access to a range of different tools used for technical analysis and most of these tools, which will have the ability to update in real time, will generally be made available free of charge, with some additional professional analytical tools being provided for a fee.

Before you start Forex trading it is a good idea to acquaint yourself with market behavior by following Forex charts for a period of time and by studying the movements and gaining an understanding of trends. Many brokers will provide training accounts just for this purpose, allowing you to trade on paper rather than with real money.