The Foreign Exchange Market, or Forex, or FX market, is a the largest and most liquid financial market in the world with daily volumes of $4 trillion. These are some basic facts and tips for those planning to trade Forex currencies.

The Short History of the Foreign Exchange Market

The Forex Market began during the 1970s after 30 years of government restrictions regarding foreign exchange transactions. The significant event that started the Forex market was the end of the Bretton Woods Agreement. The Bretton Woods Agreement became the global monetary system at the end of WW2 and for the next 30 years. Under the Bretton Woods System, all major currencies were pegged to the US dollar, and gold reserves were accepted as the basis for the US dollar. in the early 1970s, President Nixon announced that the United States would no longer exchange gold for US dollars. The floating-rate system became the new standard for the world.

The Forex market was born as major countries gradually switched from fixed currency rates (Bretton Woods) to floating exchange rates.

Today, there are three (3) exchange rate systems:

(1) Floating rate –Demand and supply determines the exchange rate {dominant system)

(2) Dollarisation –Countries selecting to link their exchange rate to the US dollar {such as Panama}

(3) Pegged rate –Countries selecting to link their exchange rate to another currency, such as the European euro or the Chinese yuan

 

Key Characteristics of the Today's Currency Market

These are some basic characteristics of today's Foreign Exchange market:

(1) 24-hour operation, 5 days per week (Operating from Sunday 20:15 GMT to Friday 22:00 GMT)

(2) Mechanism of overnight rates (SWAPS) to balance the interest rate differential between the two currencies involved (which may be positive or negative for your portfolio's balance)

(2) Enormous capital liquidity moves via the ECN network

(3) Currency pairs are available in very tight spreads (you can trade the Eurodollar paying a spread as low as 0.2 pip, 0.0002 in terms of the EURUSD exchange rate)

(4) Low margin requirements and the ability to apply high capital leverage (30:1 maximum in the EU area)

(5) Wide geographical distribution (London is the largest Forex center in the world) and 3 different trading sessions (American, European, and Asian)

 

 

Market Participants

There are many different participants in the Forex Market:

1) Central Banks (monetary authorities)

2) Commercial and Investment Banks

3) Large Trade Companies (Importers/Exporters)

4) Institutional Investors (Hedge Funds, Investment Firms, etc.)

5) Forex Brokers (ECN/STP) and Currency Dealers

6) Retail Traders and Tourists

 

Three Trading Sessions

There are three Forex sessions for the winter, and three for the summer time zone:

Forex Time Zone	GMT (open-close)	EST (open-close)
Winter Time Zone (October to April)
New York	1:00 PM 10:00 PM	8:00 AM 5:00 PM
London	8:00 AM 5:00 PM	3:00 AM 12:00 PM
Tokyo	12:00 AM 9:00 AM	7:00 PM 4:00 AM
Summer Time Zone (April to October)
New York	12:00 PM 9:00 PM	8:00 AM 5:00 PM
London	7:00 AM 4:00 PM	3:00 AM 12:00 PM
Tokyo	12:00 AM 9:00 AM	8:00 PM 5:00 AM

 

Forex Volume Analysis

The liquidity and volume activity in the currency market is ginormous. This is a typical breakdown of a $4 trillion daily Forex market volume:

• $1.765 trillion in foreign exchange swaps

• $1.490 trillion in spot transactions

• $0.475 trillion in outright forwards

• $0.207 trillion in options and similar products

• $0.043 trillion in currency swaps

Chart: The distribution of Forex daily volumes

 

Currencies Traded the Most in the Foreign Exchange Market

The majority of trading is made in 18 currencies. The eight most-traded currencies are:

• U.S. dollar (USD) -by far the dominant currency-
• European Euro (EUR)
• The British pound (GBP)
• Japanese yen (JPY)
• Swiss franc (CHF)
• The Canadian dollar (CAD)
• The Australian dollar (AUD)
• New Zealand dollar (NZD)

Currency pairs

Global currencies are always traded in pairs, categorized into majors, minors, and exotic pairs. Each Forex pair is expressed in units of the quote currency. In each Forex pair, the former currency is called the base currency and the latter currency is the counter or the quote currency (BASE/QUOTE).

Although there are hundreds of different currency pairs, an 85% of the total volume is generated by the following assets:

• EUR / USD – Euro / US Dollar

• GBP / USD – British Pound / US Dollar

• USD / JPY – US Dollar / Japanese Yen

• USD / CAD – US Dollar / Canadian Dollar

• AUD / USD – Australian Dollar / US Dollar

• USD / CHF – US Dollar / Swiss Franc

Trading the above pairs means taking advantage of high market liquidity and paying very tight trading spreads (spread is the difference between Ask & Bid)

 

What Moves Forex Currencies

As in the case of every other financial asset, the key factor affecting exchange rates is demand and supply. The key to unlocking the Forex market is understanding the role of the US Dollar. When the world demands more dollars, then the value of the dollar increases in relation to other major currencies.

• TIP: You can use the chart of the US Dollar Currency Index (DXY) to reveal the cyclicity of the US dollar market » Find the DXY chart at TradingView

In the following monthly chart, the US Dollar Index with the MA(128) and the free RSI Precision indicator on TradingView:

Chart: The US Dollar Index (DXY) and the free indicator RSI Precision by G.P.

 

In general, the demand for a particular currency is determined by:

• monetary policies (interest rates)
• new macroeconomic data (unemployment, inflation, consumption, GDP growth)
• general business conditions
• new legislation regarding taxes, tariffs, and capital flows
• political, social, and strategic risks

 

 

Key Forex Trading Tips

Forex trading is about fundamental facts and macroeconomic cycles, only traders who can make educated decisions, and follow them with discipline, can benefit from the fluctuations of the Foreign Exchange market. To successfully trade Forex, you need skills, a trading strategy, and a money management system.

These are some simple but important trading tips for all Forex traders:

 

Forex Tip 1) Identify your Trading Profile and choose a Trading Strategy that suits your personality

There are 4 questions you need to answer before selecting a trading strategy:

• What are your trading skills?
• What is the amount of capital you afford to lose?
• What is the annual profit that you need to make?
• How much time you can devote on a weekly basis?

After answering these four questions it will be easier to choose the best trading strategy for you. These are some examples:

• A manual day-trading strategy needs a lot of time and includes a lot of risks
• An automated day-trading strategy needs less time but it requires a lot of skills and includes a lot of risks
• A swing-trading strategy is less risky and demands less time
• A long-term trading strategy requires even less time and is more suitable for the average retail trader, but of course, it offers less return

 

Forex Tip 2) Don't apply Multiple Strategies in the same account

First of all, the implementation of multiple strategies is confusing and time-costly for every trader. It is preferable to focus on a single strategy and optimize it over time. However, if you decide to implement multiple strategies NEVER implement them all in the same account. Even if you are an expert in money management, it is not enough to be safe. Unexpected market volatility, especially after the weekends, can leave your stop-loss orders unfilled. That means that a single losing trade can lead to the failure of your whole portfolio. It has happened before, for example in early 2015.

20% collapse in the same day

In January 2015, the Swiss National Bank (SNB) announced that it would no longer maintain its currency (CHF) at a fixed exchange rate with the EUR, the EURCHF tanked about 20% in a single day. Imagine, a large trading account that was leveraged longed on EURCHF, it would simply be a disaster for this account.

• Use dedicated trading accounts for every strategy you implement, catastrophic events can always happen

 

Forex Tip 3) Don’t get emotional with your trades

Human beings are emotional by their nature. Being emotional with friends and family is a good thing, however, being emotional with your trades is catastrophic. Trading is all about making clear decisions and following them with discipline. You need to be logical with your decisions, not emotional. 

• Control your greed, and don't increase your position sizes after a few successful trades
• Diversify your bets in the market, and control your risk by allocating a small portion of your capital to each trade position
• In addition, keep in mind that every strategy and every trader will eventually suffer a losing period, so don’t get easily disappointed. Stick to your trading strategy and try to figure out when the profitable period begins and when it ends

 

Forex Tip 4) Keep a Track Record of your trades

Keeping a clear and honest trading record is one of the most important factors that will determine if you will make money or not in the long run.

• By keeping track of your trades you will be able to evaluate several things such as your trading strategies and money management systems
• A track record will provide you with the chance to evaluate your periodical performance, and thus avoid time periods when losing money is highly probable

 

Forex Tip 5) Limit your Greed, Trading Leverage, and Position Sizes

Greed is one of the worst characteristics of humankind. Traders who are afraid to leave money on the table, make poor decisions in the long run. Wise traders take what the market is willing to give them, and wait for the next opportunity to occur. 

In addition, don't forget that high capital leverage means higher risk and higher transaction costs. Don't try to get rich quick, it won't happen. Limit your capital leverage and keep your position sizes small. Market risk and trading costs are your worst enemies.

• In order to make money, you first need NOT to lose all your money in a couple of trades (preserve your capital)
• Poor risk management means you will lose all your money in the long-run
• Make sure that when eventually you will realize the importance of controlling your risk and transaction cost, you will still have some money in your trading account

 

Forex Tip 6) Place the Right Orders

Placing the right orders is as equally as important as selecting the right trades. Trading is all about executing the right orders at the right sizes.

• The stop-loss and the take-profit levels will determine if a trade is worth, or not, taking it
• Avoid trades offering a reward/risk ratio of less than 3
• Don't use tight stop-loss orders unless you are a scalper who knows what he is doing
• Run your profits using a trailing stop order. A trailing stop can guarantee a significant portion of profits in case the market reverses
• Be very careful during news releases. Keep in mind that brokers apply stop-hunting techniques shortly after news-releases

 

Forex Tip 7) Choose the Right Broker according to your Needs

Choosing the right Forex partner is crucial when trading currencies, as in the case of trading any other financial asset:

• Select a Forex broker that exists in the market for more than 5 years
• Review your broker and make sure that your desired funding options are fully available
• Know what you will be paying (funding fees, transaction costs, overnight rates, etc.)
• If you are a novice trader, start by using a demo account, and then move a to a micro-lot account
• When you become more advanced, you will need an ECN/STP Forex Broker offering tight spreads, fast execution, and a wide currency index
• If you are planning to apply a swing-trading or a carry-trading strategy, make sure you have selected the broker offering the most efficient overnight (SWAP) rates 

 

► Compare ECN/STP Foreign Exchange Brokers

 

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