Introduction to Forex Markets

• Definition
• History
• Importance
• Market Participants
• Influencing Factors
• Trading Sessions
• Getting Started

• Forex means Foreign Exchange, which is the simultaneous buying of one currency and selling of another. The foreign exchange market is the world’s largest and most liquid financial market with a daily average traded value of $1.9 trillion. Here, traders can buy, sell, exchange, and speculate on currencies. The Forex market is open 24 hours a day, five days a week and operates across nearly every time zone, making for an active market in a continual flux, with prices changing all the time.

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• With the discovery of new lands and colonization, a sophisticated currency system based on the price of a commodity developed. Monarchs realized the potential of currency devaluation, printing more to create a deficit and reduce commodity prices. This led to the forex system we know today, where a currency’s value can be compared and traded globally. Currency trading and exchange dates back to Ancient Egypt in 259 BC. A barter system was initially used, with one commodity traded for another based on its value. The forex market came into existence during the 1970s as a direct result of the elimination of government-imposed restrictions on foreign exchange. This significant development occurred following the introduction of the Bretton Woods system, which was established to regulate and set guidelines for financial interactions among nations in the aftermath of World War II. Under the Bretton Woods system, countries had previously adhered to fixed exchange rates. However, as time progressed, economies transitioned and opted for a more flexible approach by adopting floating exchange rates instead. This paradigm shift allowed currency values to fluctuate freely based on market forces rather than being bound by rigid, predetermined rates. This shift in the foreign exchange landscape played a pivotal role in shaping the forex market as we know it today. The forex market has continued to grow steadily, with some substantial bouts of volatility in the late 1990s, and again during the global financial crisis of 2007-2009. Today it is the world’s largest financial market, with an average daily volume of about $5 trillion, and is continuing to grow.

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• The foreign exchange market plays a crucial role in the global economy. It involves various participants such as investors, multinational firms, and buyers/sellers of goods and services. The market’s impact is seen in the prices of goods, balance of trade, and currency strength. Nations often engage in currency revaluations or devaluations to influence the market, leading to speculation and lasting effects. Due to fluctuating exchange rates, the market has become international, with transactions occurring outside the country of the currency.

  Closing a forex position involves selling assets to either make a profit or mitigate losses. Currency pairs are traded by exchanging the first currency for the second. When buying a pair, the base ( first currency in a pair) currency is purchased and the quote ( second currency in a pair) currency is sold. Selling a pair involves selling the base currency and buying the quote currency. The difference between buying and selling prices represents the trade’s profit or loss. Traders need to provide margin, and collateral in the margin account, to take a position. The forex market operates 24/5 and experiences high volatility due to various factors. This presents both profit opportunities and risks. Understanding the market and trading methods is crucial before investing significant capital. Forex differs from equity and options markets in terms of quoting prices and market accessibility. Trading occurs over the counter, allowing continuous trading at any time. In forex, there are no restrictions on directional trading, allowing traders to profit from both increasing and decreasing values of currency pairs.

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• When it comes to financial markets, participants include individuals, firms, banks, corporations, and countries involved in buying and selling financial instruments. Forex is unique, as it operates electronically in an OTC market, with trades conducted through computer networks worldwide. The market is open 24 hours a day, five and a half days a week, starting from Sydney and moving globally. This allows for multiple trading opportunities but also results in fragmented and sometimes illiquid markets. The large number of participants and geographical dispersion create intense competition, affecting price spreads. Traders aim to make a profit through speculation, while businesses participate to hedge exchange risks. This applies to various transactions, including buying/selling goods, paying salaries, and making future investments.
  2.2. Currency Pairs and Exchange Rates
  Currencies are traded in pairs. In an exchange transaction, you buy and sell one currency. For example, a GBP/USD rate and a EUR/USD quote.
  GBP/USD = 1.8300
  or
  EUR/USD = 1.2800
  The pound is the base currency in the direct quote, while the Euro is the counter currency in the indirect quote. A rise in GBP/USD from 1.8300 to 1.8400 indicates an increase in the pound’s value. Similarly, if the euro moves from 1.2800 to 1.2900, it signals an increase in the euro’s value.
  Forex traders seek favorable exchange rates to profit. Rate movements can greatly impact investments.

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• Fundamental analysis focuses on understanding the factors underlying market changes, such as inflation and interest rates. Other factors include a balance of trade and public debt. These external forces drive demand for goods and services on an international scale, affecting currency exchange rates. Government intervention in the forex is debated, as it can increase volatility and impact private sector exchange rates. Natural disasters and political instability can create uncertainty, leading to capital flight and decreased exchange rates.

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• There are four forex trading sessions: Asian, European, and US sessions. The best times to trade are during session overlaps. The European – US session overlap is from 13:00 – 16:00 GMT, when the markets are most active and have the best liquidity. Maximize your potential profit by trading during these times. If your trading system provides this information, focus on trading only during these active sessions. By automating your trades during these times, you can avoid sitting in front of the screen all day. This is the best option for those with limited time, as it allows for greater profit potential.

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• Forex is best learned by doing. Use software to simulate trading without risking real money. Test different firms and software to find what you’re comfortable with. Start with a mini account and learn from experienced traders.
  Once you are confident with virtual trading, assess yourself to determine your available time, trading style, and funds. Know the optimal markets and trading times for you. Define goals, develop a trading plan, and be realistic about your investment goals.
  It is important to self-educate and improve your knowledge of the Forex market. Evaluate your trades, learn from experiences, and gather knowledge from others. Use journals to track progress, avoid repeating mistakes, and stay consistent. The best traders are well-informed and understand that learning is ongoing. Manage funds wisely and be aware of the risks. After consistent trading for 6 months with sufficient capital, consider opening a standard account. Hire a tax consultant and accountant for tax and accounting matters. This frees up time for forex trading.

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