Forex trading involves investment activities undertaken to profit from trade or exchange of global currencies. To put it simply, Forex Trading is very much similar to buying commodities with money. The only difference between a traditional market and a currency market is the absence of commodities. Currencies are bought in exchange of other currencies. The Forex market is also known as FX, Foreign Exchange market or more commonly as the Currency Market.
Understanding the nature of the forex market
Economists regard Forex market as the practical demonstration of a Perfect Competition mechanism. The foreign exchange market represents one of the largest asset class – currencies, and is characterized by high trading volume and absolute liquidity.
The currency market is also unique due to its presence on an international level and is operated continuously – 24 hours a day on working days.
Composition of the Forex Market
The Forex market is mainly composed of two major forms of activities. The first type of transactions is performed by international companies which buy and sell raw materials and finished goods in foreign markets. Thus they need to convert foreign currencies to their domestic currency and vice versa. The second major form of foreign exchange trade is conceived by traders, speculators, FX dealers, large institutions, and governments with the intention of achieving profits, investment portfolios, or maintaining the value of domestic currency through managing demand and supply of different currencies.
The Forex market is divided into different levels of access. The top tier is commonly known as the Interbank Market, and premium securities dealers and large commercial banks deal in this category. Smaller bank, MNCs, hedge funds, insurance companies, central banks, mutual and pension funds form the remaining hierarchical levels.
Some of The Best Forex Tips for Beginners
Attain some Basic Knowledge
Novice Traders can successfully master Forex trading through Online Tutorials and Distance Learning Courses. Apart from there is a plethora of information available, in the form of eBooks, Training Simulators, and Certifications from recognized financial institutions. It is advisable for readers to beware from various scams and pursue generally free training -articles, books, and professional strategies.
Adopt a Methodology
Forex Trading is not only based on speculations, instincts calls, and guts; rather a specified set of economic fundamentals and methodologies are followed. The major economic indicators and market forces that significantly shape the Forex scenarios are: Government (Fiscal and Monetary Policies and Interest Rates); International position of a specific country (imports, exports, Trade and Capital flows of international currencies in a specific country); Overall expectations and sentiments of investors, financial experts and consumers for a specific market or country; and lastly Demand and Supply factors for consumer goods, investment and currencies.
As far as the methodologies are concerned, there are two basic approaches for successful Forex trading – Fundamental or Technical (Trend) analysis. The Fundamental approach is centered on an economical and financial analysis of a country or economy to attain intrinsic value for a specific currency. The Technical investigation is essential for reflecting market sentiments and highlighting short and long term trends (upside, downside or stagnant).
Timing is also an integral component of Forex Trading. It is imperative for traders to identify short-term and long-term trends for a specific currency. Moreover the entry and exit strategies should also be timed to reap optimal benefits from an investment.
There is a vast ocean of information on how to successfully trade in Forex markets, but the basics I have covered will be enough for individuals interested in pursuing a career in Forex trading to progress in the right direction.