Forex is the easiest asset class to access and usually the least volatile.
Great I hear you say! Well, that depends on your character and if you are suited to slow markets. Therefore, it is always best to experiment with different products on a simulator when you first start to find out which one matches your personality best.
The forex markets are the most liquid markets in the world, trading trillions of dollars daily with a very mixed set of participants from central banks to retail traders. Forex markets are also open 24 hours a day during the working week.
The forex market consists of major currencies and minor currencies. The majors are the US dollar (USD), euro (EUR), Japanese yen (JPY), British pound (GBP), Australian dollar (AUD), Canadian dollar (CAD), and the Swiss franc (CHF). If you are new to trading, then I would only consider these for the moment!
The thing to remember when you trade currencies is that you are exchanging one currency for another at the current exchange rate, which fluctuates constantly during the day. If you buy the USD against the Euro, then you are buying the USD (the U.S Dollar) and selling the Euro currency. If this was a speculative trade, then you need positive news from America or negative news from Europe…hopefully both.
Currencies are impacted by many fundamentals such as the performance of the economy, political issues, interest rates, and the trade balance to name just a few.
The different types of currency pairs: spot rate and pairs trade
A pairs trade includes the USD in the transaction i.e., GBP/USD and a cross-rate does not include the USD i.e., EUR/Yen.
Generally, you will trade spot rate although many deals are transacted at today’s rate, and the exchange will happen in the future and this is called the forward rate and a forward transaction.
Of the currency majors two are considered commodity currencies, the Australian Dollar and the Canadian Dollar. This is due to these countries’ economies being very reliant on the price and export of raw commodities such as energy and agricultural commodities. Therefore, when commodity prices increase, generally these currencies perform well.
Commodities are mostly priced in USD so when the USD drops in value it makes commodities cheaper in local currency thereby increasing demand. Of course, when you buy goods or services from another country you need to pay in local currency!
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Technical analysis and forex brokers
Many traders use technical analysis to replace or complement their decision making and there are a variety of chart types although the majority of FX traders prefer candlestick charts.
There are an almost inexhaustible number of brokers out there, although they do vary in quality and support so be careful with your selection!
Whatever product you consider trading it is important to understand the markets, how they operate and how to trade them, plus creating a trading plan that incorporates solid risk management.
Armchair Trader readers can currently enjoy a discount on Chris Tubby’s trading courses using the discount code ARMCHAIR5% when booking. More details on Chris’ courses can be found at www.masterc.co.uk