There seems to be a lot of hype these days about investing in forex, so what exactly is it? Forex stand for Foreign Exchange Market, in a nutshell it's a market that people use to make money by exchange money between different currencies.
Forex is one of the largest markets in the world. The average daily trading volume in global foreign exchange markets is between $1.5 and $4 trillion. It's a 24/7 market that begins on Sunday evening and ends the Friday close of the New York session.
The key to forex popularity is margin. A margin is essentially collateral for a position, it insures you against trading losses. Margins allow traders to control fairly large amounts of currency with a relatively small deposit. A common margin for forex trading is 100:1, this means that you can trade currency worth 100 times the amount of your deposit.
Research is extremely important in forex trading, as it gives you an understanding of how the currency exchange market works. Research is not just something you do to get started, it's an ongoing process as the markets are constantly changing and very dynamic.
Participants in the market include banks, hedge funds, money managers, brokers, investors for companies and even the average joe who like to have control of his investments.
Here are some common currency pairs that I like to trade, each has it's strengths and weaknesses.
EUR / USD
GBP / USD
USD / JPY
EUR / JPY
AUD / USD
USD / CAD
USD / CHF
EUR / CHF
EUR / CAD
EUR / GBP
EUR / AUD
NZD / USD
To trade you will need a brokerage account and and some capital. You can theoretically start with as much as $20 in your account, but it's kind of pointless. To make a living at forex trading you would probably need more like $100,000 to begin with. This large amount would cover any losses incurred while you hone your forex trading skills. You also need to learn to control your emotions, you can't treat it like weekend gambling, you have to take risks and avert losses when they are presented.
One of the biggest parts of trading forex is speculation, looking at trends and trying to figure out where the markets will be in the near future and how that affects the value of the major world currencies.
For example, when trading between US Dollars and Canadian Dollars you would most likely look at where oil is trading. The value of the Canadian dollar is heavily bound to the price of oil since oil is one of it's biggest exports, and it exports most of it to the US. So when trading between currencies look to see what the biggest commodities and items are traded between those two regions.
When it comes to forex, economic factors play a huge role. You'll have to know what's happening when it comes to government budgets (deficits & surpluses), inflation levels, trade levels between countries and economic regions, and overall economic growth and health.
Forex algorithmic trading is used widely in the industry by hedge funds, mutual funds, pension funds and other large institutional investors due to the volume that they purchase every day. It makes sense for them to trade this way because it allows them to trade at an extremely fast speed to make the maximum amount of profit from even the most minute movements.
When something big happens in the foreign exchange market like a mortgage crisis or indicators of a recession traders start to use risk aversion. It's a behavior where traders who want to lower the risk factor in their trades start liquidating positions they have in risky assets and move to more certain ones. For example, let's say North Korea starts up a big conflict, traders would most likely more their positions away from South Korean Won (KRW) to US Dollars (USD), a much safer currency to be in.