Forex Basics

Forex allows for foreign products, services and investments to occur on a multi-national level. This means that corporations, governments, and individuals can purchase currency for one nation using currency from another. For example, going on vacation in Mexico and trading dollars for pesos is a small over the counter foreign currency exchange at a bank or other instutituion. This is the foundation of the forex market -- to allow multinational trade of monetary units. Because each nation essentially has a different amount attached to its monetary unit, and this value changes again when compared to another nation’s monetary unit, value can be gained or lost depending on the forex market.

The forex market is a vast global network of multiple players, both on individual and corporate levels. However, there is not a central organization (like the NY Stock Exchange). Instead, there are multiple organizations, many of which are located in New York, Tokyo and London. These institutions handle the largest transactions and function like a currency exchange window at a local bank. A person gives money in one monetary unit and removes money in another monetary unit. The value of the money indicates the value of the trade, similar to trading stocks and bonds. The forex market trades trillions of dollars almost daily. It surpasses the stock market of any single nations, and may even surpass the value of all stock markets combined. This is because the trades are simplified. They are simplified because there is no insider trade information, unlike the stock market. No company can single-handedly destroy or enhance the value of the dollar or yen or British pound in the forex market. Instead these values are dictated by the foreign currency trade and that is predicted by the forex fundamental analysis, which uses national economy indicators.

Forex Fundamental Analysis

For the basics, a forex fundamental analysis is the trends, information, status, and indicators of a nation’s economic health. This is generally based on absolute purchasing power parity and relative purchasing power parity. The forex fundamental analysis examines the gross domestic product (GDP), which determines the growth or recession rate of a national economy. This economic indicator is also related to personal income, consumption, and expenditure. Consumer spending includes multiple dimensions such as retail sales, automotive sales, consumer price and consumer confidence indices and so forth. The amount of money that a nation spends is related to the ability of that nation to trade goods at home and abroad. Another economic indicator is the trade balance, which is the difference between imports and exports of a nation within a timeframe. The forex fundamental analysis must also take into account the industrial sectors of a particular nation. This is who is manufacturing what products for sale to which nation. The industrial production indicator is related to durable goods orders, business inventories, and supply management. The forex fundamental analysis uses construction data as another economic indicator. This is residential unit construction, purchases, and can include mortgage rated indices. These construction factors indicate a healthy economy when homes are being purchased, which increases after a recession or depression has occurred. Thus, construction indicates a strengthening economy. There are also inflation indicators, such as the producer price index and consumer price index, which are generally used for economic analysis.

These components of the forex fundamental analysis are economic indicators which can be mathematically traced, charted, and therefore predicted. The X-factor that cannot be easily quantified and categorized but has a significant ability to control the value of foreign exchange currency markets and global currency trading is the political factors. The ability of a nation to navigate in the global political environment has direct influence on the value of a monetary unit in that nation. Furthermore, political decisions, such as changing interest rates have a direct impact on the forex fundamental analysis. Interest rates of a particular nation can control the value of the monetary unit when interest rates alter in a single nation, but do not alter in other nations that are involved in the global currency trade. So, if the U.S. raises interest rates and the UK also raises interest rates, there is little change in the forex fundamental analysis. However, if the U.S. interest rate increases, but the UK does not change their interest rate, then the dollar is stronger against the pound.

Enter Or Exit The Foreign Exchange Market

The foreign exchange market is constant, volatile, and inconsistent compared to other markets. Trading in forex has increased risk when the trader uses too much leverage. Therefore, the only time you should enter a foreign exchange market is when you have done adequate research and funds are available to trade. Research regarding the technical and fundamental analysis that occur will help you decide on the correct time to enter the market. The time of entry is important to minimize risk, and that is the main reason why research is so important. A trade should be timed correctly based on the technical analysis of the current market situations. Furthermore, entering the foreign exchange market can occur at any time, as can exiting.

Before you enter the market, you will want to make sure that you have the money to lose, and not money that is necessary for survival. That is not to say that you will lose money, but there is risk and it benefits new entrants in the foreign exchange market to be prepared to lose money. Also, be logical and level-headed. Many a millionaire has lost a fortune simply from the exhilaration of trading and making the ‘big score.’ So, take some mental preparation time before you enter the foreign exchange market.

Commit to doing research prior to entering the foreign exchange market by learning the trends of the money market and understanding how the foreign exchange signals work. Set a specific time frame for your first trading experience. This way, you will be mentally prepared to leave the market. To set a specific time frame, spend time understanding the commitments of your time it takes to enter and exit the market. Can you commit to intra-day trading, which requires hourly examination of price to value changes? Perhaps you prefer a more long term approach over days or weeks. In either case, the foreign exchange market signals are based on time sensitive data — in hourly, daily, weekly, monthly, and annual technical analysis. Use these technical analyses to time your entry and exit in the foreign exchange market by recognizing market expectations. The most important advice for entering or exiting the foreign exchange market is: if you are unsure or hesitating, then observe prior to making a decision.

Forex Technical Analysis

Forex technical analysis tries to predict price movements of currency by examining the market variables and mathematical data. This includes market participants (on the national and corporate levels), price histories, fluctuations and other trends. The forex technical analysis makes the assumption that economic trends are not randomized. Therefore, the mathematical formulas used to develop a technical analysis make the assumption that a price will move in any of three linear directions: up, down or sideways.

When a technical analysis shows that a price is trending upwards, there is an increase in the currency value and then an increase in the amount of buyers. When a price trends downwards there is the opposite impact: currency value decreases and there are more sellers. A sideways trend shows that there is little movement in the value—but that does not mean that there are no buyers or sellers of a particular currency. This is because, much like the stock market, trader perceptions create buy/sell patterns. Therefore, it is important to examine the current currency market trends, as well as the trader mentalities.

A forex technical analysis uses charting tools to graphically depict trends based on current and historical information. The technical analysis may involve, but is not dependent on, fundamental analysis characteristics, such as governance and employment of the currency’s originating nation. The main benefit of technical analysis is that it is similar to your traditional stock market analysis---it shows value patterns, trends, rises, falls, and so on. In fact, many of the charting tools used in a technical analysis, such as the candles stick, is mimicry of tools used in the stock market. So while currency trading is a relatively new market for your average trader, the mathematics and chart processes are familiar.