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How to trade forex
Want to learn how to trade forex, but not sure how to start? In this article, we cover the basics of what you need to know to get started trading in the forex (FX) market. From analysing the forex market and reading FX quotes, to a step-by-step guide on how to start trading in the forex market. We will cover all this and more, to get you started on your forex trading journey.
Analysing the forex market
To understand how to trade forex, it helps to understand the background of the market. The forex market is the largest and most liquid in the world. A large proportion of the forex market’s activity is dominated by currency exchanges between large international banks. However, a small minority of the market’s activity is utilised by forex traders who attempt to take advantage of the price fluctuations that exist between currencies, with the hope of making a profit. Forex currencies are traded like any other asset class such as commodities, equities and indices.
There are two types of analysis that traders use when analysing the forex market: technical analysis and fundamental analysis. Technical analysis is the study of past prices and patterns to determine future prices movements. Whereas fundamental analysis is the study of the factors that drive valuation such as economic and political trends.
Both fundamental and technical analysis should be understood when learning to trade forex. Both of these disciplines, in addition to a trading plan, are key to learning how to trade on the foreign exchange market.
A country’s current account, inflation rates, and interest rates are among the main factors that drive foreign exchange currency valuation. There can be a considerable and immediate market impact when news and other economic data is released. Many traders utilise fundamental analysis to predict price movements and thus, inform their trading decisions.
Forex fundamental signals
- Interest rate projections. Interest rate changes are one of the most important determinants of short-term movements in exchange rates. All things being equal, a currency with a high-interest rate would tend to appreciate against low-interest rate currency. This is because currency pairs carrying a higher interest rate tend to attract more capital investment in comparison to those with a lower interest rate.
- Economic statistics. The market knows in advance when various statistics will be reported and economists put considerable effort into predicting these figures. When the figures are released, dealers are ready to pounce. If the figure is significantly different from estimations, currencies could move significantly in a short amount of time.
- Central bank intervention. Central banks are prominent players in the currency markets. Occasionally they enter the market to move exchange rates in a particular direction. Central bank intervention is most successful when done on a coordinated basis. For example, if the US Federal Reserve, the European Central Bank and the Bank of England are all buying US dollars, it is unlikely that traders will short the US dollar. Although over the long-term, it is difficult and expensive for central banks to stand in the way of secular trends.