HISTORY OF FOREX
Currency trading and exchange has been around since ancient times, with evidence of coinage exchange appearing in Ancient Egypt as early as 259 BC. The earliest was the bartering system where people exchanged goods for services, people typically traded things such as livestock, skills, talents, grains, agriculture and even people.
With the bartering system, people traded things they didn’t need for things they wanted or needed. For example, the hunter might trade 10 rabbits for the carpenter to fix his roof. The bartering system may have been very easy to establish; however, it was very much rigged with issues.
Issues with the Bartering System
The bartering system was abandoned for a more intermediate commodity system. Example:
Contrary to popular belief, precious metals have rarely been used outside large societies in the form of trades, due to them being very scarce and hard to mine. The Gold in particular has only been used as currencies for a few relatively brief periods in history.
Advantages of the Coinage System
Disadvantages of the Coinage System
The Chinese invented paper money in the form of notes, or IOUs around 700AD. It became too cumbersome to carry around coins. The people of China allowed private institutions to store their gold and silver coins in exchange for paper notes.
Advantage of paper notes was that it was very easy to transport due to being light. Foreign trades became easy now you could give specific denominations of what you want to exchange. These papers could also be easily counterfeited. It was around the 1600s that paper monies were introduced in the west when the bank institutions were created to store gold.
THE GOLD STANDARD
After world war I, it was agreed by various countries that every paper currency would be backed by Gold. For example, 1 dollar will equal 11/2 pound of Gold.
Advantages of Gold
Disadvantages of Gold
THE US DOLLAR (USD)
During the second world war, people began to abandon the gold standard, as they began to print a lot of money to fund their military project. As they printed more money the value of then gold to Dollar ratio went down even more. After world war II, countries came together to determine and monitor trading system that would work.
They wanted something that would allow them to trade and keep currency exchange rate fixed. They also wanted countries to stop printing more money when they needed it. In 1914, 44 countries came together to bring up with a monetary system that would be advantageous in foreign trade because US held 2/3 of all the world gold at that time, the USD was then chosen to become the world reserved currency, which meant that each other country will then peg their money to the USD and the USD will then be peg to Gold. Till date, The USD is still utilized as the world reserved currency.
As a result, in the actual forex market, you will notice that the USD has the highest amount of volume when it comes to trade, because most countries tend to deal with the USD when it comes to trading.
IMF and the World Bank
FLOATING EXCHANGE RATE
Nowadays, many country currencies are not backed by anything of value anymore, instead, currencies values are determined by the floating exchange rate. Floating exchange rate regime are not influenced by the government but instead, to the forces of demand and supply in the FOREX MARKET. Or FX, Because the currency’s value in a floating exchange rate regime are determined by supply and demand, their value can change freely and are determined by the foreign exchange market. Countries that are included in the floating exchange rate system include US, Canada, England. China does not participate in the floating exchange rate regime, instead their currency is pegged to a basket of currencies.
Market Participants and Influencers
MAJOR MARKET PARTICIPANTS
The market participants are what causes the prices to move. They are the ones who makes the price to move. They are the ones who make the trade set-up in over 80% of the forex market volume transactions. Retail traders are less than 20% of the transactions and in general, whatever the retail traders do barely have any major impact on the movement of prices.
THE CENTRAL BANKS
CENTRAL BANKS are some of the most influential players in the forex market. The central bank monitoring policy generally outlines the particular country vision for growth. How they are tackling issues like inflation, Deflation and their position on interest rate. It is very important to know what the central bank position is o interest rate, because this is what determines the money supply for the country and its currency rate globally. So, when you decide to trade the news, you want to make sure to pay close attention to any high impact news that has to do with the interest rates such as:
Unlike retail traders, central banks don’t pray to make profit. They have different purposes for what they do in the forex market. For example, the bank of Japan has to keep the value of the Japanese Yen low because the Japanese economy is depending on the export of Japanese products, and other countries won’t want to order from Japan if their products are too expensive. So, when the yen value goes up, the Japanese bank buys other currencies against the yen in order to lower the yen’s value. As you see, this has nothing to do with making profit, because in this case, they would have taken a significant loss. This is just one example of how the central banks play a major role in government’s monetary goals for that particular country.
BANKS AND FINANCIAL INSTITUTIONS
Banks are involved in foreign exchange for many reasons, whether it’s for business transactions or personal use. They deal with a large amount of foreign exchange at any time. One of the main players is the interbank. Inter banks creates the most volume that causes the market to move the way it does.
During major holidays and at certain seasons such as the summer, the market does not behave normally and this is not always the best time to trade. This is because the inter banks markets go on holiday vacations, with such major player out of the market, you will not see as many huge shifts and movements that causes the market to TREND or keep the momentum moving. As a result, this is the worst time to trade. In otherward, when they go on vacation, you need to go on vacation. Use that time to dig deep and study more on trading strategies, fine tune your trading plan and so on. Some of these major holidays including Christmas, thanksgiving, Easter, and New year. If there’s a major holiday in Japan, then don’t trade the Yen pair for that day. If there’s a major holiday in the UK, then don’t trade any of the GBP or EURO pairs for that day. Similarly, if there’s a major holiday in the US, then stay away from the USD pairs.
Retail traders include people who do not trade for company like you and I, who also use risk-management strategies and hopes of personal gains. And do not have a role of deciding the trend. It is very important to know that retail investors are at the bottom of the forex market. Many people come into the forex market thinking that they can predict the market and what it’s going to do. You will not be able to predict the market; your job is to find the trends that arise and follow them closely. Get ahead of them, get underneath them, but do not try to predict the market.
WHAT IS FOREX?
Foreign exchange is perhaps the largest market in the world with an average daily volume of US$ 6.6 trillion, according to the 2019 Triennial Central Bank Survey of FX and OTC derivatives markets.
HOW DO YOU PROFIT IN THE MARKET?
Forex is just like a real estate, where you buy a property, then you hold it for a little while then you sell it and make a profit. It is the same thing in forex, except for the fact that it’s a much faster process.
You buy into a certain currency, such as the euros, you hold on for a little while, and then you sell it for a different pair such as the USD and as a result, you make money if your Euro exchange rate went up while you held it. Depending on how much you bought at that time, will determine how much you get paid for that one-time purchase. Until you learn the skills and psychology of forex trade, you will be Gambling.
WHAT IS TRADED IN THE FOREX MARKET?
The simple answer is money. We exchange one currency pair for another in the forex market. Not physical money, you essentially buying and selling shares in different economy. It is also essential to refer to the money as currency-pairs because that’s actually what we are doing.
Mostly traded currency in the forex market
The healthier a country’s economy, the better it is for that county’s currency.
HOW A FOREX TRADE WORKS?
Similar to your vacation pocket money, forex trading always involves two currencies. The base currency is the currency you are buying or selling, and its price is given in the quote currency.
One Euro costs 1.05 US dollars.
Imagine that you believe the EUR will rise in value relative to the USD. You buy EUR 100,000, paying USD 105,000 from your trading account (regardless of the account’s denomination). The EUR indeed rises a great deal, to 1.0525 at the end of the day. Therefore, when you close your position by selling the EUR 100,000, you receive USD 150,250, earning USD 250.
You might ask, “where did I get USD 105,000 from in the first place?” and the answer might be that you have USD 2,000 in your trading account, and your broker enables you to borrow USD 100 for each US dollars in your account. With this 100:1 margin, you can enter forex positions with values of up to USD 200,000. If you did have USD 2,000 in your account and earned USD 250, you earned12.5% of your account value on this trade.
Now imagine that in the example above, the Euro did not rise; indeed, instead it fell to 1.0475 at the end of the day. Therefore, when you close your position by selling the EUR 100,000, you receive USD 104,750, loosing USD 250.
In FOREX, currencies are traded in pairs, the base currency and the quote currency.
MINOR PAIRS (CROSSES)
EUR/USD = 28%
USD/JPY = 14%
GBP/USD = 9%
AUD/USD = 6%
USD/CAD = 5%
USD/CHF = 4%
EUR/JPY = 3%
EUR/GBP = 3%
TERMS IN FOREX
This isn’t the market to be looking for major moves.
Not many market participants are trading heavily, so we have higher spreads. This is not a time to be looking for magnificent set up. Although, you can get some nice trade – set up from here.
NEW YORK SESSION
WHAT IS THE BEST TIME TO TRADE?
The best time to trade is going to be during the sessions overlap. Two major world markets open at the same time = High volatility, High Liquidity, and High Volume. Example:
WHAT IS THE WORST TIME TO TRADE?
The consolidated parts show little or nothing going on in the market. Sideways movement. Consolidation is what happens at the end of the New York session. When the overlaps is done, close out your profit. Link to find out what time the session is open for you. www.Forex.timezoneconveter.com
When looking at the market, Forex traders use the same two basic forms of analysis that they use for the stock market: technical analysis and fundamental analysis. While technical analysis advocates state that all you need to know about an asset is reflected in the price trends, fundamental analysis focuses on the intrinsic value of an investment.
Fundamental analysts look at everything but the price. Instead, this method implies that you can take rational conclusions and determine an asset’s fair market value by looking at the factors that influence it. Performing this type of analysis can sound a bit complicated – after all, a country is not like a company, where you can pull out the balance sheet and draw conclusions from it. However, certain factors, such as the state of the economy, the unemployment rate, or political changes, can influence the country’s monetary policy and that is reflected in the evolution of the currency.
The main premise behind fundamental analysis is that the value of an asset isn’t always reflected in the price and that, by performing this analysis, they can discover the fair market value of an asset and identify trading opportunities. Thus, if an asset’s fair market value is higher than the cost, that asset is undervalued and it should be bought.
Fundamental Forex analysts believe in four basic principles:
WHAT FACTORS CAN AFFECT CURRENCY VALUE?
Fundamental analysis is generally perceived as more theoretical because it implies understanding the underlying factors that influence the value of a security, which is why it’s mostly advanced traders who tend to use it. When establishing a currency’s intrinsic value, fundamental analysts take into consideration the following factors:
By interpreting economic data, fundamental analysts are able to foresee some shifts in the economic situation of a certain country and therefore its currency. This economic data includes: Interest rates, Inflation, Gross domestic product (GDP), Retail sales, Industrial production, Consumer Price Index (CPI).
Apart from following these main indicators, fundamental analysts keep economic calendars where they monitor other important events, such as:
In very simple terms, if a country has a good economy, its currency will likely have a higher value, but if the economy shows signs of regression, that will be reflected in the lower currency value.
A country’s political climate has a major influence on the exchange rate, which is why fundamental analysts keep an eye out for important events like:
In general, when investors believe that the policies of an elected leader will encourage economic growth, the currency value will rise. And the other way around, when a leader is expected to cause political instability, the currency value will drop. For example, when Silvio Berlusconi announced he was running again for prime minister in Italy, the market quickly reacted and the euro weakened.
These factors do not intervene with currency value very often, but when they do, they have a major impact. Typically, it’s easier to work with social circumstances, which are somewhat easier to predict, such as strikes, revolutions, or even coup d’états, because if you monitor a region carefully you will notice signs of unrest. Natural disasters, however, are much more problematic.
Even if the weather forecast gives traders some insights about higher risks of flooding, droughts, or hurricanes, earthquakes are impossible to predict and they can destabilize the currency. For example, when Japan was hit by a major level 9 earthquake in March 2011 (the largest in modern history), it cost the country 5% of its GDP. For the first time since 2000, all G7 nations had to carry out coordinated efforts to stabilize the yen.
THE MARKET REACTS TO NEWS
Another idea behind fundamental analysis is that the market reacts to news, which breaks previously formed patterns. For example, if a reputable authority issues a report on employment data in the United States, that report could be an indicator of the country’s economic health. Traders who rely on fundamental analysis use the news to adapt their strategy, but they don’t just consider the impact of the news on the dollar, but also on the other currency in the pair.
As important as the news may be for traders, reacting quickly isn’t always wise. For example, if a head of state makes a seemingly controversial statement that goes against their usual political and economic beliefs, traders should first wait and see what happens. Many times, that statement was misunderstood or may be clarified. The same goes for reports because the numbers can be revised soon after they were issued. When it comes to news and data, there’s usually a lot of commotion before it’s released, as the market sentiment tends to lean in one direction. Then, it’s more a matter of meeting expectations than the data itself.
Should your trading strategy be based on fundamental analysis? Following the Forex economic calendar and watching for important global events that could shift financial markets is a great way to boost your trading education and make informed decisions. If you look at the numbers and understand what they mean, you will also be able to manage risk substantially. And, even though technical and fundamental analysis may be on opposing sides, you don’t have to choose just one. You can always combine the two.
Technical analysis is the study and use of price information on the charts to determine the future price movement of a financial asset. Technical analysis has three premises:
The market discounts everything because all factors that can possibly affect price are captured in the price. Price is therefore a function of demand and supply dynamics, and this explains why demand will be generated by increased buying (due to fundamentally strength), or supply excess will occur due to increased selling (due to fundamental weakness). Price also factors in the herd effect: accumulation when an uptrend has been going on for some time, or panic selling when prices have been falling.
Markets move in trends (up, down or sideways), and will keep moving in a defined trend until an external force causes that trend to change. This is more like Newton’s first law of motion, which is a natural law. So traders will more likely follow a trend, until a factor emerges that causes them to change their sentiment.
History also tends to repeat itself. Why does history repeat itself? This is principally due to human psychology at work in the markets. Human reaction to certain events does not change. If traders see that a descending triangle has led to a fall in prices in the past, they will naturally sell once they see the same pattern on the charts.
WHAT DOES TECHNICAL ANALYSIS ENTAIL?
Technical analysis studies price charts to determine future price movement. Various methods are used to pull this information. You can identify chart patterns, or patterns formed by candlesticks/bars. These are methods that involve the use of price action. You may also use tools and indicators to get the information you seek. Technical analysis is vast and it involves some level of training to be able to use it. The beauty of technical analysis is that it can be used on all traded financial assets. The outcome of a symmetrical triangle in a gold chart is just the same as you would get on a US stock. This is unlike fundamental analysis, where assets do not all respond to the same fundamentals. The fundamental factors that move stock prices are not the same as what moves crude oil prices.
COMMON METHODS OF TECHNICAL ANALYSIS
Technical analysis aims to identify the prevailing trends in the market. The trend can be a major trend, intermediate trend or minor trend, and these can occur on a short-term, medium-term or long-term basis.
In identifying the trend, two main pathways are used to achieve this. These are:
Common chart patterns are triangles, wedges, flags/pennants, tops/bottom patterns:
Candlestick patterns commonly use a combination of two, three or four (and sometimes five) candlesticks to identify what traders on both sides are doing in the market. Each candlestick pattern usually tells a story. Here are some common candlestick patterns:
Commonly used support-resistance tools are:
There are times when use of price action may not suffice, and it may be pertinent at this stage to add technical indicators to the mix. Indicators may be trend indicators, momentum indicators, volume indicators and custom indicators. Some indicators provide a signal before price moves (leading indicators), while others tend to provide signals as the market is already in motion (lagging signals).
The snag with indicators is that they are subject to individual interpretation, so a trader who cannot interpret the signals generated by indicators, or who interprets the signals wrongly, may not get the desired outcomes. Correct use of indicators is therefore a must if they are to work properly. - Trend indicators: moving average (simple, exponential, weighted), parabolic SAR, envelopes, average directional movement. - Momentum indicators (oscillators): Stochastics, moving average convergence divergence (MACD), DeMarker, etc. - Volume indicators: Volume bars, On Balance Volume, etc.
WHAT ARE THE BEST INDICATORS TO USE?
With technical analysis, it is difficult to point out which indicators are really the best. All indicators will typically work as the trader wants. It is therefore not in how inherently good or bad an indicator is, but rather a function of application. A good indicator used wrongly by a trader will not produce the desired results. Be that as it may, it must be said that indicators and tools that can detect support and resistance are about the best friends you can have as a trader who uses technical analysis. The markets tend to respect support and resistance levels, and these can be used for trade entries and exits.
As such, you will find usefulness with the following indicators/tools:
It is not just support and resistance that a technical analyst must consider. Prices move in trends, therefore you have to know how to trade in a trend (uptrend or downtrend), or how to trade when the market is moving sideways or consolidating. For these situations, you will need to know how to use the following indicators:
Volume is also a key determinant of a trend. Information as simple as knowing whether volume is heavier on the buying side or on the selling side, can make the difference between success and failure in analyzing an asset technically. So volume indicators to use are:
CAUTIOUS USE OF TECHNICAL ANALYSIS
Technical analysis must be used in conjunction with fundamental analysis. This is because trends are formed by the news. The market players who drive price will quickly respond to a change in interest rates, and this will take pre-eminence over any patterns formed on a chart.
A common market mantra is: trigger fundamentally, enter technically. Therefore, technical analysis should only be used to identify entry and exit points in a trade, following the direction that the news points to.
There are four main types of forex trading styles: scalping, day trading, swing trading and position trading.
Different trading styles depend on the timeframe and length of period the trade is open for.
Scalping is the most short-term form of trading. Scalp traders only hold positions open for seconds or minutes at most. These short-lived trades target small intraday price movements. The purpose is to make lots of quick trades with smaller profit gains, but let profits accumulate throughout the day due to the sheer number of trades being executed in each trading session.
This style of trading requires tight spreads and liquid markets. As a result, scalpers tend to trade major currency pairs only (due to liquidity and high trading volume), such as EURUSD, GBPUSD, and USDJPY. They also tend to trade only the busiest times of the trading day, during the overlap of trading sessions when there is more trading volume, and often volatility. Scalpers look for the tightest spreads possible, simply because they enter the market so frequently, so paying a wider spread will eat into potential profits.
The fast-paced trading environment of trying to scalp a few pips as many times as possible throughout the trading day can be stressful for many traders and is hugely time-consuming, given the fact you will need to focus on charts for several hours at a time. As scalping can be intense, scalpers tend to trade one or two pairs.
For those that are not comfortable with the intensity of scalp trading, but still don't wish to hold positions overnight, day trading may suit.
Day traders enter and exit their positions on the same day (unlike swing and position traders), removing the risk of any large overnight moves. At the end of the day, they close their position with either a profit or a loss. Trades are usually held for a period of minutes or hours, and as a result, require sufficient time to analyze the markets and frequently monitor positions throughout the day. Just like scalp traders, day traders rely on frequent small gains to build profits.
Day traders pay particularly close attention to fundamental and technical analysis, using technical indicators such as MACD (Moving Average Convergence Divergence), the Relative Strength Index and the Stochastic Oscillator, to help identify trends and market conditions.
Unlike day traders who hold positions for less than one day, swing traders typically hold positions for several days, although sometimes as long as a few weeks. Because positions are held over a period of time, to capture short-term market moves, traders do not need to sit constantly monitoring the charts and their trades throughout the day.
This makes it a popular trading style for those who have other commitments (such as a full-time job) and would like to trade in their leisure time. However, it is still necessary to dedicate a few hours a day to analyze the markets. Swing traders (as well as some day traders) tend to use trading strategies such as trend trading, counter-trend trading, momentum and breakout trading.
Position traders are focused on long-term price movement, looking for maximum potential profits to be gained from major shifts in prices. As a result, trades generally span over a period of weeks, months or even years. Position traders tend to use weekly and monthly price charts to analyse and evaluate the markets, using a combination of technical indicators and fundamental analysis to identify potential entry and exit levels.
As position traders are not concerned with minor price fluctuations or pullbacks, their positions do not need to be monitored the same way as other trading strategies, instead occasionally monitoring to keep an eye on the major trend.
WHAT IS SCALPING
Forex Scalping is a short-term strategy; the goal is to make profit out of tiny price movements. The best forex scalping strategies involve leveraged trading. Leverage let's traders borrow capital from a broker in order to gain more exposure to the Forex market, only using a small percentage of the full asset value as a deposit. This strategy increases profits but it can also enhance losses if the market does not move in needed direction. Therefore, forex scalpers are required to keep a constant eye on the market for any changes.
Best Scalping Strategy
Bollinger Bands is used to indicate areas of market volatility. Bollinger Bands rely on a simple moving average (SMA) with a standard deviation set above and below to show how volatile a market might be. Traders believe that wider standard deviations indicate increased volatility in and vice versa, if the bands are narrow it might mean that the market is stable.
Bollinger Bands can be divided into two categories of interest to us:
Moving average (MA) - A moving average is a mathematical formula that helps to spot emerging and common trends in markets, represented as a single line showing an average. The reason for calculating the moving average of a stock is to help smooth out the price data by creating a constantly updated average price.
So for example, for a 30 -day moving average, the multiplier would be [2/(30+1)]= 0.0645. Then traders should use the smoothing factor combined with the previous EMA to arrive at the current value.
Stochastic oscillator - is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time. Indicator is popular for generating overbought and oversold signals.
The Stochastic Oscillator chart usually consists of two lines: one represents the actual value of the oscillator for each session, and the other represents its three-day simple moving average. Since price is believed to be following momentum, the crossing of these two lines is considered a signal that a reversal may be in progress, as it indicates a large shift in momentum from day to day.
The divergence between the Stochastic Oscillator and the trending price action is also seen as an important reversal signal. For example, when a bearish trend makes a new lower low, but the oscillator makes a higher low, it could be an indicator that bearish momentum is running out and a bullish reversal is brewing.
You can see in the chart above.
PARABOLIC STOP AND REVERSE (SAR)
Parabolic stop and reverse (SAR) - is used to determine the price direction of an asset, as well as draw attention to when the price direction is changing, also known as "stop and reversal system". On the chart appears as dots above or below the market price.
A point below the price is considered a bullish signal, and vice versa - a point above the price is used to illustrate that bearish momentum is in control and that it is likely to remain downtrend. When the dots are swapped, it means that there is a possible change in the direction of the price. For example, if the dots are above the price when they roll over below the price, this could signal a further rise in price.
As the share price rises, the dots will also rise, slowly at first, and then picking up speed and accelerating along with the trend. SAR starts to move a little faster as the trend develops, and soon the points catch up with the price.
RELATIVE STRENGTH INDEX (RSI)
Relative strength index (RSI) - is a momentum indicator, uses a range of between zero and 100 to assess whether the market's current direction might be about to reverse. It uses levels of support and resistance – set at 30 and 70 respectively – to identify when the market’s trend might be about to change direction.
When the RSI rises above 70, it probably shows that the market is overbought and a trader may open a short position. If the RSI falls below 30, it probably indicates that the market is oversold and a trader should open a long position.
Pros of Stock Scalping
Cons of Stock Scalping
WHAT IS DAY TRADING
When you day trade the forex markets, you are looking at short-term time frame. This time frame can range from the 15-minute chart or lower up to the 1-hour chart. But make no mistake, when you day trade forex, you will also look at the 1-day or even the 1-week time frame.
As a day trader, you need a good margin account. This is because you will be trading on leverage. Therefore, having sufficient trading capital is important. You also need to acknowledge the fact that day trading requires your time. You cannot set up a trade and walk away and expect it to make money for you.
Types of day trading strategies to use in the forex market are:
There are different approaches you can apply for trading forex. But all trading strategies can be one of the following types as below.
This is a forex day trading strategy that focuses on rapid price action movement. There is a high risk of losing when using this strategy.
This trading style requires minimal time to set up. Many mechanical trading systems use the breakout method. Profits and losses are quick with the breakout trading. You will not be using too many indicators with breakout forex trading strategies. Therefore, traders should be adept at reading price charts. Price action will play an important role.
There are also a few breakout trading methods that use indicators as well. Volatility is your best friend when using a breakout day trading strategy.
The trend trading style requires a bit more time to evolve. You may have to wait for a day or two until the right trading conditions appear in the market.