So you decided to get your feet wet on the world’s largest financial market? Congratulations! Forex trading can be a very lucrative undertaking if you know how to analyse the various factors which influence exchange rates on a daily basis.
However, before you dig deeper into the world of trading and start to gain experience with trials and errors, let’s cover five essential things you should know about Forex which makes it such a great financial market to participate in.
1) Forex is Open Around the Clock
Unlike regulated stock exchanges which have strict open market hours, the Forex market is open around the clock. Forex is an over-the-counter spot market in which currencies are traded during Forex trading sessions, the most important of which are the London session, the New York session, the Sydney session and the Tokyo session. Since these financial centres span across different timezones, there’s always a market somewhere ready to buy and sell currencies. For example, if you’re located in the United States (and a night owl), you can trade the Asian session in the middle of the night and never miss a single trading opportunity.
As Phillip Konchar, Head Tutor at My Trading Skills – an online trading courses provider explains, “There is no central exchange for Forex, which means that currencies are traded constantly, all the time. They’re traded across many different networks of dealers, brokers, and banks. Collectively, this type of continuous trading is referred to as over the counter, or OTC trading.”
Watch: The Basics of Forex Explained
The largest price movements usually happen during the overlap of the New York and London trading sessions, which spans from 8:00 AM to 11:00 AM EST if you’re based in the United States, or from 1:00 PM to 4:00 PM GMT if you’re based in Europe.
2) Start Trading on Major Currencies (But Don’t Ignore Exotics)
There are only eight major currencies on the Forex market: the US dollar, Canadian dollar, British pound, euro, Swiss franc, Japanese yen, Australian dollar and New Zealand dollar. While these are the most-actively traded currencies, Forex traders can also place trades on less-liquid currencies, called “exotics”, which are often ignored by retail traders and the online trading community.
However, the truth is that Forex traders live on volatility. Being less-liquid than majors, exotic currencies exhibit much larger volatility which can translate into higher profits if you get the direction right. Nevertheless, if you’re just getting started with trading, your best option is to focus on majors until you gain enough experience to tackle exotics. High volatility is a double-edged sword – it can increase both your profits and losses.
3) Technical Analysis Works Great on Forex
Technical analysis has a proven track record on the Forex market. Simply said, currencies love to trend for an extended period of time, and trend-following technical tools tend to produce significant gains if used the right way. Fundamental factors on the Forex market build up gradually and lead to long-lasting currency trends which can be successfully traded with technical rules.
Famous trend-following traders, such as Bill Dunn and his Dunn Capital Management company, made impressive returns simply by following peaks and troughs in the market. A good example of the power of trend-following strategies in Forex is Dunn’s trade in USD/JPY during 1995. He caught both the downtrend in the first half of the year and the consecutive uptrend in the second half of the year.
4) Don’t Neglect Fundamentals in the Long Run
While most retail traders focus on technical analysis in trading, it’s important to note that fundamentals of a currency are what drives the exchange rate up or down in the long-term. You don’t need an MBA in finance to understand Forex fundamentals, but it will still take some time until you grasp all the nuances of fundamental analysis and how they influence currencies. Start with analysing widely-followed macro releases, such as inflation rates, economic growth and interest rates, and expand your knowledge to currency valuation models later on.
5) Forex Has Relatively Low Transaction Costs
The Forex market has relatively low transaction costs compared with other financial markets. To open a trade on a major pair (a pair that includes the US dollar and another major currency), transaction costs can go as low as one pip or even lower. Cross-pairs and exotics have slightly higher transaction costs. Many Forex brokers only charge the spread as the transaction costs of opening a trade. The spread represents the difference between the bid and ask exchange rate of a currency pair and widens with less-liquid currencies.