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How To Trade Forex

The forex market also knows as the foreign exchange market is the worlds most liquid auction market. Currency pairs trade around the clock, providing opportunities to hedge exposure, assume risk and speculate. The financial instruments that are traded are referred to as currency pairs. There is a vibrant over the counter market, a futures market and even a contract for differences market. The most popular currency pairs are those traded versus the US dollar.

Currency Liquidity

The forex markets are the worlds most liquid markets with more than 5-trillion in notional value traded globally each day. Currency market trading is generally most liquid during the European time zone. New York is a very large trading hub and liquidity tends to decline around 5-pm ET. Liquidity picks up during the Australian market hours and accelerates when Japan opens for business.

The Majors

The most liquid currency pairs are those that trade versus the US dollar. The Euro, British Pound, Japanese Yen, Swiss Franc, Canadian Dollar and Australian dollar are considered major currencies when the counter currency is the US dollar. When a pair is traded without the dollar it is called a cross currency pair. There are also emerging currencies where the liquidity is less robust that the major currency pairs. Liquidity can be measured by the bid-offer spread. This is the difference between were a market maker will purchase a currency and were they will sell a currency. The wider the spread, the less liquid the currency pair.

Types of Trading Vehicles

The most liquid forex trading market is the interbank market. This is a market where major banks, central banks and large asset managers transact. Most of the transaction are over the counter trades where there is no exchange. There are also many different currency futures markets. A futures contract is an exchange traded product. The exchange acts as the clearing agent between counterparties. Many retail trades transact contracts for differences. These are leverage financial products that track the underlying movements of different currency pairs.

Spot and Forward Markets

Most of the currency transaction traded around the globe occur in the spot market. This is a transaction were the settlement will occur in two business days. If you plan to hold your trade for more than 2-business days, you will need to perform a forward transaction. When you trade a forward currency trade you are incorporating the cost to hold the trade. This cost is reflected in the forward rate which reflects the interest rates of each currencies country.

What Analysis is Used to Trade the Forex Market?

Traders will often use both fundamental and technical analysis to determine the future direction of a currency pair. Fundamental analysis includes analyzing macro information which includes interest rates, economic growth, asset flows and budget deficits. Technical analysis is the study of past prices which helps to determine future price movements. This can include support and resistance levels, overbought and oversold indicators, momentum as well as trend following. Many traders will use a combination of fundamental and technical analysis to drive their currency decisions.

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