What is Forex & Why do people trade?

Forex is short for the Foreign Exchange. The Forex market is the most liquid market in the world. It exchanges approximately $4.3 Trillion per day opposed to less liquid markets such as the New York Stock Exchange that exchanges approximately $20 Billion per day. People turn to trade the Forex markets for a variety of reasons, some which I have listed below:

• You can trade from anywhere in the world
• Most liquid market in the world
• Traders can profit whether a specific currency is increasing or decreasing in value
• Forex does not require a high initial investment
• Traders can begin with as little as $100 which makes Forex all the more popular
• High liquidity allows large amounts of leverage
• Some brokers allow leverage up to 1:1000

The goal of Forex is to buy a currency that is anticipated to gain value or sell a currency that is anticipated to lose value against another currency.

What are the four major markets to trade?

The four major markets to trade include the London Session (3am EST-12pm EST), the New York Session (8am EST to 5pm EST), the Sydney Session (5pm EST to 2am EST), and the Tokyo Session (7pm EST to 4am EST). During summer and winter months from 8am to 12 pm the London and New York session overlap.

The London Session

It is this session that 99% of traders keep their eyes on as London controls essentially the entire European market movements. Roughly 30% of all market transactions take place in the London Session. The following is important to keep in mind when trading the London Session:

• Due to the London Session overlapping with two other major trading sessions, a large portion of Forex transactions are made during this time. This leads to a massive surge in liquidity which can also lead to lower transaction costs as there will be more volume per user at the broker level
• The London Session is known to be specifically volatile for the EUR/USD (EU), as there is a plethora of European news that is released within a couple hours of the opening of this session
• Most Major movements that occur during the London Session also carry over into the New York Session
• The best times to trade the EU & GBP/USD is during the overlap of the London & New York Session Price action may slow down and trends start to change as European traders close their trades and take their profits

The New York Session

This session begins at 8am EST. This is the most traded session amongst all Forex traders, primarily due to influential market news that makes market moves occur during this session. The most commonly traded pair during this session is the USD/JPY or EUR/USD, as well as Gold sometimes.

The following is important to keep in mind when trading the New York Session:

• Major news is released in the beginning
• Every major transaction in the world involves the USD, so whenever any major news comes out which affects the USD anything that is directly related to it will move drastically
• The New York Session begins to majorly slow down after 1pm EST
• There is almost little or no movement Friday afternoons as Asian and London traders are done for the weekend

The Tokyo Session

The Tokyo Session is often referred to as the Asian session because Tokyo is the financial capital of Asia. Japan is the third largest trading center in the world, and the Japanese Yen is the third most traded currency partaking in 16.5% of all forex transactions. Overall about 21% of all transactions take place during this session. The following is important to keep in mind when trading the Tokyo Session:

• The most commonly traded pair is the USD/JPY
• The Bank of Japan (BOJ) has been known to inject massive amounts of government printed money into the markets should they feel their currency is getting too strong. This has caused the markets to move 2000 pips within 20 minutes in the past
• Liquidity can often be very thin, therefore making this session boring because of the lack of activity
• It is more likely to see movement in Asia Pacific pairs like the AUD/USD and NZD/USD opposed to pairs like the GBP/USD
• Most action takes place early in this session due to major economic data that is released. The AUD/USD is known to make large movements during this time.

The Tokyo Session

This session is starts and ends the trading week Starting on Sunday at 5pm EST and ending the week at 5pm EST. This session focuses on the volatility of AUD pairs. (ex. AUDUSD, GBPAUD, AUDJPY. Normally this session has a very low volatility compared to the other sessions.

Overview

If you are looking for times of major volatility, then look for times when two sessions overlap. Also note, trading on Fridays and Sundays can be a costly venture. Sunday is when investors are looking for the news to create a market path. Paths can often go one way Sunday and completely reverse come Monday. Same case for Fridays. NEVER hold a trade through the weekend as you are exposed to gaps in the market come Sunday when markets open due to news announced when the market is closed throughout the weekend. The only exception is if you plan on swinging a trade for an extended period of time, and it is a part of your strategy.

Three Types of Analysis

Traders often break down the analysis of the charts or Forex pairs into three different categories: Technical analysis, Fundamental analysis, or Traders sentiment.

Technical Analysis

This is reading the charts using a series of technical tools which normally involves tools that are developed using some sort of mathematical equation and using historical data to predict what will happen next.

Fundamental Analysis

This is a review of the economics and political forces that might come into play when forecasting the direction of a currency pair or tradeable instrument. Fundamental Analysis is examining the underlying drivers affecting our wellbeing such as economic health of a region in which that currency is most dominant in, interest rates, or even relationships between countries. The majority of Fundamental traders rely on news daily, weekly, or monthly to decide whether they will buy or sell an instrument.

Sentiment Analysis

Traders sentiment refers to how people can devise their own opinions over how the market is changing and where its heading to. They may do this using one of three types of charts which include Line Charts, Bar Charts, or Candlestick Charts with no real form of analysis

Technical Analysis - Using Live Data!

Trend

This is commonly used because it very clearly shows prevailing trend. The downside is these indicators typically have a delay in predicting the movements of price action which is why they have the name “lagging indicators”. These indicators work poorly in flat or ranging trends. These indicators smooth out price data but should never solely be relied upon. Examples: Moving Averages, Bollinger Bands, and Ichimoku Kinko Hyo

Support & Resistance

Support levels are levels where price has had a hard time pushing down through. Resistance levels are levels where price has had a hard time pushing up through. Plot using horizontal lines and place where price has had a hard time pushing through. Support & Resistance levels are dynamic meaning price may push past the levels only to reverse. This is a new resistance or support level now but should be coupled with old Support & Resistance levels to for a Support & Resistance Area.

Oscillators

These are used when trend is flat or ranging. Traders can use oscillators to determine whether a currency pair has entered an oversold or overbought area. Overbought and oversold simply refers to the loss of steam or pressure in any one direction over a specific period of days. The name oscillator is derived from the Latin work oscillo which means “I swing”. Examples: Relative Strength Index (RSI), Stochastics, Moving Average Convergence Divergence (MACD), and the Momentum Indicator.

Volume Based Indicators

These indicators measure the worth of a specific instrument or currency pair by determining the overall volume of transactions in any one direction by an active involvement of participants. High volume spikes can generally either change the direction of the markets or help determine a new trend. If the move lacks volume, then there will be no conviction and prices may retrace to their original starting position. These are referred to as “leading indicators” because they tend to be ahead of price action. Examples: Volumes, Money Flow Index, and On Balance Volume

Strength Based Indicators

These indicators help reduce downside risk and increase your profit potentials by indicating a strong, clear movement.. Strength indicators assist a trader in displaying the intensity of market opinion on a certain price by examining the market positions taken by various market participants. Example: ADX Indicator

Volatility Based Indicators

These indicators monitor fluctuations in currency pairs or instruments by comparing current price to historical values. Changes in volatility tends to anticipate changes in prices or can forecast a major price spike. The overall purpose of volatility based indicators is used to detect an imbalance in the markets and help traders generate a buy or sell signal. The downside is they take no account for other data in respect to price actionExample: Parabolic Stop and Reverse (SAR).

Momentum Based Indicators

These are used to determine the strength or weakness of a trend as it progresses overtime. Momentum is highest when trends start and lowest when trends change or end. Momentum indicators derives data that compares current price in relation to past price. When current prices are higher than in the past the momentum indicators will show a positive signal and vice versa. When price and momentum diverge it suggests weakness. If price extremes occur with weak momentum it suggests the end of the movement in that direction. If momentum is trending strongly and prices are flat, it signals a potential change in direction. Examples: Stochastics, Moving Average Convergence Divergence (MACD), and Relative Strength Index (RSI)

What do people trade?

When trading Forex, it is inevitable that traders will run across currencies known as “The Majors”. This term refers to the most frequently traded currencies in the world, with a list normally including the Euro (EUR), US Dollar (USD), Japanese Yen (JPY), Great British Pound (GBP), Australian Dollar (AUD), and the Swiss Franc (CHF).

In the graph below, you will find a list of the Major currencies along with their associated country and ISO Symbol. The symbol is how you will know exactly which currency you are trading when referencing a Forex Bid/Ask quote. However, it is also important to review each currencies nickname. These names will often come up in research and will be handy when communicating with other Forex Traders.