Education

The Forex currency market is an interbank market where there is a free exchange of currencies. The name of the currency market – FOREX – translated from English means “currency exchange”

The history of the market began in 1971 when US President Richard Nixon announced the termination of the US dollar backing with gold. All this pushed the Bretton Woods monetary system to the final collapse and led to the possibility of free change in exchange rates. Thus began the era of the Forex market, which today is the largest financial market in the world with a turnover of more than 5 trillion US dollars per day. For comparison, on the NYSE, the average daily turnover is $22.5 billion, and on the London Stock Exchange, the average daily turnover exceeds $7 billion.

Until 1993, trading in this market took place exclusively between banks. That year, a consortium of the largest banks in the world, together with the company KUATRON, developed and implemented an automated system for currency dealing, which made it possible to create a worldwide network of currency trading. Today, this network unites the 13 largest banks in the world. about 900 banks from various parts of the world and about 3,000 dealing companies.

In general, the participants in the trading of the foreign exchange market are:

• commercial banks
• foreign trade firms
• investment companies and funds
• central banks
• brokerage companies
• individual traders.

The main feature of this market is that when you buy or sell any of these financial instruments, you do not receive them physically. Well, as if when buying a ton of oil, it would be brought to you at the door. No, it doesn’t work that way here. In this market, you do not buy an asset directly but enter into an instant contract with a broker for the difference in the price of this asset (the so-called CFD contract).

Under this contract, the broker allocates you a certain amount of credit, and you only give a temporary deposit, which is 10, 100 or even 500 times less than the amount of the contract. And when you close the deal, the loan is automatically returned to the broker, you release your collateral, and the financial result from your deal is added to or subtracted from the amount of your total deposit.

• First, the most developed market in terms of communication system
• It is also the largest market in the world in terms of turnover, which means there is enough money for everyone
• The forex market works around the clock, except on weekends, so you choose when it’s convenient for you to trade
• Opening and closing your trades is instantaneous and you will understand why this is so important when you trade.
• And the most interesting thing is that you can carry out transactions from any place in the world where there is an Internet

A currency pair represents the quotation of two distinct currencies, where the value of one is quoted in relation to the other. The initial currency listed in a pair is termed the base currency, while the subsequent one is referred to as the quote currency.

The purpose of currency pairs is to measure the value of one currency against another—the base currency compared to the quote currency. It reflects the quantity of the quote currency required to acquire a single unit of the base currency. Each currency is denoted by an ISO currency code, which is the three-letter code associated with it in the global market. For instance, the ISO code for the U.S. dollar is USD.

Here is a list of the most popular, actively traded currencies in the forex market, as well as their abbreviations used by traders and the percentage of the total number of trading operations:

• US dollar USD 40%
• Euro EUR 20%
• Japanese Yen JPY 10%
• British Pound GBP 10%
• Swiss franc CHF 10%

The first currency in the pair is called the base currency and the second currency in the pair is called the quote currency.

For example, EUR/USD is always written with the euro as the base currency, and not vice versa. This is due to the standards that have been set across the board, with each currency ranking relative to the other. If one currency ranks higher than another, when quoted as a currency pair, it gets the status of the base currency.

In Forex trading, various quotations are used to represent the value of currencies. These figures can be confusing, but they essentially express the value of one currency in terms of another. This is why we talk about currency pairs, where one currency’s value is assessed against another. For instance, consider a base currency as a commodity, like a pink piglet, and the other currency as the money used to purchase it.

Quotations can be direct, indirect, or cross-rates:

• Direct quotations express the value of a currency in US dollars. For example, in the pairs USD/CHF, USD/JPY, and USD/CAD, the US dollar is the base currency.
• Indirect quotations apply to the euro, British pound sterling, Australian dollar, and New Zealand dollar, where these currencies are the base instead of the quote when paired with the dollar.
• Cross-rates establish the relationship between two currencies through the US dollar, without including the US dollar in the pair.

A “point” refers to a change in the asset’s value by one in the last decimal place. For example, if the Eurodollar moves from 1.1300 to 1.1301, it means the euro has risen against the dollar by one point. This term is synonymous with “pip.”

In currency pairs, the point is usually the fourth decimal place, except for the yen, which only has two decimal places. Significant changes are measured in patterns of 100 points or big patterns of 1000 points.

A “lot” is the transaction amount, a multiple of the minimum lot set by the broker. For the USD/JPY pair, a standard lot is $100,000, a mini-lot (0.1 lot) is $10,000, and a micro lot (0.01 lot) is $1,000. The exact cost of lots varies by currency and is determined by the broker.

Technical analysis employs mathematical techniques to create indicators that serve as filters for identifying specific market characteristics.

Essentially, these are the mathematical maneuvers utilized in financial markets.

The cornerstone of technical analysis is the technical indicator, which is a visual depiction of price flow’s mathematical manipulation.

A plethora of indicators exists, and much like personal tastes in food, there’s no definitive right or wrong choice. It all hinges on your ability to devise an effective trading strategy based on these elements.

Technical indicators are categorized into four fundamental groups:

• Trends: Indicators that predict the likely direction of price movement. Popular trend indicators include moving averages such as SMA, EMA, and VMA.
• Oscillators: Indicators that forecast potential pivot points in the price chart. Oscillators function well in both trending and non-trending (flat) market conditions, unlike trend indicators, which are trend-dependent. Renowned oscillators include RSI, MACD, and Stochastics.
• Volatility Indicators: These indicators evaluate the expected extent of price movements. In the Forex market, volatility signifies the rate of price fluctuation, which is evident from the highs and lows formed over a certain timeframe. The range between the highest and lowest prices indicates volatility.
• Special Indicators: This group encompasses indicators that are not related to cost or market factors. They will be covered in future courses, but for now, it’s important to be aware of their existence.

Fundamental analysis is a widely utilized method for forecasting the price trends of assets in the forex market. It’s often contrasted with technical analysis, yet both can be combined effectively.

Fundamental analysis delves into price dynamics by examining a variety of economic, financial, and global factors, as well as their interconnected impacts on price movements.

Core Principle of Fundamental Analysis

The premise of fundamental analysis lies in the belief that forex market prices mirror the interplay of supply and demand, shaped by economic fundamentals. This contrasts with technical analysis, which focuses on historical price patterns without considering the influence of fundamental factors on market supply and demand. Fundamental analysis is favored by long-term investors due to its incorporation of macroeconomic and political developments, which are typically released less frequently than once a week. However, it’s generally not suitable for short-term trading, with the exception of news-based trades, as it doesn’t reflect immediate market shifts.

Fundamental analysis considers a range of macroeconomic variables, significant political occurrences, economic-themed rumors and news, as well as the behavior of market participants, to predict future price trends, primarily for long-term investment horizons, often extending beyond three months.

The complexity of fundamental analysis is its primary challenge, given the multitude of factors involved and the difficulty in analyzing their interplay. This complexity is why only about 10-20% of traders employ this method.

Before engaging in fundamental analysis, it’s crucial to thoroughly research the asset in question and all related economic events. An economic calendar is a useful tool in this process.

Categories of Fundamental Factors

Fundamental factors influencing market shifts fall into these groups:

• News
• Indicators
• Market Indices

Central bank interest rates are a focal point of fundamental analysis. Other key factors include GDP, inflation, economic growth rates, industrial production and orders, retail sales, and credit volumes, among others.

Forex indicators, also known as technical indicators, are invaluable tools for traders, aiding in forecasting market direction. They play a crucial role in technical analysis, with the selection of an indicator tailored to the market context, its application, and the principles behind its calculations.

Technical indicators streamline the technical analysis process, a vital component in crafting trading strategies, by offering insights into potential market movements based on historical price data.

Functions of Technical Indicators:

• Identify the presence and direction of market trends;
• Generate trading signals, pinpointing entry and exit points in Forex;
• Act as dynamic support and resistance levels.

It’s essential to note that indicators are effective when the market exhibits a trending behavior. Traders often rely on established indicators while also exploring new ones, with their choice influenced by market conditions, application in trading, and the methodology behind their value calculations.

Types of Technical Indicators:

Trend-following indicators: These indicators mirror price trends and are integrated into chart windows.

Popular examples:

• Simple Moving Average (SMA): Calculated by averaging the closing prices of an asset over a specified number of periods.
• Stochastic Oscillator: Indicates the current price’s position relative to its historical range over a defined period.
• Relative Strength Index (RSI): Measures the magnitude of recent price changes to evaluate overbought or oversold conditions.

Moving Averages Varieties:

• Weighted Moving Average (WMA): Assigns greater importance to recent data.
• Exponential Moving Average (EMA): Also prioritizes recent data and responds swiftly to price fluctuations.
• Variable Moving Average (VMA): Considers both the values of indicators and their significance.

Oscillators: Suited for range-bound markets without a clear trend.

Volume and Market Sentiment Indicators: These indicators assist traders in gauging the prevailing sentiment in the market, typically represented by the ratio of sales to purchases.

Notable indicators:

• Speculative Sentiment Index (SSI): Assesses the market’s price dynamics mood.
• Volume Indicator: Displays the buy/sell ratio.

By understanding and utilizing these indicators, traders can enhance their market analysis and make more informed trading decisions.