The Forex Currency Market is the world’s largest financial trading market. This foreign exchange is a true 24-hour market from Sunday 5 PM ET to Friday 5 PM ET, trading begins in Sydney, Australia, and moves around the globe as the business day begins, first to Tokyo, then London, and New York. Unlike other financial markets, traders can respond immediately to currency fluctuations, whenever they occur - day or night
The Forex Currency Market trades currencies in pairs, buying one currency and selling the other like the Euro/US Dollar (EUR/USD) or US Dollar / Japanese Yen (USD/JPY). Profit or loss depends on the spread of the relative value of each currency and are constantly changing every second of every day. Unlike stocks or futures, there's no centralized exchange for Forex. All transactions happen via phone or electronic network
Trading in currency comes from two sources:
- Speculation for profit (95%).
- Foreign trade (5%). Companies convert profits from foreign sales into domestic currency and buy foreign currency to conduct business in foreign countries.
It is argued that the high level of speculation is ultimately a stabilizing influence on the market. Well capitalized "position traders" and large hedge funds are the main professional speculators and perform the important function of providing a market for transferring risk from those people who don't wish to bear it, to those who do. Well capitalized traders are able to weather the minor fluctuations in the market. Individual traders act as "noise traders" and have a more destabilizing role than larger and better informed actors.
Economies around the world are in constant flux because of political instability, along with their continuously growing and shrinking economies, as a result relative currency values are endlessly changing. Seeking to stabilize their country's currency, Central Banks trade their country's currency on foreign exchange markets. Businesses doing business in foreign markets seek to minimize the risk and hedge their risk by trading on foreign exchange markets.
Currency Market analysis is based on two different approaches:
· Fundamental Analysis
· Technical Analysis
Fundamental analysis identifies and measures factors that determine the intrinsic value of world currencies. An analyst for a given currency studies the supply and demand for the country's currency, products or services; its management quality from central banks and government policies; its future plans and the most important for the shorter term, all the economic indicators. One difficulty with fundamental analysis is accurately measuring the relationships among the variables and difficulty receiving reliable data from foreign countries.
Technical analysis is concerned with what has actually happened in the market, rather than what should happen. Technical analysis is based on three underlying principles.
· Market action discounts everything
This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. The pure technical analyst is only concerned with price movements, not with the reasons for any changes.
· Prices move in trends
Technical analysis is used to identify patterns of market behavior which have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. Also there are recognized patterns which repeat themselves on a consistent basis.
· History repeats itself
Chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little with time.
Technical Analysis is the most common means of analyzing forex markets and making trading decisions. Technical indicators, the primary tools to successfully trade short-term price movements, set profit targets and stop loss orders are; compare relative prices levels over a period of time, observe volatility, moving averages, stop-and-reversal patterns, relative strength, and momentum. These in addition to trends, support and resistance levels, are combined in computer software programs to provide a trading strategy to buy low, sell high, limit risk, and engage in Automated Trading.
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