Fx 101 Archives - Currency Trading Success

The Most Traded Currencies

Not all currencies are created equal!

You’ll find that some currencies are traded much more frequently and in much greater volume than others. Most forex traders look to trade currencies that offer good volume and frequency, which translates into good liquidity.

The Forex overall offers great liquidity but not all currency pairs are necessarily very liquid. However, if you stick to trading “the majors” (the most traded currencies) low liquidity should not be an issue in your trading.

Trading currency pairs with high liquidity is important for a number of reasons. Liquidity means there is plenty of volume so you can enter trades when you want to and exit trades when you want to. Liquidity keeps you from getting stuck in a trade when all you want to do is to get out.

High liquidity also means there is enough movement in the major currency pairs so you can enter and exit trades numerous times a day and make a profit.

So which are “The Majors”?

All the majors include the US Dollar as part of the pair, either as the base or the counter currency. The majors make up roughly 85% of all forex trading volume and include four main currency pairs:

EUR/USD (EUR/US Dollar)

GBP/USD (British Pound/US Dollar)

USD/JPY (US Dollar/Japanese Yen)

USD/CHF (US Dollar/Swiss Franc)

Other frequently traded currency pairs are the:

AUD/USD (Australian Dollar/US Dollar)

NZD/USD (New Zealand Dollar/US Dollar)

USD/CAD (US Dollar/Canadian Dollar)

The above pairs are also called the Commodity Pairs or Commodity Crosses, since they include the currencies of commodity reach countries. Note: all the commodity pairs are traded against the US Dollar.

Trading the above currency pairs has many advantages including:

High liquidity, as discussed above.
Low trading costs as spreads for all the major crosses typically are very low. Spreads may range from 2,3 or 4 pips, depending on your broker, your account and the time of day you trade.
Greater consistency in price movement. Make no mistake, nothing is guaranteed when trading! However, trading the majors does provide some consistency due to scheduled releases of economic data and general news coverage available regarding the respective economies.

Even though the above currency pairs are the most commonly traded pairs, they are not the only currencies traded in the Forex. Since every country has a currency, many different currencies can be traded in the foreign exchange.

The Exotics:

These currencies are referred to as the “Exotics”. Trading an exotic currency means that you may have to deal with low trading volume, illiquidity and higher, if not expensive, bid-ask spreads.

When trading exotics, you should also be prepared to deal with increased country risk since what goes on in the country will affect its currency. Politically, some countries may not be very stable and their economies might be rather unstable as well. All of this translates into greater exposure to risk for traders.

The Exotics may include currencies like the South African Rand, the Polish Zloty, the Uruguay Peso or any number of other less commonly traded currencies.

In summary, the US Dollar is the most traded currency and the greatest trading volume takes place in the major currency pairs. Other less known currencies are available to trade, however, there may be greater risk associated when trading exotics.

Currency Trading Education: Fundamental Indicators

By Jo Leave a Comment

If you want to be successful and make money from foreign exchange trading it’s important to give some time to your currency trading education. Understandably we all would love to be able to get online and start profiting right away.

However, it is important to understand at least the basics of what makes the forex market move, before you can expect to profit from it. And just like with anything else, it takes some time and focused attention before you get a good understanding and feel for how this market tends to behave.

Fundamentals Drive The Forex Market

So what is it that’s at the root of all the swings, trends, downturns and upturns that forex traders need to make money from? The answer is the fundamental factors of the global economy such as the gross domestic product (GDP), interest rates, trade deficits etc.

A release of information about any of these fundamental indicators can cause a sudden swing, a temporarily reversal or in some cases a reversal of a major trend.

Two Ways To Profit From News and Fundamental Data

There are two ways that you, as a forex trader can use fundamental data and indicators. The first is, of course, to trade on the information that is released.

You might do this if you had good reason to believe that the economy of a certain country was likely to be experiencing an upturn or downturn that was substantial enough to cause an upward or downward trend in that country’s currency price.

Of course, any announcement of economic or financial news usually has implications for currency values but often these are short lived and rather unpredictable (unless you have some inside information on what will be announced).

Most retail traders don’t try to profit from these announcements but on the contrary will exit any open trades before an announcement is made. They want to avoid the possibility of a sudden price movement against their position and hence getting stopped out.

However, if you have an interest in economics you may feel that you can develop a clear idea of when a trend is forming in a particular country that might have longer term implications for currency prices. In this situation you would have a much better chance of making a profitable trade based on your understanding of fundamental indicators.

Another way toprofit from fundamental factors is to analyze the historical behavior of currency prices and build a trade around that. This means that after a major economic announcement you could go back and look at what happened to currency prices the last few times that there was a similar event and take a position based on the assumption that a similar reaction is likely to happen again this time around.

However, many forex traders prefer to stay out of the market completely when major announcements and financial reports are due. While this is a good approach overall, it is particularly advisable for beginning traders still getting a feel for the market.

So depending on your experience and interests, you either want to get behind fundamental indicators and try to profit from them or you want to close out your trades and stand on the sidelines ahead of major news announcements.

Know When News And Data Are Scheduled For Release

Either way you will need to keep track of when financial data and news will be released, not only in your own country but in all of the countries whose currencies you regularly trade.

The internet of course is a great place to find information about upcoming economic data releases. Your broker will also have economic and financial information available for you through the platform.

The other option would be to subscribe to a financial news service. This would be of particular importance for you if much or your trading is build around using fundamental indicators and fundamental analysis.

Take the Time to Learn Currency Trading

By Jack Leave a Comment

If you’re thinking about trading the forex it’s vital you understand the playing field and take the time to learn currency trading. Today, the foreign exchange market, or FOREX, is the largest and most liquid financial market in the world. While many small retail traders participate in the forex, it’s the “Big Boys” that move that market.

Know the Players

In order to become and stay profitable, all while limiting your losses, you must familiarize yourself with the market and how the whole system works. In the forex, the big players are large Commercial Banks, Central Banks, international corporations, investment funds, broker companies and private individuals trading large amounts of capital.

While it’s difficult to have 100% current information on the moves of the big players, you still can keep tabs on the “Big Boys” by staying tuned to news releases and staying up to date with world events.

Know the Language & the Basics

The Forex does not have a central exchange nor one set time it trades. The bulk of forex transactions take place in the major financial centers around the world including Tokyo, Singapore, London and New York.

Trading is really done around the clock depending on which country is awake and at work. As you learn currency trading, it is to your advantage to pay extra attention to when is the best time for you to trade with respect to volatility, news and time of day.

In the spot forex, trading is done in pairs. The most commonly traded currency crosses are the Majors, the EUR/USD, GBP/USD, USD/JPY and USD/CHF. Other commonly traded pairs include the USD/CAD, AUD/USD, NZD/USD, EUR/JPY, GBP/JPY and the EUR/GBP.

Currency pairs are traded in lots. You can choose to trade standard lots (1 lot = $100,000), mini lots (1 lot = $10,000) or even micro lots (1 lot = $1,000), depending on what your broker offers and what it is that you want. The degree of movement of a currency pair is expressed in units, called pips. A pip (point of price change) is the smallest unit of price change of a currency pair.

Fundamental and Technical Analysis

If you are to survive in the forex you need to have a basic understand of both fundamental and technical analysis. Fundamental analysis looks at economic data and draws conclusions as to how the current and future economics might impact the markets.

While fundamental analysis is vital for long term trading, it should not be neglected for shorter term trading approaches. Governments release economic data on a predefined schedule. Know when important economic data will come into the market and prepare accordingly regardless which time frame you trade.

Technical Analysis looks at representation of price in the form of charts and draws conclusions based on that. Traders using technical analysis believe that all price information is contained within the chart.

While it has not always been the case, today, technical analysis is widely used in trading all types of markets, including the forex. To be successful in trading the forex you must have an understanding of technical analysis.

Develop a sound trading strategy

Your trading strategy will depend on what kind of trader you are. As you develop as a trader and learn currency trading this will become clearer to you.

Are you more of a short term trader or do you prefer more of a long term approach? What trading approach are you more comfortable with and which approach best fits your life style and circumstances? How comfortable are you with risk, with taking losses and with being wrong?

Choose the trading strategy that fits into your life and suits your personality rather than changing your life based on a trading approach. You will find that you’ll be happier and more successful in the long run!

Walk before you run

Open up a demo account with a broker. Next, practice your trading strategy until you can proof to yourself that you can trade it successfully over a number of trades. To reach long term success you want to be profitable in demo mode before you commit your hard earned cash. To really learn currency trading, you need to practice, practice & practice!

Know your broker’s platform inside and out. Once you go live and are in a trade, you won’t have time to figure out how to move a trailing stop or enter a limit order. Demo trading will allow you to familiarize yourself with all aspect of your trading platform before you start real trading.

Trading may seem easy and manageable when in demo mode. However minor, to some degree it will prepare you for the emotional stress and demands the life market will place on you once you leave demo mode. By spending the time to learn currency trading you’re putting the odds in your favor!

Currency Tading Basics

By Jack Leave a Comment

The forex market or FX, stands for foreign exchange or foreign currency exchange. The forex is the largest financial market in the world today, trading at a daily volume in excess of over 4 trillion dollars (in 2010) and the market continuous to grow!

You may also hear terms like spot or cash market which refer to the same: the forex market. In a forex transaction, you buy one currency while simultaneously selling another currency (in other words, you’re always exchanging one currency for another). Currencies are traded in pairs such as the Euro-USD or the UDS-YEN.

Who are the players?

Who are the players in this market? The forex is made up of many different participants: large global banks, central banks setting monetary policy for their respective country, Fortune 1000 companies, large investment companies and of course speculators, amongst them the small retail trader (you guessed it – you and I!). The forex market facilitates the conversion of currencies and thereby enables international trade and investment activity.

Where is the forex located?

Unlike other markets, the forex is not a physical market. The foreign currency market is an over the counter market. There is no physical location, no building housing the central exchange. The forex is a global electronic market linking together banks, investment firms and retail traders via computers and computer networks. You see, the forex really has been made possible by technology, allowing even the smallest of trader to participate in this huge market and opportunity.

How can you trade currencies?

To get started with trading currencies, you need to setup a trading account with a brokerage firm, fund your trading account with money (based on the type of account opened), familiarize yourself with your trading platform and learn how to trade currencies. You also need the appropriate computer equipment that can handle fast data transmission and offers you reliability in terms of availability (or uptime).

Is the forex pure speculation?

While there is much speculation in the forex, worldwide there is also a real need for currencies to be exchanged on a daily basis. Look at the following examples:

A US business sells products overseas. Eventually, the company may want to exchange the foreign currency it received as payment back into dollars.

You plan a trip around the world. You need to exchange US Dollars for the currencies of the countries you expect to spend the bulk of your time. Upon your return you exchange any remaining foreign currency not spent back into dollars.

A global company purchases parts from foreign suppliers and pays for the products in local currency. The same company sells products all over the world and hence needs to exchange its own currency into multiple currencies on an ongoing basis.

You get the idea, right?

The vast majority of daily trading volume includes the currency pairs that are most widely traded and most liquid. These currencies are also called “the majors” and include the US Dollar, the Japanese Yen, the Euro, the Swiss Franc and the Canadian and Australian Dollar. A big part of all currency trading volume includes the US Dollar.