So you want to learn about this thing called Forex? Great! Let’s start with some Forex basics, but first let me say that I’ve designed this “mini” course to be both educational and FUN! I think the most important part of learning anything is having fun. After all, if we aren’t having fun, what’s the point?
Ok, let’s get right into it…
The Forex Market
The Forex market can be thought of as the place where all global currencies are traded. It is the single largest, and therefore most liquid, market in the world. It’s said that about $5 trillion exchanges hands every day!
The Forex market is also called the “FX market” or it’s longer version, “Foreign exchange market”. They are all interchangeable.
So why is the Forex market so popular, you ask? Aside from it being the largest, most liquid market in the world, it’s also open 24 hours a day and 5 days a week. This means you can sit and watch price tick away until your eyes bleed. Of course I don’t teach that…in fact it’s the opposite of what I teach in my Forex Price Action Trading Course.
Unlike the stock market, the Forex market has no central marketplace such as the NYSE. Instead, trading is conducted electronically over-the-counter (OTC). This simply means that trading is conducted between computer networks around the world, rather than one centralized exchange. The largest financial centers are London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney. As you can see, the Forex market is seriously global, hence the need for a 24 hour marketplace.
This is an important section to understand Forex basics because I find that many retail traders (you and I) forget that we are but a flea on an elephant’s behind when it comes to the scale of the Forex market. The big boys we’re about to discuss are the real “market movers” when it comes to the Forex market. Understanding more about these players will help you grasp why the Forex market moves the way it does.
The 400 lb gorillas of the Forex market. These big mamas are by far the largest players in the Forex market. Banks primarily interact with the Forex market in two capacities.
The first is by facilitating transactions for retail traders (you and I). When a bank does this they are also called a “dealer” and they facilitate client trades through a trading desk, where the bid-ask spread is their profit.
The second way banks profit from the Forex market is through speculative trading, just like you and I. Do note that banks have A LOT more resources than you and I and thus, are on a much different playing field. Having said that, we can even the playing field by using the same techniques they use, which is what I teach in my Forex Price Action Trading Course.
While banks may be the largest player in the Forex market, central banks are arguably the most important. Central banks set the tone for how a particular currency pair will trade, also called an exchange rate regime. I’m not going to go into detail there because anything further and we’d be getting into economics. I don’t know about you, but that stuff bores me to tears, which is why I became a technical trader.
Moving on…central banks often intervene to make their currencies appreciate or depreciate. For example, a central bank may weaken its own currency by creating more of the currency, which can then be used to purchase foreign currency. In doing so the central bank effectively weakens the domestic currency thus making exports more competitive in the global market.
Ok, enough of that…I’m starting to feel my Econ101 gag reflex kicking in 😉 Just know that central banks like to muddy up the water in order to make their currencies appreciate or depreciate, so it’s usually a good idea to know which way the waters flowing.
Investment Managers and Hedge Funds
After banks, portfolio managers, pooled funds and hedge funds are the second largest players in the Forex market. Investment managers trade currencies for large accounts such as pensions. If the manager is managing an international portfolio, he/she will have to buy and sell currencies in order to trade foreign securities. Hedge funds also execute speculative currency trades.
Corporations that engage in international trade (importing and exporting) conduct trades in the Forex market in order to pay for goods and services. An American company might buy parts from China and then sell the end product to Germany. When the American company buys from China it must convert dollars for yuan just as the German company must convert euros for dollars to purchase the end product. Every time this happens, a transaction is made in the Forex market.
Retail Traders (you and I)
Last but not least, the peons of the Forex market (proud peons at that!) We make up a very small percentage of the market compared to the other institutions. Although small in size, retail trading in the Forex market is growing at a rapid pace. In fact the Forex market is the fastest growing market at the moment for retail trading. Retail traders primarily make currency trades in two ways.
Fundamental traders make currency trades based on things like interest rate parity, inflation rates, monetary policy expectations, etc. These traders would be interested in what the central banks are doing. While it is a popular way to trade Forex, it certainly isn’t for me.
Technical traders – now we’re talkin! Technical traders typically make trades based on support and resistance, technical indicators, price patterns, etc. In my Forex Price Action Trading Course I teach traders how to trade based on price action alone…no need for indicators; they just get in the way 😉
Getting a Piece of the Pie
So we’re starting to grasp some Forex basics, great! The next question you’re liking asking yourself is, how the heck can I get a piece of this $5 trillion pie?
When I first heard about Forex I remember thinking, how am I supposed to compete with banking giants like Goldman Sachs and JP Morgan. The great news is, you don’t have to compete with these guys to make substantial money in the Forex market. With the advent of the internet and trading platforms such as Metatrader, you can join these guys while still in your pajamas sipping on your favorite coffee; or tea if you prefer.