Oct 2011 04

Getting Started In Forex

The worldwide foreign exchange (forex ) market is an electronic, over-the-counter system of banks and market participants. Forex is where currencies are bought and sold. The forex market plays a major role in global commerce. Market participants include central banks, foreign governments, international commercial banks, international corporations and tourists. These players collectively set market exchange rates. The exchange rate represents one currency priced in another. Since every currency only has value relative to every other currency, they are traded in pairs.

For easy reference, each currency is assigned a three-character code, such as USD for the United States dollar and EUR for the euro. These codes are used to create the symbols for currency pairs, such as USD/EUR. When a market participant purchases this pair, he is simultaneously selling euros to buy dollars. He makes money if the value of the dollar rises relative to the euro, and he loses money if the opposite circumstance occurs. The first currency is the buy currency, and the second is the sell currency. Currency pairs form the price structure of the forex market. Everything that happens in forex occurs within the context of that structure.

Forex Brokers

A multitude of brokers exist for connecting retail and institutional clients with the forex market. Each broker has a unique perspective and brings certain features to the table that may win over a prospective client. Savvy traders know that careful investigation must be carried out before they commit their money to a broker. To investigate a broker, it is useful to have information like the pip spread or whether the broker indulges in sniping and hunting. A pip spread is the difference between the buy and sell currencies. Pips are percentage points, the smallest units of forex trading.

Since forex brokers do not charge a commission, the pip spread is how they make money. A high spread means they are likely taking their clients to the cleaners. Lower spreads save traders money. Sniping and hunting is buying or selling at predetermined points. These are shady acts committed by brokers to make extra money. No broker wants to admit to sniping and hunting, so scouring forex trading forums or talking to traders is the only way to find out. Brokers that engage in sniping and hunting must be avoided at all costs. They are bad news for all traders.

Strategy

Traders new and old use a strategy to determine where they enter and exit a particular trade. In this respect, buying and selling currencies is no different than doing the same with stocks or bonds. Fundamental and technical analysis apply to forex as well as to the equity markets. Fundamental analysis involves looking at economic conditions. Analyzing the economy of an entire country can be difficult, and this type of analysis is used mostly for long-term trades. Economic indicators to watch include Gross Domestic Product, inflation, interest rates, unemployment and trade balances. Fundamental analysts can use the data gathered to put together an accurate picture of a country.

Technical analysis focuses on trends in the pricing of currencies. As such, this brand of analysis can complement fundamental analysis by suggesting solid entry and exit points based on the state of the current market. Technical analysis relies on market psychology, but the key features revolve around identifying market conditions that signify buying or selling opportunities. Technical analysis allows traders to quantify their positions and look into the future based on past trends and conditions. Combined with fundamental analysis, traders have two powerful tools at their disposal, but most use one or the other.