8 Reasons To Trade Forex And A Quick Guide To How The FOREX Market Works!

8 Reasons To Trade Forex And A Quick Guide To How The FOREX Market Works!

If you are thinking of diversifying your trading then FOREX can be a good area to get into. It can be a bit confusing to start, so I hope to explain very briefly how the FOREX market functions and operates and the reasons why you should consider trading FOREX in this article. There's also a good selection of FOREX markets to trade on Tiger which I will also take a quick look at!

Here are my 8 reasons why you should consider trading FOREX :

1. Most liquid / largest market in the world - 5 Trillion US Dollars traded daily!
2. Virtually a 24 hour a day market, 5 days a week.
3. Tight spreads and low costs.
4. Works well with technical analysis - good repeatable patterns / trends. (Also very good and easy to automate these technical analysis based strategies)
5. Good for Trade and Risk Management
6. Transparent and regular news events to trade off e.g. US NonFarms.
7. Plenty of easily accessible research info and data about to aid your trading.
8. Lots of very 'different' currency pairs to trade - giving you a different global and economic outlook by which one you trade!

Some further facts:

• FX trading - 41% London, 20% USA
• Mostly a spot market but does have a very liquid futures market as well
• Works through financial institutions- not primarily exchanged based.
• Major players = 85% of the action e.g. Banks, Hedge Funds, othe Fininancial Institutions

Key Markets and opening hours:

KEY TERMINOLOGY:

• All currencies trade in “pairs” - the value of a currency is always determined in relation to its value against another currency. There are 2 currencies in every pair. 
• The first currency in the pair is referred to as the “Base” currency and the second currency in the pair is referred to as the “Counter” or “Terms” currency. Therefore the quote is for how much of the Counter currency it takes to buy 1 of the Base currency in the pair.
• The base currency always = 1. 
• EG GBP:USD currently trading at 1.5 means: 1 GBP is worth 1.5 USD
• Another E.G. currency pair is the USDJPY. 
• In this example the US dollar is the base currency and the Japanese Yen is the counter currency. For the purposes of this example, the USDJPY is trading at 93.33. In this case we know that it takes 93.33 JPY to buy 1 USD.
• Largest traded pairs:EURUSD 24%, USDJPY 18%, GBPUSD 9%
• Key Major FX pairs: 
• EUR:USD, GBP:USD, USD:JPY, USD:CHF, AUD:USD, NZD:USD, USD:CAD
• Major commodity currencies: AUD:USD, USD:CAD, NZD:USD, ZAR:USD
• Most common crosses involve: EUR,GBP,JPY e.g. GBPZAR, EURJPY

Base currency rules: 

• Most currencies are quoted against the USD. 
• There are however 4 main exceptions to this rule: GBP, AUD, EUR, NZD. 
• The European Central Bank (1999) stipulated that the EUR has first precedence as a base currency. 
• Therefore, all currency pairs involving it should use it as their base, listed first. 
• For example, the US dollar and euro exchange rate is identified as EURUSD - called “Euro crosses”.

Further Basic Rules:

• A simple way of remember: if the rate is increasing then this means that the base currency is strengthening, and therefore that the counter currency is weakening. On the other hand, if the rate is decreasing then this means that the base currency is weakening, and therefore that the counter currency is strengthening.
• Use 4 decimal places in FX e.g. 1.6512 
• Note that JPY is 2 decimal places e.g. USDJPY = 85.43
• The last 2 / 4 digits are known as PIPS and this is what we are interested in.
• NOK,SEK, HKD for example to 5 decimal places.
• FX spreads for trading are very tight and good for us due to the large liquidity in this market.

What Is A PIP?

• Currency prices move in very small increments that are quoted in pips (percentage in point). 
• As we’ve seen most currency pairs are quoted out to the 4th decimal place. So in most cases, a pip refers to the fourth decimal point of a price that is equal to 1/100th of 1%.
• FOR JPY pairs the pip is the second decimal place.

Some examples:

• If GBPUSD moves from 1.3010 to 1.3030 = 20 pip increase
• If USDJPY moves from 108.35 to 107.35 = 100 pip decrease

How to calculate the value of a pip?

Value of 1 pip depends on the base currency & which is the terms currency.

Calculation: 

• (Size of pip) * (Base currency) = Pip value
• 1 pip * lot size = $1USD

Example Calculation: EURUSD

• If you buy 100,000 Euros vs USD at 1.1730 and you get $1 for every pip move and say the price fell 20 pips, you would lose $200.

Example Calculation: USDJPY

• You buy USDJPY at 108.25 and lot size = 10,000.
• A 1 pip move = (1 pip (i.e. 0.01) / 108.25) * (10000 USD) = $0.92

Futures:

Lot Sizes in Forex: 3 main types: 

• Standard Lot = 100,000 units of a currency
• Mini Lot = 10,000 units of a currency
• Micro Lot = 1,000 units of a currency

DETERMINANTS OF EXCHANGE RATES:

Key factors:

• Trade Balances
• Internal budget deficit or surplus
• Interest Rates
• Political 
• Central Bank Intervention (BoE, Fed, BoJ, ECB)
• Inflation
• Wealth: GDP
• Health: unemployment, retail sales, purchasing orders, durable goods,

NEWS RELEASES: ARE A FUNDAMENTAL DRIVER OF EXCHANGE RATES ESPECIALLY IN THE SHORT TERM – GREAT FOR INTRADAY TRADING!

A lot of these fundamental factors are hard to gauge and determine and factor into your trading strategies. Technical Analysis on the other hand cuts through the noise and presents are far clearer picture of what is going on in the FX world to the trader.

Tip: As these are some of the most liquid markets in the world, they work very nicely with technical analysis – this can take away some of the very burdensome and heavy fundamental analysis required and in the process saving you bundles of time. 

You can just rely on technical analysis to trade FX – many do. This is one of the reasons it is so popular. 

FOREX On TIGER - if you go to 'futures' then 'CME' / category FOREX you will find a good selection e.g.

• AUDUSD
• NZDUSD
• MXNUSD
• EURUSD
• GBPUSD
• CADUSD
• CHFUSD
• USDJPY
• USDCNH

If you’d like to find out more about FOREX trading and what I do, you can get in touch with me via:

• Email: info@thestophunter.co.uk
• Website: www.thestophunter.co.uk
• YouTube: thestophunter

Visit my YouTube channel for loads of free FOREX educational content / courses / tips / analysis /ideas via my TIGER Intro post: THE STOP HUNTER (Links to YouTube at bottom of post)

Risk Warning: This course is purely for educational purposes and should not be construed as investment advice. Always be aware that trading and investment comes with a high degree of risk - always speak to your financial adviser first before investing and trading.