We will be looking at what forex is and why we trade it. Different market participants. Focus on the 4 pillars of professional FX trading. By the end of this video, you should be able to begin to analyze and trade this market.
Lets begin with what fx trading is. The FX markets is where currencies of different nations around the world are traded and exchanged. The market is the worlds largest and equates to around $5trillion per day in traded volume. Least vulnerable to manipulations and interventions.
The spot market is worth 1.5 trillion dollars per day still bigger than any other market on its own. Trading the fx market is literally buying and selling money.
Buying a currency is like buying a share in a particular country. The currency is usually seen as a reflection of the countries economy
If you buy US dollars, u are betting on the future success of the future economy.
First 2 letters represent the country whilst the last letter refers to the currency. USD = US for united states, D for dollar.
Currencies are traded in pairs such as EUR/USD
They can be broken down into product and price. For example EUR is the product and USD is the price. Meaning 1 EUR costs 1.4 USD
So if EUR increases, it will cost more. And if USD increases the EUR will become cheaper.
The major traded pairs are USD EUR CAD GBP AUD NZD and JPY. Minor currencies have less people trading them, have less liquidity and hard thus harder to trade.
There is no fixed location for the trading of currency. Eg there is no stock exchange. FX is traded over the counter. It is run electronically within a network of banks continuously over a 24 hour period. Can trade from anywhere in the world. USD most traded EUR second and Jpy third. According to the IMF the USD comprises of 60% of the worlds currency reserve around the world. Since a lot of people own it, there is a lot of attention paid to movements in the USD.
Why usd so important. The US is the worlds largest economy. It is the reserve currency of the world. The united states has the largest and most liquid markets in the world. The political system is probably the most stable. The dollar is also the medium for most cross border transaction. For example Oil is normally transacted in USD. All of this combined make the USD and its data very important. Most liquidity comes from speculators trading for a profit. We comprise of 90% of traded volume each day.
Other currency trading products include futures, options and ETF’s (exchange traded funds)
Why trade forex. Inexpensive compared to stocks and commodities. Attractive especially to new traders. The commissions are far lower. Cause its not centralized. Costs such as clearing fees, exchange fees etc do not even exist. Hence the only costs are the brokerage fees but they are usually very competitive since there are so many brokers out there. There are also no fixed lot size. You can set the lot size to whatever you want to minimize the risk that you are exposed too on each position.
Such high liquidity. Trade can be executed at anytime of day with no issues. This means that as soon as you want to enter or exit, you can do so at the click of a mouse.