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Forex Markets Tutorial 2020

Forex (short for “Foreign Exchange”) is a global marketplace in which national currencies can be traded for the purposes of business transactions or speculative profit.  Forex is the largest trading market in the world, with average liquidity levels that reach several trillion dollars every day.

Forex markets operate through vast electronic networks populated by trading brokers, banks, and other financial institutions.  As a result, the forex market doesn’t have a centralized location.  But investors can easily submit buy and sell orders (24 hours per day / five days per week) to speculate on market changes in the valuation of most world currencies.

Forex Highlights

Pivot Point Trading Tutorial

Strategies

The first question is what is a pivot? A pivot point is a technical analysis indicator, or calculations, used to determine the overall trend of the market over multiple time frames. The pivot point itself is simply the average of the high, low and closing prices from previous trading sessions. Once a pivot point has…

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MACD divergence trading strategy

Strategies

Beginner traders often make the mistake in thinking that the more indicators they have the better their results will be, but this is not the case. Using too many indicators, or not knowing which indicators to use in combination with each other, can cause sensory overload, confusion and generate false signals. This guide will hopefully…

TD Line Breakout Strategy

Strategies

The difficulty in determining a pivot point in sentiment was accomplished by DeMark in creating an objective way to measure breakouts and breakdowns. DeMark created objective trend lines which can be used to create breakouts which will help determine if demand or supply is advancing. The proper construction of trend lines is the basis for…

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Connors RSI Trading Tutorial

Strategies

As a result, the Connors RSI can be a valuable tool which can be used to construct intra-day strategies with a high probability of success. Trading signals are generated based on indicator readings that fall between the values of 0 and 100. In general terms, indicator readings below 5 suggest asset prices are oversold (a…

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Momentum ‌Trading‌ ‌Tutorial‌

Strategies

First, traders must understand what the word “momentum” actually means in practical terms. For these purposes, a straightforward definition of the concept can be interpreted as follows: Momentum = Underlying Trend Strength Let’s consider the market price activity that’s visible in three different examples: In our first example, we can see a market showing positive…

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Swing Trading Tutorial

Strategies

In many cases, swing traders will utilize fundamental analysis techniques in addition to their assessments of market trends and technical chart price patterns. However, swing traders tend to base their investment decisions on technical analysis strategies that identify new trading opportunities while they are still in their developing phases. Swing Trading Position Stances Swing trading…

Bollinger Bands Trading Tutorial

Strategies

Of course, these specific price measurements can be adjusted to fit the requirements of each person’s unique trading style. However, these are the defined parameters which were used when John Bollinger first made these tools available to the public in the 1980s. In the chart depicted above, Bollinger Bands can be seen bracketing a 20-period…

Ichimoku Trading Tutorial

Strategies

Designed by Goichi Hosoda in Japan in the 1960s, the Ichimoku system provides traders with additional data points when compared to traditional candlestick charts. At first glance, the Ichimoku Cloud (and the signal lines which make up its component parts) might seem like an overly complex piece of abstract art. However, once traders develop experience…

EMA Crossover Strategy

Strategies

What is important to understand about the EMA is that it does not work all the time. Asset prices trend only 30% of the time. Your risk management will play an important function in the success of an EMA crossover trading strategy. The goal, when using a trading strategy such as the EMA, is to…

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Day Trading Tutorial

Strategies

Successful day trading strategies aim to capitalize on the small price moves which characterize intraday trends. However, day trading can also pose many risks for those without a tested, though-out strategy. This is why it’s particularly important for investors to gain a deeper understanding of the common principles of day trading. In this article, we…

Relative Strength Index (RSI) Tutorial 2020

Strategies

In its most traditional applications, values below 30 are interpreted as undervalued (or “oversold”) while RSI values above 70 are considered overvalued (or “overbought”). These informative readings can be used to design trading strategies and alert traders to potential price reversals or corrective pullbacks within a larger market trend. Basics of RSI RSI is one…

Breakout Trading Strategy Tutorial

Strategies

When many people hear the term “breakout trading,” the first thing that comes to mind is a stock trend that rallies higher. However, these ideas can just as easily be applied to negative market scenarios (i.e. downside or bearish price breakouts) that can be accurately identified before establishing short-sell positions. Additionally, the technical analysis concepts…

Gap Trading Strategy Tutorial

Strategies

Expert traders are often able to interpret the true meaning behind these price gaps and capitalize on their occurrences as opportunities for investment. When used properly, price gaps offer favorable trade set-ups for experienced investors and open the door to substantial profit potential for those interested in active trading. For some background, it’s important to…

Scalping Trading Tutorial

Strategies

Scalpers typically employ technical analysis strategies as a way to identify potential trading setups. Some of the most common technical indicator tools used by expert scalpers include: Support and Resistance Levels Stochastic Oscillators Bollinger Bands Moving Averages Parabolic SAR Trend Analysis Since scalpers primarily focus on market prices, technical indicators will contain a high level…

Turtle Trading Tutorial

Strategies

Essentially, Dennis believed anybody could be taught to master the futures markets but Eckhardt was much more skeptical. Instead, Eckhardt argued that Dennis had years of training and experience that enabled him to beat the market and profit from his approach to trading. As a result, Dennis devised an experiment that could be used to…

Dividend Capture Strategy Tutorial

Strategies

The capture strategy is a two-trade system that is solely designed to allow investors to benefit from a stock’s dividend without encountering the risks involved when holding shares for an extended period of time. In any market investment, the longer an asset is held, the greater the potential it has to fall in value. This…

Growth Investing Tutorial

Strategies

The ability to successfully buy into a young company in its earliest stages of growth is a skill that can generate impressive returns if the business is able to deliver on its expectations. This central reason growth investing is particularly interesting for many investors. However, many of these companies are new and untested, so there…

Dividend Stock Investment Tutorial

Strategies

When investors are able to focus on solid and stable companies capable of making regular dividend hikes, the magic of compounding gains can turn a relatively small investment into a substantial nest egg over the long term: Unfortunately, many beginner investors lack a basic understanding of what a dividend actually is —and what it isn’t. …

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Advantages of Forex Trading

The foreign exchange market possesses many positive characteristics that make it very different from all other trading markets:

  • Complete Market Access – Since the forex market is open and available for access 24 hours per day, there are no limitations on the time frames when trades can be placed. For most forex brokers, the only exceptions occur during the weekend periods and on major holidays.
  • Low Fees/Commissions – The forex market is unregulated so brokerage commissions and fees will vary. The vast majority of the market’s forex brokers will make their money on the mark-up spread placed on each currency pair made available for trading.  However, the high level of broker competition in the market helps keep these fees/commissions relatively low.
  • Limited Rule Restrictions – The forex market is not subject to most of the strict regulations that characterize stock, options or futures markets. This means there are no governmental bodies controlling the daily activities in the global forex market and no restrictions are placed on short-selling activities in the same way that might be seen in stock markets.
  • Attractive Leverage Opportunities – Leverage levels in the forex market are generally far greater than the allowances made in global stock markets. Some countries allow leverage levels of up to 500:1, which means traders can command a position size that is 500x larger than the original cash outlay.

Forex Market Characteristics

For investors, the forex market contains additional features that distinctly enhance its potential for trading profitability (when compared to other asset classes):

  • Forex traders can profit from changes in the underlying market value of spot exchange rates (which occur almost constantly).
  • Forex traders can profit from interest rate differentials that exist between various world currencies (which compound as long as positions are held).

Unlike stock trades, positions that are taken in the forex market have the potential to benefit from interest rate differentials.  Specifically, this means traders can sell currencies with low interest rates as a way of funding purchases in currencies with high interest rates.  These interest rate payments compound daily (at the close of each market session) and are guaranteed for as long as the interest rate differential remains constant.  This forex strategy is widely known as the “carry trade.”

As an example, one carry trading strategy (which was even more popular before the global financial crisis of 2008) involved funding long trades in the British pound or Australian dollar using a short position in the Japanese yen.  At the time, the GBP and AUD currencies were both characterized by high interest rate levels while the Bank of Japan was busy enforcing interest rate policy at near-zero levels for several decades.

Establishing long trades in currency pairs like GBP/JPY or AUD/JPY meant capturing high-yielding interest rollover at the close of every market session.  Carry trades are still very popular in the forex markets, given their unique ability to guarantee returns outside of the base fluctuations seen in spot prices.  For these reasons, most expert forex traders recommend factoring carry value into a long-term strategic approach to the currency market.

Factors Influencing Forex Prices

Of course, even carry trades are affected by the underlying changes in spot prices.  So, it’s a good idea for forex traders to have a good understanding of what moves the currency markets.  Classical economic factors like supply and demand are always critical as these forces largely influence the bullish/bearish sentiment that surrounds each currency.  For example, if central banks or world businesses need to buy the Swiss franc at a faster pace, it’s value is likely to move higher against most world currencies.  If there are too many francs circulating through the global financial system, the market value is likely to decline.

Factors Influencing Forex PricesSupply and demand dynamics tend to be long-term in nature.  However, many forex traders operate on time frames that are much shorter in length.  In these cases, relevant price fluctuations are likely to be influenced by economic data reports, which often have the effect of influencing sentiment for days or weeks (rather than months or years).  Fundamental analysis in the short-term is usually dictated by economic reports, which include:

  • Market Economy Reports: GDP, Consumer Confidence, Monthly Home Sales, Retail Sales, Durable Goods
  • Labor Market Trend Reports: Non-farm Payrolls, Monthly Jobs Additions
  • Short-Term Labor Market Reports: Unemployment Rate (Monthly), Weekly Jobless Claims
  • Manufacturing Reports: Purchasing Managers Index (PMI), ISM Surveys
  • Inflation Reports: Consumer Price Index (CPI), Personal Consumption Expenditures (PCE)
  • Import/Export Reports: Trade Balance

Of course, these economic reports don’t represent all of the fundamental influences watched by forex traders.  Other important events like interest rate decisions by central banks, geopolitical tensions, or major technical moves make up additional factors that affect currency prices and are actively monitored by short-term forex traders.

Reading these economic reports and examining the public commentaries made by central bankers can aid in the process of fundamental analysis.  Additionally, these practices can help forex traders attain a better understanding of what actually causes price trends to develop in the market.  This is why it’s always a good idea to have economic calendars available, as they can help ensure important data reports are never missed.

Technical Chart Analysis

In addition to fundamental analysis, strategies based on technical chart analysis are critically important for most expert forex traders.  Essentially, technical analysis of the forex markets can help traders to better understand trending price activity.  Some of the common approaches technical analysis expert traders use in the forex markets include:

  • Elliott Wave Theory
  • Harmonic Patterns
  • Fibonacci Retracement Analysis
  • Pivot Points
  • Ichimoku Analysis
  • Indicators and Oscillators
  • Parabolic SAR
  • Trend Analysis
  • Moving Averages

Expert forex traders will often combine multiple technical analysis techniques as a way of improving objectivity (and making more accurate price predictions before placing trades).  There are many different examples of this which could be cited.  Some of the most popular technical analysis combinations include the use of Fibonacci retracement studies along with analysis conducted using Elliott Wave Theory, or the use of indicator/oscillator readings in conjunction with Exponential Moving Averages (EMAs).  The vast possibilities for alternative combinations are literally endless, so this creates an excellent trading environment for each person to develop their own trading style and unique approach to the forex market.

Developing Your Forex Strategy

The most successful forex traders are the people able to develop an approach to the market that can result in consistent profits over time.  Of course, the long-term performance is always more important than winning or losing a few trades in succession.  The key to achieving success in forex trading requires each person to devise a system that protects gains and limits losses in all market environments.

Some forex traders will focus on a particular technical indicator while others implement complex systems that combine technical analysis with fundamental analysis to achieve favorable long-term results.  Since the forex market is (literally) the largest trading market in the world, the possibilities are essentially endless for all intents and purposes.  Most forex experts will recommend backtesting any strategy using a demo trading account before putting real money at risk in live markets.

Conclusion:

Trader Summary: Forex Trading Strategies

  • The forex market is the world’s largest financial trading environment.
  • The forex network is comprised of trading brokers, banks, and other financial institutions. Forex trading markets are open 24 hours a day, five days per week (trading is closed on weekends and major holidays).
  • Under these conditions, currencies trade against one another as pairs (i.e. EUR/USD, GBP/JPY, AUD/CHF, etc.). Each currency pair is quoted in percentage points (or “pips”).
  • Using a brokerage account, retail traders and buy/sell currencies and make a profit or loss from the results based on future changes in the price difference of each currency pair.
  • Currency pairs fluctuate in value based on macroeconomic conditions and the relative strength/weakness of each country involved. Factors like GDP growth, exports, manufacturing, and interest rates are all used in the fundamental analysis of each respective currency.