Forex Trading Guide

The global financial markets are a place where fortunes can be earned and lost in the blink of an eye, and is a haven for speculators, investors and fund managers looking for a return on their capital. Whether its managed by an individual for the individual or managed by an institutional investor on behalf of a fund, financial markets ranging from shares to commodities to derivatives are traded around the clock across the world’s major financial centres to enable traders to respond to changing market circumstances while allowing suppliers and businesses an alternative mechanism for raising vital private capital.

One of the larger areas of the trading sphere, and in fact the largest type of market by traded volume is the forex market. The forex markets, short for ‘foreign exchange’, allows traders and speculators to trade off the back of different currencies and their fluctuating valuations in much the same way as a share speculator might buy and sell shares. It is a marketplace that is driven by supply and demand in the same way as every other financial market, and presents opportunities for traders to capitalize on macro-economic triggers that shift currency values in both directions.

The forex markets trade around the clock, and unlike CFD or spread betting transactions, traders generally place their orders in the markets directly, with the broker facilitating their move. What forex does have in common with CFDs and spread betting is that traders can deploy massive amounts of leverage to increase the size of the position, and make more money from smaller incremental price increases. However, the degrees of leverage afforded by forex are often many times greater than those with CFDs and spread betting, often as much as a ratio of 500:1, which means that forex is both potentially more profitable while also potentially much more risky.

The forex markets’ real point of distinction lies in the volatility of the traded currencies as compared to the volatility of the stock markets, and indeed many other different types of financial market. Currencies trade up and down on the basis of two major factors: economic indicators and geopolitical current affairs. This means that while currency valuations do have the ability to move heavily in either direction, they tend to be less volatile on the whole than share markets. This is a significant part of the reason that leverage plays such an important role in forex markets – by inflating the transaction size, leverage effectively mimics the effects of volatility by making much smaller movements up and down more severe.

On a similar vein, forex markets are substantially more liquid than all other types of financial markets, because currency is the most liquid asset there is. Rather than a share purchase, which must then be kept for a dividend or sold for cash, currency is already cash, and therefore positions are traded with much more speed and order filled much more quickly than in other financial markets.

Foreign exchange trading, hereinafter referred to as forex, can be a fantastic way to make money trading off the back of a potentially narrower field of research than many other financial markets. For those that want to be successful, the trick lies in understanding how the markets work, how they might respond to different triggers, and how you can manage the potentially massive risks that are posed to you by exposure to the market. In the coming sections, we’re going to look at how you can achieve these objectives, with a view to delivering the best return on your capital from the forex markets.