What is Forex?

The purpose of this article is to introduce the Forex market to those who have little clue about. As with many markets there are many derivative of the central market such as Futures, Options and Forwards. In this article we will only be discussing the Forex Market. The word FOREX is derived from the words Foreign Exchange; and is the largest financial market in the world. Unlike many markets the Forex Market is open 24 hours per day and has an estimated $1.3 trillion in turnover every day. This tends to lead to a very liquid market and thus a desirable market to trade because the volume is always there.

Unlike many other securities the Forex Market does not have a fixed exchange. It is primarily traded through financial institutions, banks, brokers, dealers and private individuals. Trades are executed through phone and increasingly through the Internet. It is only in the last few years that the smaller investor has been able to gain access to this market. Previously the large amounts of deposits required precluded the smaller investors. With the advantage of the Internet and growing competition it is now easily within the reach of most investors.

The Foreign Exchange Market owes its existence to the 1971 abandonment of the Bretton Woods accord and the subsequent unwinding of the regime of universal fixed exchange rates. Although currency trading is inherently governmental (central banks) and institutional (commercial and investment banks), the Foreign Exchange market is also the province of non-banking international corporations, hedge funds and individual private investors and speculators.
Technological innovations like the Internet have made it available for private investors to monitor currency markets and to trade via intermediaries (Forex Brokers).

The Forex Market is very attractive for private investors because:
1. They can trade 24 hours, 5 days a week with continuous access to global dealers just using an Internet connection or a phone;
2. The playground; is an enormous liquid market making it easy to exchange most currencies;
3. The market volatility leads to large profits in a very short time (e.g.: +USD 300 / 20 minutes trading session);
4. Leveraged trading with low margin requirements;
5. No commission taken by the Forex Brokers.

The Forex trading instruments are margin products, which mean that your investment exposure can be a multiple of the cash that you lay down. Margin enables traders to trade in markets with high minimum units of trading and enhances the profit rate. Forex is still a relatively unknown territory and most investors are afraid of investing in it. It is true that it is the most dangerous trading market. Advantages come with disadvantages. And so with Forex Trading.

Technical indicators
Relative Strength Index (RSI): The RSI measures the ratio of up-moves to down-moves and normalizes the calculation so that the index is expressed in a range of 0-100. If the RSI is 70 or greater, then the instrument is assumed to be overbought (a situation in which prices have risen more than market expectations). An RSI of 30 or less is taken as a signal that the instrument may be oversold (a situation in which prices have fallen more than the market expectations).

Stochastic oscillator: This is used to indicate overbought/oversold conditions on a scale of 0-100%. The indicator is based on the observation that in a strong up trend, period closing prices tend to concentrate in the higher part of the period's range. Conversely, as prices fall in a strong down trend, closing prices tend to be near to the extreme low of the period range. Stochastic calculations produce two lines, %K and %D that are used to indicate overbought/oversold areas of a chart. Divergence between the stochastic lines and the price action of the underlying instrument gives a powerful trading signal.

Moving Average Convergence Divergence (MACD): This indicator involves plotting two momentum lines. The MACD line is the difference between two exponential moving averages and the signal or trigger line, which is an exponential moving average of the difference. If the MACD and trigger lines cross, then this is taken as a signal that a change in the trend is likely.

Fibonacci numbers: The Fibonacci number sequence (1, 1, 2,3,5,8,13,21,34...) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next larger number is 62%, which is a popular Fibonacci retracement number. The inverse of 62%, which is 38%, is also used as a Fibonacci retracement number.
Gann numbers: W.D. Gann was a stock and a commodity trader working in the '50s who reputedly made over $50 million in the markets. He made his fortune using methods that he developed for trading instruments based on relationships between price movement and time, known as time/price equivalents. There is no easy explanation for Gann's methods, but in essence he used angles in charts to determine support and resistance areas and predict the times of future trend changes. He also used lines in charts to predict support and resistance areas.
Waves Elliott wave theory: The Elliott wave theory is an approach to market analysis that is based on repetitive wave patterns and the Fibonacci number sequence. An ideal Elliott wave patterns shows a five-wave advance followed by a three-wave decline.

Gaps Gaps are spaces left on the bar chart where no trading has taken place. An up gap is formed when the lowest price on a trading day is higher than the highest high of the previous day. A down gap is formed when the highest price of the day is lower than the lowest price of the prior day. An up gap is usually a sign of market strength, while a down gap is a sign of market weakness. A breakaway gap is a price gap that forms on the completion of an important price pattern. It usually signals the beginning of an important price move. A runaway gap is a price gap that usually occurs around the mid-point of an important market trend. For that reason, it is also called a measuring gap. An exhaustion gap is a price gap that occurs at the end of an important trend and signals that the trend is ending.

Trends A trend refers to the direction of prices. The breaking of a trend line usually signals a trend reversal. Horizontal peaks and troughs characterize a trading range. Moving averages are used to smooth price information in order to confirm trends and support and resistance levels. They are also useful in deciding on a trading strategy, particularly in futures trading or a market with a strong up or down trend.