Primary Reaction in Forex Markets

In forex markets, the primary reaction is in the JPY-crosses, like EUR/JPY, AUD/JPY, and GBP/JPY, commonly referred to as carry trades. As stock markets fall, the JPY tends to strengthen, sending USD/JPY, GBP/JPY, and the like down. When stock markets gain ground, USD/JPY and the JPY-crosses tend to move higher. Against other major currencies, the USD generally fared better on demand for USD from still frozen credit markets and on a flight to safety basis. If markets begin to stabilize and recover higher, it should be a positive for USD/JPY and the JPY-crosses, while the USD is likely to lose ground as fear and panic subside. If markets continue to slide, there is more downside in USD/JPY and the JPY-crosses and more upside for the USD against others.

The Main Players In Forex Market

Central Banks And Governments

Policies that are implemented by governments and central banks can play a major role in the FX market. Central banks can play an important part in controlling the country's money supply to insure financial stability.

Banks

A large part of FX turnover is from banks. Large banks can literally trade billions of dollars daily. This can take the form of a service to their customers or they themselves speculate on the FX market.

Hedge Funds

As we know, the FX market can be extremely liquid which is why it can be desirable to trade. Hedge Funds have increasingly allocated portions of their portfolios to speculate on the FX market. Another advantage Hedge Funds can utilize is a much higher degree of leverage than would typically be found in the equity markets.

Corporate Businesses

The FX market mainstay is that of international trade. Many companies have to import or exports goods to different countries all around the world. Payment for these goods and services may be made and received in different currencies. Many billions of dollars are exchanged daily to facilitate trade. The timing of those transactions can dramatically affect a company's balance sheet.

The Man In The Street

The man in the street also plays a part in toady's FX world. Every time he goes on holiday overseas he normally need to purchase that country's currency and again change it back into his own currency once he returns. Unwittingly, he is in fact trading currencies.He may also purchase goods and services while overseas and his credit card company has to convert those sales back into his base currency in order to charge him.

Speculators And Investors

We shall differentiate speculator from investors here with the definition that an investor has a much longer time horizon in which he expects his investment to yield a profit. Regardless of the difference both speculators and investors will approach the FX market.

How to evaluate a forex broker

How can I evaluate a forex broker and make sure I select a good one?
There are several things you can check before making a decision on a forex broker:

1. Is the forex broker regulated? The parent company of the forex broker must be regulated by at least one government regulatory body. Some of the regulatory bodies in the US include the US Securities and Exchange Commission, Commodity Futures Trading Commission, National Futures Association, Financial Industry Regulatory Authority, and the Securities Investor Protection Corporation.

2. Does the forex broker have a good reputation? Before doing business with any forex broker, it is very important to check on their reputation. For example, how long have they been in business – it should be 3 years at the very least. Brokers who are successful and have been around for a while usually have positive news press on their websites. Find out what former and current clients say about the forex broker – there should be at least 20 reviews available to read.

3. Does the forex broker provide a natural trading environment? There are two major benefits that come from natural trading environment. First is that you get to benefit from true spread which can often be as low as ZERO. And second is that your stop/losses will get hit less often. For example, you should immediately be able to see price changes when submitting limit orders.

4. How much does it cost to withdraw money from your broker? Immediately before opening an account with a forex broker, call them and tell them that you are planning to withdraw money 10 to 15 times per month, and ask them how much it would cost. You may be surprised to find out that with such withdrawal activity, you may be losing extra $500 to $1,000 per month just in withdrawal fees.

What is “Swap”?

Swap is basically interest that you are either charged or paid. When open a “buy” or a “sell” position on a currency pair, what you are really doing is buying one and selling the other. Swap is paid to you when a positive offset of interest occurs and charged to you when a negative offset of interest occurs on the buy and sell. Wednesdays are triple swap days where you will either pay or receive more swap due to the weekend coming.

What is a Lot?

Spot Forex is traded in lots. The standard size for a lot is $100,000. There is also a mini lot size and that is $10,000. As you already know, currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments, you need to trade large amounts of a particular currency in order to see any significant profit or loss.

What is a Pip?

The most common increment of currencies is the Pip. If the EUR/USD moves from 1.2250 to 1.2251, that is ONE PIP. A pip is the last decimal place of a quotation. The Pip is how you measure your profit or loss. As each currency has its own value, it is necessary to calculate the value of a pip for that particular currency.

Demo Trading

Free demo accounts are available with most Forex brokers. These accounts have all the capabilities of a "real" account and allow you to test your trading skills with ZERO risk. You should demo trade for at least 2 months before opening a live account and using real money.

EUR/USD

In this example Euro is the base currency and thus the “basis” for the buy/sell. If you believe that the US economy will continue to weaken, which is bad for the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will rise versus the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold Euros in the expectation that they will fall versus the US dollar

Bid/Ask Spread

All Forex quotes include a two-way price, the bid and ask. The bid is always lower than the ask price. The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency. This means the bid is the price at which you (as the trader) will sell. The ask is the price at which the dealer will sell the base currency in exchange for the quote currency. This means the ask is the price at which you will buy.

What Tools Do I Need to Start Trading Forex?

A computer with a high speed internet connection and a good understanding of forex basics is all that is needed to begin trading currencies

What is Forex

The Foreign Exchange market, also referred to as the "FOREX" or "Forex" or "Retail forex" or “FX” or "Spot FX" or just "Spot" is the largest financial market in the world, with a volume of over $2 trillion a day. If you compare that to the $25 billion a day volume that the New York Stock Exchange trades, you can easily see how enormous the Foreign Exchange really is. It actually equates to more than three times the total amount of the stocks and futures markets combined! Forex rocks!