How do Trader Trade Forex
Forex trading requires analysis of market conditions and forecasting the future. There are two schools of thought in the area of Market Analysis and resulting market movement, these are:
1. Fundamental Analysis:
Fundamental analysis focuses on the economic, social and geo-political forces that drive supply and demand. Fundamental analysts look at various macroeconomic indicators such as economic growth rates, interest rates, inflation, and unemployment. Changes in all such macro-economic indicators of countries whose currencies are being traded have impact on the forex market.
2. Technical Analysis:
Technical analysis focuses on the study of price movements. Historical currency data is used to forecast the direction of future prices. The premise of technical analysis is that all current market information is already reflected in the price of that currency; therefore, studying price action is all that is required to make informed trading decisions. The primary tools of the technical analyst are charts. Charts are used to identify trends and patterns in order to find profit opportunities. The most basic concept of technical analysis is that markets have a tendency to trend. Being able to identify trends in their earliest stage of development is the key to technical analysis. FX market moves in any of the three directions, that are, upward, downward or sideways. When the market of a specific currency pair is upward or downward it is called to be in a trending market and money can be made both ways. However, if it is sideways, it is called a range-bound market. Technically speaking, moving average based technical indicators can be using on charts to find out market entry points in trending market. However, in sideways market oscillator indicators are used for the purpose. Indicators are lines or symbols on the chart, drawn mathematically, which indicate perfect timing to enter a trade, they use historical data to do so.
Technical Analysis or Fundamental Analysis?
Most traders abide by technical analysis because it does not require hours of study. Technical analysts can follow many currencies at one time. Fundamental analysts, however, tend to specialize due to the overwhelming amount of data in the market. Technical analysis works well because the currency market tends to develop strong trends. Once technical analysis is mastered, it can be applied with equal ease to any time frame or currency traded, however it is sagacious to use both.
Brokers or Market Makers:
In order to trade forex, one has to open an account with a Broker/market maker, as told earlier a broker provides the infrastructure to trade. Although brokerage firms are spread across the globe one may select a broker/market maker on the basis of the size of its spread (difference b/w buy/sell price), quality of trade execution, including anti-slippage guarantee, efficiency to handle trades during highly volatile periods, commission and other charges, wire transfer cost to bring profits back home and minimum account size requirements.
Account Types:
Most of the forex brokers offer two types of accounts, mini and regular account. The size of mini account varies from US$ 300 to US$ 500 to a maximum of US$ 2,000 and the minimum size of regular account typically is US$ 2,000, there is no upper limit.
The size of the account is less important, more important it the minimum lot size, in mini account typically a lot size can not be lower than US$ 10,000 and US$ 100,000 per lot for a regular account.
Taking the advantage of 1:100 leverage a trader can open a position by committing only US$ 100 for mini account and US$ 10,000 for a regular account.
Currency Pairs:
Currencies are traded in pairs, most heavily traded pair are EUR/USD, GBP/USD, USD/JPY. Each pair represent 2 currencies a base currency and a quoted currency, the first currency in a pair is a base currency and the second one is the quote currency. Example, EUR/USD means number of United States Dollars that can be purchased in 1 EURO, the pair will increase in its value if EURO tends to strengthen or US Dollar starts to weaken.
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Tags: forex, Trade Forex, Trader
