About 40 years ago, my lifelong obsession with trading and the market began when I started working in the interbank forex market. Years later, I still remember how I felt during the first few weeks in Dealing’s room. It was mostly a mess. At the time, at least at the company I worked for, there was no formal training program and trainees were expected to absorb knowledge and ask the right questions.
But for those who have recently tried to trade forex from home and do not have direct contact with a 10 or 20 year veteran who can pick their brains, what is forex and how it works. You should not enter the market blindly, but forex with a lot of leverage can be especially harmful to your assets if you do not understand the basics of the market. There is a possibility.
Below are some of the things everyone should understand before participating.
What is Forex?
The word “foreign exchange” is an abbreviation of the term “foreign exchange” or currency trading. While we usually think of our national currency in terms of the goods and services we buy in our country, each currency also has a value relative to others. Previously, exchange rates between most currencies were fixed. This was either due to deliberate policies, as China is now, or due to the fact that the value of the currency was tied to the country’s gold reserves. Everything changed in 1971 when Richard Nixon took the bold step of removing the dollar from the gold standard and allowing exchange rates to be set by freely traded markets. Other countries soon followed suit and the Forex market as we know it was born.
The foreign exchange market is not a single physical entity equivalent to a stock exchange. It is the product of pricing and trading by individuals and institutions around the world. Although there are no closing prices, there are very few trades at any given time of day or at any given widely observed holiday, with relatively large gaps between traded prices. It can be very rewarding for traders as it moves fast and generally uses a lot of leverage, but it is also potentially very risky.
currency pair
The first and most important thing to understand about forex is the concept of currency pairs. When you buy one currency, you pay in another, so when you do a forex trade, you are actually trading in two currencies. These currencies are usually represented by three-letter abbreviations such as USD for US dollar, EUR for euro, GBP for British pound, and YEN for Japanese yen.You can find a full list of these abbreviations at here.
In forex trading, you buy one thing and sell another at the same time. This has important implications for traders. First, it means that you need to include multiple currencies in your analysis. For example, if the dollar is expected to appreciate in value, it must be determined for which pair of currencies those profits are maximized.
Secondly, if you have a forex position, it almost always means that you are short of one currency. Effectively, this is an overdraft, so banks and brokers charge interest on the shortfall until the position is squared. Conversely, you can earn interest in the currency you have been using for the same period for the same period.
Interest rates and the carry trade
Since most forex trading remains open for short periods of time, the difference is minimal to non-existent or irrelevant. But for major players in the interbank market trading tens of millions of dollars Even a position left open overnight can have a significant impact on earnings. This is important to understand as it explains one of the biggest movements in the forex market: interest rate movements.
When central banks raise interest rates, the currency becomes more attractive to forex traders. This is because if central banks buy and hold currency, they will get better returns, and if they sell short, they will earn less interest. Logically, more people looking to buy and hold a currency means that its price will rise relative to other currencies. In other words, the higher the interest rate, the higher the foreign exchange rate. If the difference is large enough that the deposit interest rate on the currency you bought is higher than the fee for the shortfall, then in theory you could hold the position indefinitely and make money overall every time the interest rate is evaluated. You can That’s what we call the “carry trade.”
Other influences
Nevertheless, interest rates are not the only thing that drives the forex market. Equally important is the state of the economy of the country in which the currency is traded, both now and in the future. Again, it’s based on relative. For example, after most central banks around the world hiked rates for some time in late 2022 and early 2023, data show that the U.S. economy is absorbing these rate hikes better than most countries. At the beginning, the dollar rose against the dollar. almost any other currency.
Then there is the short-term impact of charts and technical signals. Most forex trading takes place during the day and positions are executed for a very short time. Interest rate spreads and economic strength have been the market’s most important fundamental movers over time, but intraday movements within these long-term trends typically range from simple levels of support and resistance to momentum and relative strength.
As you can see from what I have written so far, trading in the Forex market is not simple. In fact, in many ways it is the most difficult market for the average trader. Still, a huge number of users join each year, attracted by the low account fund requirements and big profit potential. There is nothing wrong with that. I persuade you because I know better than anyone that stepping into the complex and often dizzying speed of the forex market will prepare you for other successful trading later in life. I will not try.
But what I’m trying to say is that before you spend real money you need to make sure you understand as much as you can about it. Know what drives the markets and keep abreast of economic news So, understanding at least some basics of how to read charts will allow you to participate in what I still consider to be the most important and purest market.
