Before you go too far in along the road towards setting yourself up for forex trading, there is quite a lot of ground to cover. Forex trading is a complex, challenging trading environment, and there are many pitfalls along the way, so it’s essential to get the forex trading basics under your belt.
No doubt you will have encountered much talk about the forex markets, and the possibility of earning high returns. Which can be the case, but profits flow to the experienced trader, and there is the real risk of losing out when you are getting started. If you want to avoid being one of the losers, start your education here.
Let’s start it easy on our look at the forex trading basics – what does forex mean? The abbreviation is of course for foreign exchange. In this market you are always buying one currency, and selling the other. The basic need for such a market starts with international trade, and the payment for goods made elsewhere.
Additionally, many investors want to look outside their home countries, and put their money into another country’s stock or credit markets. Once again you exchange your home currency for the currency of the country you invest in.
On top of this real trade is are the forex market speculators, typically well capitalised traders with the big investment banks and hedge funds. They are looking to make money by taking the underlying market on. Any mis-pricing, and they’ll hit it hard.
But sneaking in there, now, are a new breed – the retail forex investor, which is to mean the self financed individual trader, out looking to test her mettle, and improve her investment bottom line. These have gained access to the markets on the back of the internet revolution, which allows them the same live data feeds and tools as the professional trader.
The next thing you need to know in the forex trading basics is “which way do you swing?”. In this case, are you going to trade from a fundamental perspective, or from an analytical slant. Fundamental analysis looks at those factors that seem to drive each movement of the market. Things like release of new economic data, elections, rumblings of imminent conflict.
Technical analysis, on the other hand, doesn’t care for causes of market moves. Traders taking this approach are only interested in the patterns the rates make. These seem to follow certain predictable cycles, especially over the short term. If you have the right software to analyse past price movements, and chart out the trading indicators, you can put trades right into the profit taking sweet spot.
So which why should you go? Fundamental analysis needs a pretty good understanding of economics, and insightful sources of information. Armed with these, you can find areas of mis-pricing, and, hopefully, milk them for profit. Generally plays are longer here as well.
But if you don’t think you can cut it in understanding the fundamentals of the forex market, technical analysis may be for you. However obscure and intimidating the terms sound, it really all comes down spotting repeated trends, and using your indicators to predict them. This may take a while to become familiar with, but is probably the safest route for new traders just learning the forex trading basics.
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