The FX Market: What is It?

The forex or FX market is the currency trading market where foreign currencies are exchanged. It is not located in just one place. By its very nature it is a global market and trading happens all over the world.

In a sense there is a separate market for each currency pair. Every possible combination of currencies has its own price. Although these are related in some ways there is not necessarily a direct connection between them. Obviously if a country is doing very badly in economic terms,
then its currency is likely to fall in comparison with most other countries. But another country might be doing even worse and then the opposite would show on that particular currency pair market. For example the dollar could be falling against the euro while at the same time it is rising against the yen.

The biggest participants in the FX market are banks and other large financial institutions who have a lot of money to invest. They employ professional currency traders who do this for their job. But the markets are so huge and access is so easy that anybody can get involved these days.

All you need is a computer with a high speed internet connection. Do not try trading over a dial up connection! You will find it very frustrating. Prices will change too fast for you to act and you will probably lose money.

You will also need access to a broker who will cover your trades by offering you leverage. This means that with say $100 of your funds you can control $10,000. The broker handles this amount, but you can get started with just a few hundred dollars in a mini FX trading account.

The forex market is highly liquid and very volatile. Liquidity is a measure of how easy it is to turn an investment to cash. Currency is already cash so it has high liquidity. What this means for you is that you can buy and sell at any time. You do not have to wait to find a buyer as you often do with stocks.

The high volatility of the forex market means that prices are constantly changing. This makes it a very risky investment but also potentially very profitable. The possibility of gaining or losing a lot of money in a short time is very attractive for people who are prepared to take the risks. Forex trading is exciting and can be very lucrative for the skilful trader.

Traders use charts and graphs to indicate trends in the movement of the prices. The aim of course is to predict whether the price will continue to move in its current direction or when there will be a reversal. These charts and graphs are normally provided by your broker.

At the same time it is important to stay alert to world events that might affect the financial markets. Many brokers also provide a live feed of forex news. This can be very useful if only to remind you to leave the FX market by closing your trades before major financial announcements are expected.

FX Trading Platform: Finding The Best

Finding the best FX trading platform can be a challenge for both brokers and traders. Brokers will want software that is reliable, adaptable to their needs and easy for their clients to use. Traders are also looking for ease of use with good technical information.

Forex Platforms For Brokers

Many forex brokers, especially the larger organizations, will have a trading platform custom built for them. This is big business and a brokerage company will usually sneak a look at all of the platforms that competitors are using and then try to build something better. The cost of this is sure to be high. It can take a long time too. Software development, like construction, is something that always seems to take longer than expected.

Smaller brokers cannot usually afford to have all of the software designed for them from scratch. Instead, they may buy an FX trading platform that they can use out of the box. However, experienced traders will recognize this and may avoid such brokers. It is hard for traders to have confidence in a company that does not appear to be investing any resources in its trading software.

A compromise that works well for many brokers is to take a pre designed package and then have somebody customize it for you. The look of the program can be altered to include your logo, company colors and other factors. Better still, you could add more charts and offer any the technical analysis that traders are looking for but cannot get elsewhere. This way you can give the appearance of offering a unique trading platform without the cost of full scale software development.

Forex Platforms For Traders

Individual traders will generally use whatever software their broker provides. The platform is an important consideration when looking for a broker. For some traders, it is more important than cost. They may accept a bigger spread for the sake of the exact charts or information that they need to operate a system that they know is profitable.

In addition, traders who use automated systems or robots to trade the foreign exchange market will need a software platform on which their robot can operate. Experienced traders who have developed a profitable system of their own sometimes design a robot to automate their system for their own use. Most of the popular robots or expert advisors run on the Metatrader 4 platform. You need to download this for free in order to use most of the forex robots that you can buy today.

Automated trading software has many advantages, including the ability to automatically open and close trades when the market favors your system. Many forex traders are now moving into the world of robots and Metatrader 4 is probably the best FX trading platform for those traders.

Which Type of Forex Market Analysis is Best?

Within the forex trading environment, there are basically two types of analysis used to anticipate what is going to happen to currency movements. These are known as fundamental analysis and technical analysis.

Fundamental Analysis

What are the fundamental factors influencing the movement in currency prices? Of course we have to start with the world economy as a whole and the local national economies of the nations involved when we are looking at a specific pair of currencies. Generally, a healthy economy will point to a strong currency and vice versa.

Each time there is a financial report or statement issued concerning the state of a nation such as Gross Domestic Product, statements of the national debt, inflation, employment levels and trade deficits etc, there is a movement in currency values. By analysing historical data it's possible to predict what might happen when such a report or statement is due.

It's not only the economy that can cause fluctuations in currency values. Social and political events can have a strong influence particularly events such as an election, social unrest, terrorist attack or a natural disaster. Again it is possible to predict the effect of such events based on historical data.

Technical Analysis

This method is based entirely around charts to identify trends and patterns in currency movements. There are literally hundreds of technical analysis indicators available to traders and it takes a lot of time and practice to work successfully with this method.


As you would expect there are two schools of thought as to which is the best method and many forex traders will rely on one or the other. However, my advice is that neither method is mutually exclusive. It can be argued that fundamental analysis is based on emotion and technical analysis on logic. Well, like all things in life, the reality is a combination of both.

Fundamental analysis will help to identify large movements in currency prices but technical analysis is better at identifying small fluctuations which cannot be attributed to any significant economic announcement, social or political event.

So my advice is to work with technical analysis for identifying trends and patterns in the short term but also use fundamental analysis to keep and eye on the bigger picture. Forex market analysis using both methods is the way to achieve the best levels of consistent success with forex trading.

Candlestick Charts used in Forex Trading

Among the many types of technical analysis available to forex traders, the single most useful and popular are probably candlestick charts. These were originally developed in Japan during the 18th century by a prominent commodity trader who used them to chart the fluctuations in the price of rice. For this reason they are often known as Japanese candlestick charts, and many of the patterns that they form have Japanese names.

Simple line graphs plotting the price of a commodity at regular intervals in time had been used for centuries, but traders were in need of something that could plot more variables within a two dimensional graph. The bar chart showing the opening, high, low and closing prices of a commodity was useful and helped traders to predict future price movements in a more reliable way than line charts, but candlestick charts were even better.

They were introduced to the American stock market and from there to the worldwide financial markets by Charles Dow at the beginning of the 20th century. Dow was the founder of the Wall Street Journal and co-founder of the Dow Jones company.

Candlestick Formation

The chart is made up of a series of 'candlesticks' which typically have a chunky body with vertical lines stretching up from the top (the upper shadow or wick) and bottom (the lower shadow or wick). The different points measure the differential in prices over a certain period of time, which might be 5 minutes, 15 minutes or longer.

The top of the wick is the highest point reached during the time period and the lowest point of the lower wick is the low. The top and bottom of the body are the opening and closing prices. If price rose during the period the body will be white (or green or blue if colored). The bottom of the body marks the opening price and its top marks the close. If the price fell during the period the prices are the other way around and to show this at a glance the body will be black (or red if colored).

How To Use Candlestick Charts In Forex Trading

A chart showing 5 or 15 minute candles over a period of several hours can provide the forex trader with many patterns on which he can base a system for determining when a trend is developing. For example, when the candle body is white or green and higher than the preceding candles, it indicates that buyers are very bullish. When it is black or red and lower than the preceding candles, it indicates that buyers are very bearish.

Being able to see these implications at a glance is vital in the fast moving forex markets where trading decisions often need to be made in a split second. So candlestick charts are one of the most useful visual aids for any forex trader.

Foreign Exchange Brokers: How to Choose

Foreign exchange brokers are in abundance around the world with new brokers entering the market every day. So how do you set about choosing a good forex broker?

Firstly, look at the way they advertise. What are they saying to you? Of course they will want to attract your custom by telling you about the benefits of forex trading and the possibility of making lots of money. However, they should also be realistic and tell you about the risks. Many traders entering the market for the first time are blind to the risks and 'dive in' too soon.

Look for a broker who clearly states the risks and in doing so gives you some automated protection in your account, particularly the closing of trades when the funds in your account are in danger of being insufficient to cover a losing trade. This is particularly important for beginners who may not spot a potentially bad trade until it's too late. Be aware of the leverage offered. In the Forex market we see the highest leverage ratios being applied. Typically 50:1, 100:1 or even 200:1. At the lower end, 50:1 or 100:1 is normally provided for a standard trade of 100,000 units of a given currency. For smaller trades of $50,000 or less 200:1 is the norm. So make sure you understand how to apply stop losses and make sure your broker will hold your hand on this and apply stop losses automatically until you acquire the necessary trading knowledge and skills.

Look for a broker who has been around for a while and can demonstrate a good track record. We wary of customer testimonials on their website. You have no way of knowing if they are genuine. Look for credentials such as membership of a regulatory body. Are they supported by a reputable parent company?

Look for a broker who will offer you a complete service from tutorials, demo or paper trading accounts for beginners and full chart and technical analysis support with a variety of 'off the shelf' trading systems for you to try and bespoke systems you can develop for yourself as you become more proficient.

Look for a broker offering reliability and backup servers. You need to be sure that you’re in control of your trades 24/7. Does the broker provide a customer forum on their site? This is a good sign and gives you the opportunity to visit the forum and research problems that existing customers may have experienced. If they don't have their own forum, visit one or two of the popular forex public forums and don't be afraid to ask questions.

Finally, look at the spread being officered by the foreign exchange brokers. This is how they make their money. Is the spread on offer consistent with all forex pairs?

Forex Mini Trading Account

Forex mini accounts are ideal for just about anybody who is starting out in forex trading. You would have to be very rich or very confident to start right out with a standard account if you are a retail trader (i.e. somebody trading on their own account from home). A mini account lets you get started without risking so much money and this makes it a very attractive option for most people.

Mini forex trading accounts generally allow you to trade with just one tenth of the normal lot size. This usually means 10,000 units of currency instead of 100,000.

Of course you do not have to have this much in your account. Currency trading works with leverage. If you are using 100 times leverage then you need $100 to control $10,000 in your mini account or $1,000 to control $100,000 for a standard account.

$100 or 100 units of other currency per trade is enough for most people to commit to a trade when they are starting out and that is why the mini trading account is so attractive.

The pip size is also usually smaller in a mini account. Pips are units in which you will measure your profits, losses and costs (the spread).

Their dollar value can vary depending on the currency pair that you are trading, the lot size and other conventions of your broker, but a common standard pip size is $10 and mini pip size is $1.

Some brokers are now quoting prices to 5 decimal places which technically would make one pip 0.00001 of the quoted price, but we will continue to use the standard 4 decimal place pip for this example.

So if you have a standard forex account you can expect to put up $1,000 on each trade, be involved in trading lots of $100,000 and measure your profits in $10 units.

If you have a forex mini account you can expect to commit $100 on each trade, be involved in trading lots of $10,000 and measure your profits in $1 units.

Of course you can set stop losses so that you do not have to risk all of the money that is committed to the trade. But your losses will be measured in terms of pips so these too will be 10 times greater in the standard account.

If you are successful and your fund grows, you may want to move up to trading greater sums. You can still do this in your mini account by trading more than one lot at a time. So if you want to trade a standard lot size you would just trade 10 mini lots. This has the advantage of still giving you the ability for fine control of your stops because your pip size is still just $1.

The standard account used to be all that was available before so many people had powerful home computers and high speed internet connections that made it possible for the ordinary person to trade from home. The forex mini account is a development that has opened up the market to people who have the technology but not the money for standard currency trading investment.

If you want to risk even less of your money, you could look at forex micro accounts which allow you to make even smaller trades. Be aware though that the spread is often a little high and you might find it difficult to profit with a micro account. It may be better to use a demo account until your confidence builds and then open a forex mini account for real trading.

Forex Trends Is The Way To Make Money In The Currency Markets

The way to make money with forex trading is by observing patterns and trends in the currency movements and then acting when a trend is about to form in a positive direction. When I say positive direction, this can be an upward trend when opening a trade or a downward trend when closing a trade.

Charts are used for this type of technical analysis. There are generally three types of chart used for this - line, bar and candlestick charts but the most common is the candlestick chart because most traders find them easier to read.

In a candlestick chart, a vertical column shows the high and low price whose width represents the opening and closing prices. The columns are traditionally coloured white for rising and black for falling prices but colours such as green for rising and red for falling are now becoming more common. This type of chart is preferred by many traders because it is easier to see the turning points where a price has reversed from an upward trend to a downward trend and visa versa.

Being able to identify a trend before it actually happens is the big secret and this is where skill and experience is so important. Some traders will observe a currency movement between two imaginary horizontal lines on a candlestick chart and any movement up or down between these lines is considered to be a sideways trend and any movement beyond these lines is considered an upward or downward trend and will consequently trigger an opening or closing trade.

Sometimes these lines are referred to as resistance lines because the currency price will usually fluctuate between them or 'bounce' off them as though they were a physical barrier. Of course they are imaginary and the positioning of these lines is the secret to success.

It is important to take your time and practice with paper trades until you are confident with your interpretation of currency movements and emerging trends before you start trading with real money. Forex is risky and even with the best systems there will always be losing trades. The secret is to ensure that there are more winning trades than losing trades.

Traditional traders prefer to work with charts and develop there own manual systems. It gives them a buzz to be able to read the market and spot a good time to open or close a trade. For others, it's more do with just making money and increasingly there are some very good automatic trading systems, often referred to as robots, entering the market. Of course you have to set the parameters which are similar to the imaginary lines I've just mentioned but having done that you just sit back and let the robot open and close trades automatically.

However, even with robots, you should always paper trade until you are confident in setting the parameters correctly. When you purchase the robot software to run on your computer, it will come with detailed instructions and the ability to demo trade. Visit my blog for regular reviews of the latest robots as they hit the market.
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