Forex or FX stands for Foreign Exchange, the foreign exchange market owes its existence to the 1971 abandonment of the Bretton Woods accord and the subsequent unwinding of the regime of universal fixed exchange rates. According to the 2001 triennial survey by the Bank of International Settlements (BIS), global foreign exchange turnover amounts to more than $1,200bn per day.

Although currency trading is inherently governmental (central banks) and institutional (commercial and investment banks), the foreign exchange market is also the province of non-banking international corporations, hedge funds and individual private investors and speculators. However, technological innovations like the internet have made it possible for individual investors to trade via intermediaries.

Forex trading offer endless short-term and long-term cashing opportunities simultaneously at the same time forex traders are exposed to higher levels of risks and therefore it should not be undertaken without proper training and knowledge.

Forex is still relatively fresh territory for private investors, having really only been rendered feasible by the advent of the internet. Like any financial discipline, the best investment is a sound and practical education and experience.

The growth in this area of the trading industry has been very rapid, especially as equity and futures traders realize the approaches they’ve been using for years in their respective markets, particularly price-based techniques based on technical and quantitative analysis are equally applicable to Forex.

From a price- action perspective, currencies rarely spend much time in tight trading ranges and tend to develop strong trends. More than 80 percent of currency trading volume is speculative in nature and, as a result, the market frequently overshoots and then corrects.

Who Regulate The Market?
Forex Market is not regulated by any authority, Central banks such as the Federal Reserve Bank of the U.S., provide to some degree oversight. But in general, the currency markets are much more lightly regulated than stock or bond trading.

Medium:
Typically Internet is use as the medium of trading, investors have to open their account with a Market Maker or Broker and send their funds via wire transfer or bank cheques to their Brokers to open a live trading account. They can start trading as soon as the amount is credited into their accounts.

Market Maker/Broker:
A Market Maker or Broker is a firm which provides the infrastructure to individual investors to trade in inter-bank forex market. These are typically very large companies with huge trading turn over by their clients. They charge no commission and their interest is limited to the spread. Spread is the difference between the buying and selling price of a currency pair. Suppose the spread on a currency pair in the inter-bank market is 2 pips (a pip is the smallest unit of a lot, if the rate buying rate of a pair is 1.8241, the last digit ‘1’ is a pip) the Broker may charge 3 or 4 pips on each roundabout trade and it has to be given to the Broker regardless of the outcome of a trade.


Advantages of Forex Trading:

 

1. High liquidity: since FX traders directly deal in real money, they do not have to wait for long time to cash their investments.
2. Highly Leveraged: Here in the FX market you have the leverage of 1:100, that is, in order to buy and benefit from a lot of US$ 10,000 you only have to commit your US$ 100, rest of the amount is leveraged by the Market Maker/Broker.
3. 24 Hours Market: FX market is a truly 24 hours and 5 days a week market with highest volume trading occurs at London time, New York, Tokyo in descending order.
4. Profiting Either Way: In FX market you can profit in both directions, when a currency pair is increasing in value and also when it is going the other way round.
5. Total Control: You have total the control, at the time of taking a position, you can precisely define how much you target to profit from the trade and how much you are willing to loose, if the market goes against you. Doing so relieves you from the burden of watching the computer screen during that trade.
6. Zero Commission: The intermediary, called Market Maker/Broker typically charges no commission.

Disadvantages of Trading Forex:

1. High Volatility: It is a highly volatile market, which on one hand offer the opportunity to capitalize and on the other hand it has the potential of great losses.
2. High Leverage: Leverage is a both way weapon, on one hand it lets traders to profit on a lot size of 100 times larger than their investments. On the other hand it exposes them to the losses of equal magnitude.

How Do Traders 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:

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.

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.