8 Basic Forex Market Insights

You don't have to be a daily trader to take advantage of the forex market - every time you travel abroad and exchange your money in foreign currency, you participate in the foreign exchange market, or foreign exchange. In fact, the forex market is a quiet financial giant, dwarfing all other capital markets in the world.

Apart from this extraordinary market size, in terms of currency trading, the concept is simple. Let's look at some basic concepts that all foreign investors need to understand.

Eight Majors

Unlike the stock market, where investors have thousands of stocks to choose from, in the currency market you only need to follow the eight main economies and then determine which ones will provide the best undervalued or overvalued opportunities. The following eight countries constitute the majority of trade in the currency market:

·         United States of America

·         Eurozone (what you have to watch is Germany, France, Italy and Spain)

·         Japan

·         Great Britain

·         Switzerland

·         Canada

·         Australia

·         New Zealand

These economies have the largest and most sophisticated financial markets in the world. By truly focusing on these eight countries, we can take advantage of getting interest income on the most creditworthy and liquid instruments on the financial market.

Economic data is released from these countries almost every day, allowing investors to stay on top of the game when it comes to assessing the health of each country and its economy.

Results and returns

When talking about currency trading, the key to remember is that returns encourage returns.

When you trade on the foreign exchange market (where trading occurs immediately or in place), you actually buy and sell two base currencies. All currencies are quoted in pairs because each currency is valued in relation to another currency. For example, if the EUR / USD pair is quoted as 1.2200 it means it takes $ 1.22 to buy one euro.

In each foreign exchange transaction, you simultaneously buy one currency and sell another currency. As a result, you use the results of the currency you sell to buy the currency you buy. In addition, every currency in the world is equipped with interest rates set by the central bank of the currency of that country. You must pay interest on the currency you have sold, but you also have the privilege of obtaining interest on the currency you have purchased. For example, let's look at the pair of New Zealand dollars / Japanese yen (NZD / JPY). Let's assume that New Zealand has an interest rate of 8% and that Japan has an interest rate of 0.5%. In the currency market, the interest rate is calculated on the basis of the points. The base point is only 1/100 of 1%. So, New Zealand's rates are 800 basis points and Japanese rates are 50 basis points. If you decide to take a long NZD / JPY position, you will get an 8% annual interest, but must pay 0.5% for a 7.5% net return, or 750 basis points.

The forex market also offers tremendous leverage - often as high as 100: 1 - which means you can control $ 10,000 worth of assets with as little as $ 100 in the capital. However, levers can be a double-edged sword; it can create big profits when you are right, but it can also produce big losses when you are wrong.

Obviously, leverage must be used wisely, but even with 10: 1 leverage that is relatively conservative, a 7.5% yield on the NZD / JPY pair will translate into a 75% return on an annual basis. So if you hold a position of 100,000 units in NZD / JPY using $ 5,000 worth of equity, you will get $ 9.40 interest every day. Interest of $ 94 dollars after 10 days, interest of $ 940 after three months, or $ 3,760 per year. Not too bad considering the fact that the same amount of money will only give you $ 250 in a bank savings account (at an interest rate of 5%) after a full year. The only real advantage provided by a bank account is that a $ 250 return will be risk-free.

The use of leverage basically worsens all types of market movements. As easy as increasing profits, it can quickly cause huge losses. However, this loss can be closed through the use of a stop. In addition, almost all forex brokers offer margin observer protection - software that monitors your position 24 hours a day, five days per week and automatically liquidates once the margin requirements are violated. This process ensures that your account will never send a negative balance and your risk will be limited to the amount of money in your account.

Bring Trade

Currency values never remain silent, and it is this dynamic that gives birth to one of the most popular trading strategies of all time, a carry trade. The carry trader hopes to get not only interest rate differences between the two currencies (discussed above) but also find their position to value their value. There are many opportunities for big profits in the past. Let's look at some historical examples.

Between 2003 and the end of 2004, the AUD / USD currency pair offered a positive yield spread of 2.5%. Even though this may seem very small, the return will be 25% with the use of 10: 1 leverage. During the same time, the Australian dollar also rose from 56 cents to close at 80 cents against the US dollar, which represented a 42% appreciation in the currency pair. This means that if you are in this trade - and many hedging funds at that time - you will not only get positive results, but you will also see tremendous capital gains in your basic investment.

Figure 1: Australian Dollar Composite, 2003-2005

Source: eSignal

The carry trade opportunity was also seen in USD / JPY in 2005. Between January and December of that year, the currency strengthened from 102 to a height of 121.40 before ending at 117.80. This is equivalent to appreciation from low to high of 19%, which is far more attractive than the return of 2.9% on the S & P 500 during the same year. In addition, at that time, the interest rate spread between the US dollar and the Japanese yen averaged around 3.25%. Not level, this means that a trader can get as much as 22.25% this year. Introducing 10: 1 leverage, and that could be a profit of 220%.

Figure 2: Composite Japanese Yen, 2005

Source: eSignal

Bringing Trade Success

The key to creating a successful carry trading strategy is not only to pair the currency with the highest interest rate against the lowest level currency. Conversely, far more important than the absolute spread itself is the direction of spread. In order for the carry trade to run well, you must be in the interest rate currency that is in the process of expanding against a currency with a fixed interest rate or contract. This dynamic can be true if the central bank of the country where you have longed to raise interest rates or if the central bank of the country where you are deficient tries to reduce interest rates.

In the previous example of USD / JPY, between 2005 and 2006 the US Federal Reserve aggressively raised interest rates from 2.25% in January to 4.25%, an increase of 200 basis points. During the same time, the Bank of Japan sat in his hand and left the interest rate at zero. Therefore, the spread between US and Japanese interest rates grew from 2.25% (2.25% - 0%) to 4.25% (4.25% - 0%). This is what we call a growing interest rate spread.

The point is that you want to choose to carry trading that benefits not only from positive results and growth but also the potential to value its value. This is important because just as currency appreciation can increase the income value of your carry trade, currency depreciation can erase all the benefits of your carry trade - and then some.

Get to know the interest rate

Know where the direction of important interest rates in foreign exchange trading and requires a good understanding of the country's basic economy. In general, countries that are performing very well, with strong growth rates and rising inflation will probably raise interest rates to tame inflation and control growth. On the other hand, countries that face difficult economic conditions ranging from a broad slowdown in demand to a full recession will consider the possibility of lower interest rates.

The Bottom Line

Thanks to the widespread availability of electronic trading networks, foreign exchange trading is now more accessible than ever before. The biggest financial market in the world offers great opportunities for investors who take the time to understand it and learn how to reduce the risk of trading here.

How to Choose a Forex Broker?

TopAsiaFx.com helps you compare and choose your preferred Forex Broker. We suggest keeping the following checklist in mind when making your decision:

• Is the Forex Broker regulated?
• Account Details: Ideally, your broker should offer either a selection of account types or some element of customizability. Competitive spreads and easy deposits/withdrawals are good indicators too.
• Number of Currency Pairs offered: The variety of currency pairs on offer, as well as the quantity, should be considered (the more of both, the better).
• Availability of Customer Service.
• Quality of the Trading Platform: look for a platform that is easy to use, straightforward and offers a collection of technical and analytical tools to enhance your trading experience.

Rank	Broker Name	Special Offer	Minimum Deposit	Spread	User Score	Maximum Leverage	Regulation	Start Trading
1	NordFX	55% Deposit Bonus	$10	0.0 Pips	96	1:1000	VFSC	Open Account
2	SGT Markets	Refer a friend $10	$500	0.0	95	1:400	IFSC	Open Account
3	OctaFX	50% Deposit Bonus	$100	0.4	94	1:500	IBC	Open Account
4	Exness	No	$1	0.1	93	1:2000	FCA,CySEC,IBC	Open Account
5	IC Markets	No	$200	0.0	92	1:500	ASIC	Open Account
6	Tickmill	$30 Welcome  Account	$100	0.0	91	1:500	FSA,FCA	Open Account
7	Axiory	$50 Deposit Bonus	$200	0.0	90	1:400	IFSC	Open Account
8	Justforex	100% Deposit Bonus	$1	0.0	89	1:3000	IFSC	Open Account
9	ThinkMarkets	No	$250	0.4	88	1:400	ASIC,FCA	Open Account
10	XM	$30 Welcome Account	$5	0.0	87	1:888	ASIC,FCA,IFSC	Open Account
11	FBS	$50 Welcome Account	$1	0.0	86	1:3000	IFSC	Open Account
12	HotForex	No	$5	0.0	85	1:1000	INC	Open Account