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Types Of Markets Part 7: An Introduction To Forex

The term “Forex” stands for Foreign Exchange. In short, buying or selling one currency for another. Since businesses, countries and individual people participate in the market, it is such an easy market to get into without a large amount of capital. It is the most heavily traded market in the world with trillions of dollars going through it each day. To give you an idea of how easy it is to participate in the global foreign exchange market, if you for example go to Europe and exchange your Rands for Euros then you just participated.

 

Although forex markets have been around since international commerce, modern Forex trading only began in the early 1970’s when the United States of America allowed its currency to float freely in the market. It used to be extremely difficult for individuals to trade currencies before the internet. Forex trading required a lot of capital so most of the currency traders were hedge funds or huge multinational corporations. With the internet becoming more and more accessible, a new market for individual forex trading began as it provided easy access to the market.
So, the modern forex market as we know it today is fairly new. In 1971 after the accord at Bretton Woods more currencies were allowed to float freely against each other. With the values of each currency being different the need for forex services increased. Investment and commercial banks do most of their forex trading on behalf of their clients, but there are many opportunities for individual/professional traders to convert one currency into another for a financial advantage.

“Forex Trading” is such a widely known term that people often make the mistake to say that trading stocks and indices is forex. Don’t do that, you will look stupid at the braai. The differences between the markets are simple. The stock market deals in shares – the units of ownership in a company, you physically buy a “piece” of the company. If you are buying or selling an index the value of that index stems from underlying assets from the companies making up that index. Forex or foreign exchange is in contrast the relationship between two things – one currency moving against another.

Like most markets the risk with forex is high. This does not mean that it can’t be managed. The high-risk level is caused by a huge number of forces that affect the global forex market such as politics, inflation rates and speculation. Forex manipulation is also something that happens on a weekly basis where market makers force the price into a level where there is a big amount of stop orders. They do this by manipulating smaller traders to enter the market in the wrong direction. This is more common with unregulated brokers and is the reason why it is ultimately better to trade directly onto the real market – however you will need the capital of large banks and investment corporations to do that.

To pick a timeframe to trade forex is really all about personal preference and lifestyle. If you are a swing trader you will hold your positions for a significantly longer period than a day trader would. If you are a day trader and not one to hold on to overnight positions then by all means trade at a timeframe you are comfortable with. The way we do it at The Traders Hideout is by using a forex matrix. This allows us to compare each currency pairs trend in 3 different timeframes. By using the matrix and building a history we can easily see where the market is heading on a bigger timeframe and then look for entries on a smaller timeframe. This combined with some of our other strategies makes entries and exits comfortable as we follow strict rules when it comes to money management.

 

When you trade forex, I cannot put enough emphasis on discipline. Discipline will be your “money maker” over time –  whether you are trading a small timeframe or a bigger timeframe. When you trade a bigger timeframe, you need to make sure to stick to your strategy and take every trade religiously or you might lose out on a few and in return be less profitable over time. If you prefer the shorter timeframes then consistency will be key. Analise the market and identify the hours you will have to trade to get the desired results. Once you have your strategy and the hours you need to trade, stick to it. See it as planting a seed. When you plant a seed, you will have to water it every day without much visible results in the beginning. Over time you will see it starts to make a small stem, does it help to stop giving it water at this point? NO. This is where you have to nurture and trust in the process even if you can’t see it grow bigger every day. The key is to give it water consistently and over time see how the tree grows.  

If you are new to forex trading or trading in general then please don’t overlook the importance of getting educated. Spend some time and learn how the forex market works. Other than that, you will learn that nothing beats experience. If you want to learn how to trade forex then experience will be your best teacher. There is nothing wrong with decreasing position size to a point where it doesn’t bother you anymore and to practice and trade your strategies until you are profitable and comfortable with the market. Like all skills you learn in life, practice makes perfect.  

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