The global forex market hit a record high of $6.6 trillion per day in April 2019. This figure blows past the daily average trading figure of $5.1 trillion per day in April 2016, indicating just how significant currency trading is in international markets. While the spot FX market is significant, it pales in comparison to the swaps market, and now accounts for approximately 50% of all worldwide currency trading turnover.
The 2019 figures are a revelation to many in the global currency trading arena (Courtesy of the Bank for International Settlements). Some 90% of all currencies traded in the world have the USD as one of the trading pairs. While the US is a major market player in forex trading, it is still second to London – the world’s epicenter, with 43% + of all forex trading activity. Spot currency trading activity increased to $2 trillion daily in April (up 20%), but it declined precipitously to just 30% (from 38% in 2013) of all global currency trading activity.
Success in the currency trading arena is dependent on a host of factors. These include knowledge of the interrelated components of the financial markets, effective use of technical and fundamental analysis, capital management, and risk tolerance. We will now explore each of these forex trading resources in greater detail:
1. Knowledge of the Financial Markets
Many traders rely on news headlines to place buy and sell orders. In the absence of a trading plan however, trading the news can be detrimental to your forex portfolio. Day traders are advised to wait until after volatility has subsided for trends to emerge. While most every trader agrees that the news will impact the financial markets, nobody has 100% certainty about the direction of change. What appears to be a clear case of ‘if this, then that’ with macroeconomic variables often moves in the opposite direction. A classic example is interest rates.
If the Federal Reserve Bank decides to raise interest rates, this will likely benefit the USD by making it more attractive to foreigners to buy USD. However, it’s the guidance provided by the Fed that has more of an impact than the actual decision to raise rates. For example, the impact of an interest-rate hike may be tempered by not-so-flattering guidance. It is largely impossible to make accommodation for every eventuality if you’re simply trading on news announcements alone.
One of the most useful knowledge-based resources in the trading realm is an economic calendar. These comprehensive market resources provide access to chronologically-based announcements which impact economic trading activity. For example, Markit Composite PMI Final, Balance of Trade, Consumer Confidence, Business Confidence, Inflation Rate, Non-Farm Payrolls, Unemployment Rate Figures, Core Inflation Rate, Retail Sales, et al have a direct bearing on the financial markets and currencies.
The greater the correlation between economic indicators and forex trading, the stronger the price movements. Sometimes, the actions of central banks around the world will impact currencies in other countries. In this regard, the decisions taken by the Bank of England, European Central Bank, and the Bank of Japan are paramount. The interconnected nature of the world markets necessitates a careful and methodical analysis of global market activity. This type of knowledge can assist in your forex trading.
2. Demo Trading Accounts
Trading, like any other skilled vocation or profession requires hands-on experience. Unfortunately, the risks involved in real-money trading for novices can far outweigh the benefits. Only a small percentage of forex traders actually enjoy sustained success; the vast majority lose money. One of the ways to guard against loss is use of a demo trading account. Reputable forex brokers routinely allow registered traders to access virtual money using real world market data.
It’s just like trading on the financial markets, with zero risk. There are many notable benefits of demo account trading, such as an ability to understand the intricacies of the trading platform without risking any of your funds in the process. Plus, demo accounts also allow for automated trading activity such as robo advisors (bots) under real-world trading conditions. Since demo trading platforms mimic real trading platforms in every way, a trader who successfully masters the art of forex trading on a demo account will likely be able to make the crossover just as successfully on a real account.
3. Technical Analysis
Technical analysis is the bedrock upon which most forex trading activity is built. It is a measure of historical prices, with an eye to determining price movements in the future. Technical analysis proponents posit that the current price action of a currency pair such as GBP/USD has all of the market-related elements already built into its price. Thanks to the trusted aphorism, The Trend Is Your Friend, it becomes a simple matter of looking for past patterns and extrapolating to the present.
The use of charts, graphs, and key resistance and support levels are sacrosanct in technical analysis studies. Currency traders routinely look at these figures to determine likely patterns that will result. Naturally, technical analysis is a subjective assessment, and each analyst will formulate their own opinions based on what will transpire in the future. Nobody can anticipate with absolute certainty where prices will move; the best you can do is make an educated estimation based on the data you’re working with.
4. Fundamental Analysis
Price forecasting is typically conducted with fundamental analysis. Forex traders tend to look at the overall state of the economy – the macroeconomic elements – to determine how each of these factors impact on the national currency. Some of these elements include manufacturing data, international trade, gross domestic product, interest rates, inflation rates, employment, and GDP. Pricing is often imbalanced in the markets; it is the fundamental analyst’s job to determine the correct price based on market realities.
This is how trading opportunities present themselves. For example, if the USD/EUR currency pair is weak, it indicates that the buying power of the dollar is less than what it should be. Fundamental analysis may indicate that rising interest rates, strong GDP growth, positive non-farm payrolls data and other economic indicators support a stronger USD/EUR exchange rate. The fundamental analysis would therefore seek to determine parity between currency pairs. To this end, new data is continually being fed into the markets to price quotes, and developments are provided courtesy of a forex calendar.
It is always a good idea to participate in forex trading courses to fine-tune your skills, use all of the available resources, and put the theory to the test. These 4 trading resources will serve you well when buying and selling forex at a reputable broker.