Forex Market
In this article, we aim to briefly discuss the main topics of the Forex market.
Financial markets, especially the ones can use leverage, have many risks for your investment, and most people who enter these markets lose all or a large portion of their capital in less than three months.
One of the best ways to earn dollars is through global financial markets such as Forex and digital currencies. In this turbulent market, your knowledge and skills are protector of your capital, and reaching a steady dollar income is in line with your personal growth.
What is FOREX?
Forex stands for Foreign Exchange Market.
In this market, exchange rates between currencies are determined floatingly.
For example, the USDJPY currency pair's exchange rate is currently 132.10. This means that each US dollar is priced at 132.10 Japanese yen. This price is determined based on the supply and demand of traders.
Unlike stock and exchange markets, the Forex is decentralised. The reference for the momentary prices of currencies and commodities in all economic and exchange contracts in the world is the Forex market.
More than 90% of Forex market trading volume is related to banks, interbank institutions, financial and commercial institutions, risk hedging institutions, insurance companies, and private economic companies. The daily trading volume of Forex is estimated at around $6 trillion.
Note that the gross domestic product of a large economy like Turkey in 2021 was $400 billion, and the total value of digital currencies market is about $800 billion. That is why even governments cannot manipulate prices.
History of the Forex Market
The spark of the Forex market's emergence dates to the first banks.
At first, humans exchanged goods and then traded valuable metals with goods, which had their own problems such as transportation and so on, and over time, banks emerged to solve these problems, and banknotes replaced valuable metals in transactions. The Bank of England was the first bank to print banknotes.
The word bank comes from the Italian word BANKO, meaning bench. Banks initially held the responsibility of storing wealth, minted coins, and valuable metals, and gradually added services. Today, banks and their economic policies are the main arteries of countries' economies.
In the past, people would entrust their assets to religious temples to preserve them, and in fact, the first banks were religious temples that evolved over time. Documents have also been found showing that these temples also provided loans.
The Romans were the first government to create banks as independent and legal entities, and then this idea spread throughout the world.
World War I and the interwar period are considered a turning point in the global economy. The economic crisis that had started in the United States spread throughout the world and exposed the inefficiency of economic policies and banking systems.
Before the start of World War I, many of the world's major economies had gone bankrupt due to inflation and stock market crises. The Bank of England had introduced gold as a backing for the pound sterling, and before the war, people were lining up for hours to convert pounds to gold, leading to the closure of banks in England and the collapse of its stock market.
What is the Plaza Accord and why did US move towards it?
The Plaza Accord was a signed agreement between the Group of Five members (including France, Germany, the US, UK, and Japan). The negotiations leading to this agreement began in November 1983 between the Ronald Reagan administration and Japan and lasted for two years. This agreement, which was ultimately signed on September 22, 1985, had far-reaching implications for the world economy, including the increase in the value of the Japanese yen and German mark against the US dollar.
As this agreement was signed at the Plaza Hotel, it became known as the "Plaza Accord." The signing of the Plaza Accord had a profound impact on the Japanese economy more than any other country. With the appreciation of the yen, the asset bubble in Japan's market became serious, and after the bursting of the asset bubble in the early 1990s, Japan entered a decade-long recession that continues to this day. In fact, this agreement plunged Japan's economy into a widespread crisis for nearly three decades.
Why did the US move towards the Plaza Accord?
According to statistics, from 1980 to 1985, the value of the dollar against a basket of four other global currencies, including the Japanese yen, Swiss franc, British pound, and German mark, grew by about 50 percent. With the appreciation of the dollar, imports of goods and services became economically viable compared to domestic production in US, and as a result, imports exceeded exports and the US trade balance became severely negative.
Ultimately, the high price of the dollar put many American industries under severe pressure, and they lobbied extensively to reduce the value of the dollar against other world currencies. Therefore, US was forced to start negotiations with other countries to reduce its negative trade balance. This event can be considered as the main reason for the US's move towards negotiations leading to the Plaza Accord.
After the dissolution of the Bretton Woods agreement, major economic powers sought to create agreement to adjust global currency rates and price currencies without government intervention, but each of these agreements had problems, such as the Plaza Accord and the Smithson Agreement.
When did the Forex market become what it is today?
The traditional Forex market can be traced back to the 1970s, but it wasn't until the 1990s, the era of technological advancement, that home computers and the internet became widespread. The internet revolutionized and solved problems in the foreign exchange market by allowing anyone to easily access the latest prices and various charts, which was not possible before. The emergence of the internet eliminated a legion of middlemen and led to the entry of small brokers, individuals, and small economic entities into the market. During this time, banks also created a system that made price fluctuations available to the public in real-time. In fact, the internet brought the Forex market to maturity and solved problems that governments had been trying to solve for years with various agreements. Currently, the Forex market is the world's largest financial market and is commonly referred to as an OTC or off-exchange market.
What currencies are traded in Forex?
The Forex market deals with a set of 46 symbols, with about 20 of them being particularly popular dollar symbols. Forex currency pairs are classified into three categories: MAJOR/CROSS/EXOTIC, with most trades being made on MAJOR and CROSS pairs due to their lower spreads. However, nowadays, brokers offer trading on various symbols such as commodities, stocks, digital currencies, and different indices.
The list of Forex symbols is as follows:
USD: US Dollar
GBP: British Pound
JPY: Japanese Yen
CHF: Swiss Franc
AUD: Australian Dollar
CAD: Canadian Dollar
EUR: Euro
NZD: New Zealand Dollar
ZAR: South African Rand
SGD: Singapore Dollar
TRY: Turkish Lira
CNY: Chinese Yuan
MXN: Mexican Peso
Combining these symbols creates Forex currency pairs. For example, the AUDJPY symbol represents the Australian Dollar against the Japanese Yen.
Forex Market Hours
The Forex market is active 5 days a week, from Monday to Friday, and operates 24 hours a day. The market opens with the New Zealand and Australian banks on Monday morning and closes with the New York banks on Friday evening.
You can trade on any currency pair at any time of the day or night, but we recommend trading during high volume periods.
When does Forex trading volume increase?
Trading volume reaches its maximum when major economies like the US and UK banks are active at the same time, making it the best time to trade.
The larger the market volume and depth, the less likely there are to be irrational fluctuations and stop-hunting (activating stop-loss orders to secure bank liquidity).
What is a trading session and which is the best trading session?
The main price movements occur during the 4 main trading sessions, which are:
• Sydney session
• Tokyo session
• London session
• New York session
The timing of trading sessions varies in different months of the year because some countries, such as Iran and Germany, change their time by one hour in the beginning of autumn and spring. It is better to always keep track of the trading sessions. The market during non-trading sessions has short and sometimes illogical movements.
In the image below, you can see the timing of trading sessions and use the app below to view trading sessions.
Most market fluctuations occur during the New York and London market hours. Of course, your trading strategy also affects the type and timing of your trades, but one of the best times for short-term trades is from the opening of the London market until the end of the New York session.
It is noteworthy that market makers, who are large banks in the forex market that cannot change the price trend, but with their large capital, they can create short-term fluctuations in the market and activate the stop-loss limits of other traders. This happens more often when trading volume is low, so it is recommended to trade during the main trading sessions to reduce your risk and not be affected.
What is market analysis?
In short, market analysis refers to the examination and analysis of various data to predict future price movements.
What are the methods of market analysis?
• Technical analysis
• Fundamental analysis
• Sentimental analysis
Technical Analysis
The most important method of analysis for interpreting price direction, finding entry points, managing open trades, and exiting the market is technical analysis. Various methods, tools, and indicators can be used in technical analysis depending on the analytical strategy.
Technical analysis is a comprehensive subject that we will discuss in detail in future educational articles. The goal in technical analysis is to predict future price movements by examining past price behavior through different styles such as price action, smart money, RTM, etc.
TRADINGVIEW website and CTRADER and METATRADER software are among the most popular technical analysis platforms.
Fundamental Analysis
Technical analysis is a necessary tool for trading, but it is not enough on its own. The main driving force behind market movements and direction is economic news and large-scale statistical data. In fact, macroeconomic policies determine the overall trend of currencies. For example, in 2022, due to the Federal Reserve and US government policies to control inflation, interest rates increased gradually over the year. This led to the strengthening of the dollar index and the rise of dollar pairs such as USDJPY, USDCAD, and other currency pairs where the dollar is in the first position, as well as a drop in prices of currencies and commodities that are tied to the dollar and traded against it, such as the NZDUSD and AUDUSD currency pairs.
Similarly, over the past year, as you are aware, the overall trend of crypto currencies and commodities markets has been bearish due to these Federal Reserve policies.
Therefore, we can conclude that fundamental analysis and macroeconomic data determine the overall trend of prices, and a trader must be aware of this news and information. The best websites for reviewing economic calendars and analyzing and predicting market news are forexfactory.com, Bloomberg.com, and investing.com.
During the release of important economic news that is highlighted in red on the Forex Factory website, the market experiences severe fluctuations, so it is better to avoid trading during these times and manage open trades and set stop-loss orders.
What are the economic data that have a significant impact on the market?
• NFP (non-farm employment): The non-farm employment index, which is released every month, has a significant impact on the relevant currencies.
• Initial jobless claims: The jobless claims index indicates the number of people who have lost their jobs and are applying for unemployment benefits. This data is released every Thursday and usually leads to significant fluctuations in the market if it exceeds 30,000 units.
• PPI (producer price index): The producer price index is the average price of goods or services that factories receive in exchange for production and service companies receive in exchange for their services. This index is released monthly and annually.
• CPI (consumer price index): The consumer price index is a measure of the cost of goods and services consumed by an average middle-class family over a specific period of time. This data is one of the most influential on other economic indicators and macroeconomic policies. It is released monthly and annually.
• PMI (purchase managers index): The purchase managers index is a comprehensive report of 250 large companies in the United States that is released monthly and annually. This data includes a general report on the economic situation of companies, including employment and production levels, and its positivity indicates economic growth and strengthening of the relevant currency.
• GDP (gross domestic product): Gross domestic product is the most important variable that has a significant impact on the market and is, in fact, the most important macroeconomic indicator. This data indicates the welfare and economic health of a country. Details of gross domestic product are released monthly and annually and are derived from the total monetary value of goods and services provided in a country over a specific period of time.
• Durable goods orders: The durable goods orders index refers to goods that have a longer shelf life. This index is a leading indicator and is therefore highly important. The first signals of economic growth or recession can be obtained from this index. This data is also released monthly.
• Retail sales: The retail sales index refers to the amount of sales of durable and non-durable goods and services provided in a specific time period. The retail sales index is one of the most important indicators of a country's welfare and economic health. This data is also released monthly.
What is sentimental analysis?
Sentimental analysis refers to the analysis of emotions and psychological moods prevailing in the market. This method is complementary to technical and fundamental analysis and is recommended for confirming the direction of trades.
What is a trading strategy and how can we create a successful trading strategy?
Like any other job, you need to have a complete plan in place for successful trading. Continuous profit without order and attention to the smallest details of trades cannot be achieved, and you need to develop a strategy for entering, exiting, and managing your capital based on your acceptable level of risk. This comes with experience and knowledge.
Like many professions, trading also takes years of experience and knowledge to become profitable.
A trading strategy is not effective for anyone else in the market, and you need to adjust your strategy based on your own mental and psychological characteristics. Contrary to claims made by market gurus, achieving continuous profits in the market is not easy and requires years of experience, knowledge, and skill.
What is a broker?
Forex brokers are financial service companies whose job is to provide a suitable platform for trading international currencies and other assets such as metals and stocks through a trading platform such as MetaTrader and CTrader. Brokers are essentially intermediaries between buyers and sellers.
To enter the forex market, after registering with a broker and selecting the type of account and then charging the account, you can start your activities in the forex market.
What are the important factors for choosing a broker?
Regulation and broker licenses are the most important principle in choosing a broker because your capital is in the hands of the broker and the one you choose must have valid legal licenses. For example, US brokers must obtain a license from the Commodity Futures Trading Commission (CFTC). So, in the first step, licenses and credibility of the broker require careful consideration.
The type of accounts and fees you pay for transactions are usually the broker's income from users' commissions and spreads. The amount of commission you pay to the broker has a significant impact on your profit or loss, and it is recommended that you work with brokers that have the minimum commission and spreads, although most brokers that provide services to Iranians receive higher fees than well-known brokers in the world.
Broker support - A good broker should have online and available support to quickly resolve your issues.
Deposit and Withdrawal
The discussion of deposit and withdrawal in a broker is very important, and it is better to use brokers that have diversity in deposit and withdrawal methods.
Also, the speed of withdrawal transactions from the broker is important, and withdrawal from the account should not take more than one business day.
