Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a Forex trader!
So What exactly is Forex?
The Forex world may conjure ideas of a slick lifestyle full of Plush goods and luxurious assets but is the reality far from the portrayal as so many retail Forex programs lead you to believe.
In truth trading the Forex market is a skilled profession and the effort you put in to accumulating and back testing your knowledge is ultimately going to reflect on your results in the long term! There is no quick fix indicator or strategy that will allow you to become profitable over night and the Forex market can be deadly for your hard earned finances if you have not taken the time to do your homework.
The Forex market or FX market is a form of exchange that international currencies are traded on in set of pairs, one pitted against the other.
It Is also known to be the largest in the world with reports showing that over 5.1 trillion dollars are being traded every day! You can trade Forex in the week Monday through Friday 24 hours a day but there are specific windows where volume of trading is considerably higher, these windows offer more opportunity due to that increased volume.
To imagine how the Forex market works we can look at it in it’s basic form which would be a supply and demand model. Economically speaking when there is a surplus of a product it becomes cheaper to obtain due to less demand for the product and competition between the sellers. The opposite is also true, when demand increases for a product but there are less sellers and product available, the product becomes more expensive.
So how do we apply this supply and demand market scenario to the foreign exchange market? every time a particular currency is bought, surplus demand is created on the market! This throws the price off balance, and pushes the price higher. Similarly, every time a particular currency is sold, a surplus supply is created this time the opposite is true it throws the price off balance and pushes the market price down.
Now how much the price is moved is equal to the trading volume per deal. Market makers such as national banks for example can cause a great deal of destabilisation or volatility by tampering with the supply of their home currency and they control a huge portion of the market.
The smaller participants in the market like retail traders, thee every day Joes! can only influence the market ever so slightly, but they make their prescience known through volume in numbers. The constant fluctuation of supply and demand where currencies are concerned is what drives the Forex market and allows us opportunity to profit.
The reason supply and demand and its effects on price is key to understanding Forex trading is the economic events in the world are relevant in terms of how much they alter the balance of supply and demand in an asset.
When trading the Forex market you will always be using two currencies in a pair because you’re betting on the value of one currency against another.
When we look at a pair such as The great British pound over the U.S dollar represented here as GBP/USD. GBP is the first currency or the primary currency in this case and USD would be the second.
When you see a price quoted on your trading platform, that price is how much one pound is worth in US dollars. You always see two prices because one is the buy price and one is the sell. The difference between the two is the spread, we will look at this a bit more in another video. Whether you click buy or sell, you are buying or selling the first currency in the pair.
Now take some time to think about these concepts and how they apply to the Forex markets, remember Contemplation is the key to learning, have a good day!