David Waring

In our last lesson we finished up the InformedTrades.com Trading Basics course with a look at the 20 components that every trader’s business plan should have. Now that we have a sound foundation in the basics of trading I am excited to be moving forward towards the next phase of the InformedTrades.com trading courses, which will be lessons on the basics of each of the major markets that Individuals trade, beginning with the Forex Market.

There are many interesting things that can be pointed out about the foreign exchange market, however there are a few major things that really separate this market from the equities and futures markets.

24 Hour Liquidity
Probably the biggest advantages that traders of the forex market will cite is that the market is by far the largest market in the world, and that main currencies can be traded actively 24 hours a day. The huge amount of volume traded in the world’s main currencies each day, dwarfs the volume traded in the equities and the futures markets many times over. This combined with the 24 hour trading day gives traders the ability to determine their own trading hours instead of having to trade within set hours as they would have to when trading stocks and/or futures. More importantly than this however is that as the market is more liquid than the futures and equities markets, price slippage (the difference between where you click to enter or exit a trade and where you actually get in or out) in the forex market is normally much smaller than in the stock and futures market.

The disadvantage here is that real market junkies sometimes cannot pull themselves away from the screen while the market is trading and need the finite trading hours of futures and/or stocks to force them to step away from the market. As my background is in forex I have seen many stock and futures traders burn out when trying to trade forex for this reason.

Leverage

There is more leverage provided to traders by most forex trading firms than any other market in the world. Many firms offer you up to 200 to 1 leverage which if fully used would essentially take a .5% move in the market and turn it into a 100% gain or loss on the value of the account.

As the most highly traded currencies rarely move more than a couple of percent in a day, this allows traders to tailor the forex market to their needs, making it a conservative instrument when traded without leverage or the crack cocaine of financial instruments when making full use of the leverage available.

While the availability of leverage is normally seen as an advantage in the above sense, it is also one of the places where forex gets its bad name. Many times new traders are lured to the market after seeing the ability to amplify their returns by making use of all that leverage. What these traders do not fully understand however is that leverage is a double edged sword causing greater losses just as quickly as it can cause greater profits. As a result of this lack of understanding and jackpot mentality, many beginning forex traders loose their money very quickly as a result.

Only Macro Events Affect the Forex Market

Unlike stocks where individual company events have a huge affect on price movements the most highly traded currencies are only affected by macro events like the capital flows between countries, and changes in government or central bank policies. This is often pointed to as an advantage by Forex Traders who feel that this brings less uncertainty to their trades than stock trades which can be thrown way off track if a surprise happens such as a CEO quitting or something similar in the micro picture.

This combined with the fact that there is so much liquidity in the market also makes it a much harder market for someone to come in and manipulate the price to their advantage and to the detriment of others.

The disadvantage here is that this also means less opportunities to gain an informational edge and to profit from that edge as well.

No Upward Bias

Over the long term the US stock market has always gone up giving stocks in the US an upward bias when trading. As currencies are traded in pairs when the value of one currency is falling this automatically means that the value of another currency is rising. This is an advantage from the standpoint of there is equal opportunity for profit from both long and short trades. This is a disadvantage from the standpoint of not having that upward bias working for you when you are in a long trade.

The last characteristic that we will cover is how the fact that the forex market is an over the counter market affects us as traders. As this is a fairly in depth topic we are going to devote a full lesson to it which will be our next topic of discussion so we hope to see you then.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

Borges

Isn’t it an advantage for technical traders (in compare to other markets), since most all the information is already “priced-in” and reflected on price charts?

David Waring

Hi Borges,

Yes I think this could be seen as both an advantage or a disadvantage depending on the perspective of the individual trader.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Shamir

To what extent are movement limited to macro events and movement currency prices. Can investors with significant purchasing power affect currency prices? If so to what maginitude and under what time frames? 1 Min, 5 Min? Or does it depend on the context of the "investors" action and investors alike?

David Waring

Hi Shamir,

Glad to hear from you.

While macro events certainly a major factor that moves the forex market, I think the fact that prices continue to fluctuate in the absence of any major fundamental moves is evidence that there is more at play than just macro events.

If trades are large enough then the forex market, just as any other maret, can be moved by large individual trades. The difference with the forex market however is that because there is over $3 Trillion a day traded it takes much larger trades to move the forex market than it does in other markets such as stocks or futures.

The currency pair that is being traded and the time of day that the trade is made are also a factor meaning that it will be easier to move say USD/CAD than it will EUR/USD. Similarly it will be easier to move the market if you are trading at 4pm than it will at 8am.

The trade sizes that we would be talking about in any example for the main currency pairs would be in the 10's of millions.

Hope that helps.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Unregistered

Hi David,

First of all, I´d like to thank you for the work u´ve done so far.
Dailyfx offers COT analysis once a week, on mondays. Could u suggest me some free services available which offer COT analysis free service more often (three times a week would be nice)? And also could u suggest me some COT analysis packages/toolkits, which does not cost very much (max $200)?

I´m looking forward to your answer. By the way, I find all the software packages u´ve suggested so far very good to make demo account trades on. Maybe I´ll even open a real money account by one of these service provides. Thanks a lot again!

Have a nice and sunny day!
Lauri

Tekmnd

Hi Lauri

Welcome to the site.

Here is a COT link-
Commitment of Traders - Current Reports

That link came from a previous thread on COT, which is here-
Using the Commitment of Traders (COT) Report to Trade Successfully

You also might look at FXCM's Speculative Sentiment Index which is basically FXCM's proprietary version of a COT report.
http://www.informedtrades.com/415739...per-month.html

Cheers
Tek