The Foreign Exchange (FOREX) market is by far the largest market in the world. The $1.3 trillion average daily turnover dwarfs the daily turnover of the American stock and bond markets combined. There are many reasons for the popularity of foreign exchange trading, but among the most important is the available margin trading, the 24-hour a day 5 day a week liquidity, and low if any commissions.

Of course many commercial organizations are participating purely due to the currency exposures created by their financial institutions accounts on their import and export activities. Investing in foreign exchange remains predominantly a domain of the big professional players in the market such as hedge funds, banks and brokers. Nevertheless, any investor with the necessary knowledge is and complete understanding of this market can benefit from this exciting arena.

 

Margin Trading

Foreign exchange trading is normally undertaken on the basis of margin trading or gearing. A relatively small deposit is required in order to control much larger positions in the market. This is possible because when you buy one currency you sell another. Margin requirements are set by your Customer broker and vary from as little as 1% to 10% margin. This means that in order to trade 1,000,000 USD on 1 % margin, you need to place just 10,000 USD by way of security. That same security of 10,000 USD, traded on a 10% margin could control up to 100,000 USD worth of one currency against another currency.

As you can see, with gearing your capital from 10 to 100 times calls for a very disciplined approach to trading as both profit opportunities and potential loss are equal and opposite.  

Trade Currency and Price Currency

When you trade, you will always trade a combination of two currencies. For example, you will buy US dollars and sell Japanese Yen or buy Euros and sell Japanese Yen. There are many combinations of the dozens of widely traded currencies. There is always a long (bought) and a short (sold) side to each trade. This means that you are speculating in the prospect of one of the currencies strengthening and one of them weakening.

The trade currency or dealt currency is normally, but not always, the currency with the highest value. When for example trading US dollars against Japanese Yen, the normal way to trade is buying or selling a fixed amount of US dollars, USD 100,000. When closing the position, the opposite trade is done, again USD 100,000. The profit or loss based on price change will be apparent in the amount of Yen credited and debited for the two transactions. In other words, your profit or loss will be denominated in Japanese Yen that are known as the price currency.  

24/5 and No Central Location

The FOREX Market has no fixed location. It is a market based on the vast network of hundreds of major banks and their branch offices across the globe. The liquidity is always there because someone, somewhere can make a price. From Monday morning in New Zealand to Friday afternoon on the California Coast the FOREX Market is basically a 24 hour 5 day a week market that does not stop. Australasia starts a day then comes the Asian market, then Europe, followed by the American and Canadian markets then Australasia again and the cycle continues with the markets closed only on the weekends or in countries with bank or national Holidays.

Spreads not Commissions

When trading foreign exchange, you are always quoted a 2-sided dealing price where you can buy or sell the trade currency. The difference between the buy and sell price is the spread  

The dealing spread is typically around 5 basis points or pips under normal market conditions, e.g. EUR/USD 1.2250-55. This means that you can sell Euros against US Dollars at 1.2250 and buy Euros at 1.2255. There are no more costs, no commissions or exchange fees because so called commissions are built into the spreads. The wider the spread the bigger the commission!  

Spot and forward trading (Swaps)

When you trade foreign exchange you are always quoted a spot price valued 2 business days in advance. This is under normal conditions where there are no bank holidays in the traded currencies countries or is not over a weekend. If you trade on Monday it is valued Wednesday. If you trade on Friday it is valued Tuesday.

Forward trading is making the opposite trade of a spot trade in a given period of time. Often investors will swap their trades forward for anywhere from a week or two up to several months depending on the time frame of the investment. Most common is one-day rollovers, keeping a spot position overnight. These overnight positions are technically one-day forwards. It is very important to know what interest you paying if short and what interest you are receiving if long when keeping an overnight position. Even though a forward trade is on a future date, the position can be closed out at any time. The closing part of the position is then swapped forward to the same future value date.  

Stop-Loss discipline

There are significant opportunities and of course risks in the foreign exchange markets. Aggressive traders might experience profit/loss swings of 20-30% daily. This calls for strict self-disciplined stop-loss policies in positions that are moving against you.

Luckily, there are no daily limits on foreign exchange trading and no restrictions on trading hours other than the weekends. This means that there will nearly always be a possibility to react to moves in the main currency markets and low risk of getting caught without possibility of getting out. This market can move very fast and a stop-loss order is by no means a guarantee of getting out at the desired level.  

The main risk is really an event over the weekend, where all markets are closed. This happens from time to time as many important political events such as G10 meetings are normally scheduled for week The main risk is really an event over the weekend, where all markets are closed. This happens from time to time as many important political events such as G-20 meetings are normally scheduled during the weekend.
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It was mentioned in a past article that Fibonacci forex trading is the basis of many forex trading systems used around the world by profitable forex traders. These systems are all based on the famous Fibonacci ratios (.236, .50, .382, .618, etc.) and each of them can specialize in a particular ratio along with other minor indicators in order to make the pinpointing of the entry and exit levels as accurate and profitable as possible.

One of the widely used Fibonacci ratios is the 0.382 ratio. As it can be easily seen on any forex chart, currency prices are continually changing and they follow an oscillatory pattern with peaks and valleys. The limit of the peak is usually called a resistance level while the valley is usually called a support.

In order to find the 0.382 ratio level what you do is, first; measure the size of the drop or rise over your time of interest. Once you have that value you multiply this by 0.382. Now depending on what you are looking at, a rise or a drop on the price of the particular "currency pair" you are trading, you will add the last value you calculated to the total drop or subtract the value from the total rise.

These operations will give you the 0.382 Fibonacci ratio level, either for a rise or a drop on the chart you are analyzing. Once you have the value you can then start planning the strategy you will follow in order to make a high probability profit from this valuable information. For the 0.382 ratio level calculated for a recent rise in the "currency pair" exchange price, your calculated level will be a highly probable support and for the case of a level calculated for a recent drop of the prices your level will be a highly probable resistance.

Knowing this ahead of the market and having the proper secondary indicators, will give you a huge advantage over most forex traders, and that's something any trader would like they could count on. That's why Fibonacci trading is so widely accepted over the world, and of course, why it's so profitable and successful.

Free chapters of a forex day trading system can be downloaded at http://www.1-forex.com in case you are interested in learning more about Fibonacci forex trading