A Practical Introduction To The Forex Market

If you never traded or read about the Forex market, the terminology might be a little confusing.

Today we will guide you through the basics of the Forex market. We’ll start by explaining you what are the Foreign Exchange rates, we’ll give you some simple but effective forex trading tips, we’ll explain you the different types of charts used by Forex traders, and we’ll teach you how to find a good forex trading platform. Last but not least, we’ll tell you how to start trading Forex, how to reduce the risks and how to avoid some risky Forex brokers.

Foreign Exchange Rates

If you ever traveled to a foreign country or if you ever bought a product in a foreign currency you had to deal with foreign exchange. Every time you need to convert your currency into another, you are dealing with foreign exchange rates.

Traveling

If you’re traveling abroad, if you’re looking to buy a product or service online which is sold in a foreign currency, you’re (sometimes automatically) converting your currency into another. In reality you’re doing 2 operations at the same time: you’re selling your currency and you’re buying another currency. The currency you need to deliver for the foreign currency you’re buying is the exchange rate.

The Price of a Currency

The currencies are crucial to our national and global economies. With them we buy products and services in our country or abroad. Our national currency is not always accepted abroad, and that’s why we need exchange rates.

You can look at the exchange rate as the price of a currency. For example if the exchange rate for the Euro Dollar is 1.36, that means if you want to exchange your dollars for Euros, you’ll need to pay 1 dollar and 36 cents for each Euro. The opposite scenario is when a European plan to trade Euros for dollars, he will get 1.36 dollars for each euro he delivers.

The world currencies used to be backed up by gold for centuries but that’s no longer the reality. A currency value is no longer tied to the value of gold. There are 2 systems to determine a currency exchange rate: The Floating currency system where the Forex market supply and demand forces determines the value of the currencies, and the Pegged Currency system where the exchange rate is set by a government.

The floating currency system is used by mature and developed countries and the exchange rate is determined by the supply and demand. The imports and exports as well as the foreign investment represent powerful supply and demand forces so they are important aspects in the floating currency exchange rate system.

In the pegged currency system the exchange rate is fixed and maintained by a national government. This exchange rate will be pegged to a strong currency (usually the US Dollar or the EURO). In this system the government of the pegged currency needs to try to keep the rate stable.

Both systems at the same time

In modern economies, few countries adopt a 100% pegged or floating system. Most countries adopt a mix of those systems where they peg the foreign exchange rate to the Euro for example but the government reviews their peg often making the necessary adjustments to adjust the market value of their currency.

Governments also interfere in the floating system by adjusting their tax rates, interest rates and import taxes. So commonly the floating system is not only determined by the market supply and demand but by the government policies and interventions.

Forex Trading Charts

Forex education charts are the most important tool you can use to time the market and trade successfully Forex. You need to learn how to read a chart, detect support and resistance levels, and learn technical analysis.

The 5 most popular forex trading charts used are: The Line chart, the area chart, the Bar chart, the candlesticks and the point and figure charts.

Forex Line Chart

The line chart is the most simple to use and understand since it’s just a line that shows the closing prices for the past periods.

To draw a line chart your software simply connects the closing prices. In this chart you can’t know the open, the high or the low. You can only see the historical closing prices but that alone gives you a quick glance to the overall trend.

Forex Area Chart

The Forex Area Chart is similar to the line chart. In this chart you can only see the closing data as well.

Area Chart
The only difference between these 2 types of charts is the visual layout of each. While the line chart only shows you a line, the area chart shows the exact same line but it transforms the information into an area to easily show you what’s happening in the market.

Some traders prefer the line chart, others the area chart. Both show the exact same information so it’s your personal preference to use one or the other.

Forex Bar Chart

The Forex bar chart adds more information: Besides showing you the close, it also shows you the open, the high and the low. It shows you the trading range for the specified period:

The bar chart is built by drawing vertical bars where each one represents a data period. The high of this bar represents the highest price reached in this period, and the lowest point of the bar represents the low. The open and the close are represented by the horizontal dash you see at these bars (on the left side represents the open and on the right side represents the close).

Some charting platforms will use the same color for all bars (usually blue or black), others will display green bars when the close is higher than the open, and red bars when the close is lower than the open.

Forex Candlestick Charts

Candlesticks are similar to the bar charts, the only difference is the visual impact the candlesticks offer:

Just like in the bar charts, the each candle bar represents a data period. The high and the low price for the day is represented by the candlestick high and low.

In candlesticks charts you can also see the open and close prices and you get green and red signals representing a positive or negative open to close price change.

The candlesticks are the most popular type of charts used, and there are dozens of price patterns used by technical traders specifically for this type of chart.

Forex Point and Figure Charts

The Forex point and figure charts is not as popular as the previously discussed charts. One of the reasons is the point and figure charts are not available in all forex trading platforms. They are more exclusive to paid charting packages. Point and figure charts try to show the price movements only and their main goal is to remove the noise and allow you to trade with the trend.

This type of chart is built with Xs and Os. Each X represents uptrends while the Os represents downtrends. Another important point about these charts is the reversal criteria. The reversal criteria are simply what price movement the currency need in order to signal a new trend. Point and figure charts also have specific trading patterns that give you trading signals.