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8 Most Important Forex Market Notions

In order to make a profit in the forex market, one doesn’t necessarily need to be a regular trader. In fact, each time you travel abroad and exchange currencies, you are making use of the forex market, the financial giant that overshadows all the other money industries.

Nevertheless, the concepts on which this amazing, and apparently overwhelming, financial market is based are quite simple. We will examine some of the fundamental notions that any foreign currency investor must know and understand.

The Eight Dominant Economies

If stock market shareholders have at their disposal thousands of shares to make a choice from, in the Forex world you only need to be aware of the opportunities these 8 dominant economies provides you with:

Eurozone

United States

United Kingdom

Japan

Australia

Canada

New Zealand

Switzerland

These 8 countries have developed the most complex financial markets available worldwide, releasing economic data almost every day, and allowing investors to accurately assess each country’s wealth and economy and thus earn interest income.

Yield and Return

Forex functions on a simple equation: investing drives gaining.

Trading in a spot market means you are buying, then selling, two basic currencies. Currencies are always priced in pairs, their value being related to one another. Let’s take for example the USD/EUR pair: if the quote is 1.4500, it means you need $1.45 to buy one euro.

Foreign exchange transactions imply buying a currency and selling a different one at the same time. What you are actually doing is using the profit from the sold currency to buy another currency. What’s more, the central bank of the currency’s country establishes an interest charge, obliging you to pay the interest for the sold currency and, at the same time, earn the interest on the bought currency.

Leverage Return

Leverage is another Forex key concept. Sometimes as high as 100:1, leverage allows you to manage $10,000 worth of riches with a $100 capital. Nevertheless, leverage can be tricky: when one is right, it can generate huge profits, but, when one is wrong, it can cause huge losses. Nonetheless, losses can be covered using stops, and many forex brokers use a margin watcher – a special software that monitors your status and liquidates automatically when the margin is reached, limiting the risks and preventing negative account balances.

Carry Trades

Carry trading is one of the most famous trading strategies, generated by the dynamic nature of currencies. Carry traders not only earn the interest rate between two different currencies, but they are also able to appreciate its value.

For example, towards the end of 2004, a positive yield of 2.5% was offered by the AUD/USD pair. At first sight, it may seem small; however, using a 10:1 leverage, the return becomes 25%.

The Success of Carry Trading

An efficient carry trade strategy goes beyond pairing up a currency with a high interest and a currency with a low rate. The dynamics of each currency, controlled by the respective central bank, plays a crucial role, as you must take into account the interest rates fluctuations. To sum up, a growing, positive yield, compounded with a potential value appreciation can generate bigger befits.

Currency appreciation and depreciation can consistently make your earning fluctuate.

Knowing the Interest Rates

A good understanding of a country’s economy can help you estimate the direction interest rates are heading. Put simple, countries that are doing well, with solid growth rates and growing inflation rate, are more likely to raise interest. On the contrary, countries facing serious economic problems are more likely to reduce interest rates.

A New Opportunity

In the era of online trading networks, forex trading has become more convenient than ever and this huge financial market provides investors with endless trading opportunities. All it takes is the patience to learn how to trade.

US GDP Plunges 2.9%, The Dollar Is Taking Hits

Nobody was expecting such a drop for the US GDP. The median forecast for the current release was around -1.8%. This show that the US economy is still not that strong and Fed did well not cutting the QE even more at the last FOMC meeting. Core Durable Goods Orders fell 0.1% (exp. 0.3%). This was another tough punch for the dollar and the economy, right after the real estate market was signaling a comeback.

The dollar got a very strong hit at this moment. EURUSD hit a 15 days high at 1.3650, USDJPY touched 101.66, AUDUSD rallied at 0.9385.

From the technical analysis point of view, the symmetrical triangle was signaling a 50% chance for the US dollar to fell in front of the Euro (EURUSD – Holding its position). At this point I am expecting the rally somewhere near 1.3664. A break above this level would clearly signal that investors are targeting 1.37. A false breakout here would be a very strong bearish signal.

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Twitter’s Annual Meeting and Future Perspectives

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With Twitter holding its annual meeting on Wednesday, the stock’s price is declining towards 30$ per share after climbing a high of almost 75$ in December 2013. Since then, the microblogging site had a downfall and suffered a big drop in market … [Continue reading]

USD/JPY Forecast For May 5-9

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The week that passed was an undecided one for USDJPY; the quotation had a fluctuating path and closed the week almost at the same level it started. Monday and Tuesday, the bulls took the price around 102.80 so that Wednesday the bears to take control … [Continue reading]

USD/JPY Forecast For April 28 – 2 May

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The Japanese yen was in total control last week having been 5 days out of 5 in the positive territory in front of the US dollar. This is largely due to the escalation of the geopolitical conflict from Ukraine and the “Cold War” between Russia and the … [Continue reading]

EUR/USD Forecast And Price Action For April 17th

This week is almost ended, Easter is here and investors took a break. The Euro-dollar currency pair moved sideways from the opening price to the current moment. Tuesday the price stopped at 1.3800 even though the fundamental analysis was sustaining a … [Continue reading]

EUR/USD Forecast And Price Action For April 15th

The EURUSD doesn’t stop to amaze me. The quotation touched 1.3900 before the Friday close. During the past weekend Draghi had a speech in which he mentioned the possibility of quantitative easing because the Euro is pretty high and it will hurt EU’s … [Continue reading]

USD/JPY Forecast For April 14 – 18

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USDJPY had a downfall last week amid a selloff of the US dollar, pushing the quote again towards the 101.00 level. Even though the macro indicators from the Nippon economy were weak, the most important one, current account, managed to stabilize … [Continue reading]

NZD/USD Forecast For April 14 – 18

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The retracement we were talking about last week did not seem to matter too much for the NZDUSD bulls as the quotation broke the resistance level from 0.8700 and flied to a new annual high of 0.8745. Well, the macroeconomic data had its part as the … [Continue reading]

EUR/USD Forecast And Price Action For April 10th

1.3815 fell yesterday under bulls’ pressure. EURUSD’s price has rallied again and got near 1.3870 near the end of the trading day, right after the release of the FOMC meeting Minutes. I was expecting the US dollar to strengthen, but the opposite has … [Continue reading]

EUR/USD Forecast And Price Action For Aprilie 9th

Because I skipped (without intention) yesterday’s forecast I will try to recuperate today. On Monday we had no important economic releases for US and EU. I was expected a low volatility day with no more than 60 pips move and so it was. The European … [Continue reading]

USD/JPY Forecast For April 7 – 11

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USDJPY had a flying evolution for the first four days of the week and managed to establish a two month high above 104.00 level. Friday was the day the investors were waiting for because the NFP report had to be published. The new jobs created were … [Continue reading]