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Lesson 3: Introduction to Forex part 2

Introduction to Forex, Forex for Beginners, forex

Introduction to Forex, Forex for Beginners, forexLet's continue our trip into the Forex world. In the previous article of Introduction to Forex, we have seen the first characteristics that concern the currency market.

There are eight major currencies which make up 80% of trade in the Forex market. Seven of these currencies coupled with the eighth, the US Dollar (USD), form the so-called "Majors". They are:

EUR/USD, USD/CHF, GPB/USD, USD/JPY, USD/CAD, AUD/USD, NZD/USD.

Currency pairs that do not contain the US Dollar are known as Cross-Currency Pairs or simply “Crosses”. Historically, if we wanted to convert a currency, we would have had first to convert the currency into US Dollars and then into the currency which we desired.

With the introduction of the Crosses, we no longer have to do this tedious calculation as all brokers now offer the direct exchange rates. The most active crosses are derived from the three major non-US Dollar currencies (Euro, UK Pound and Japanese Yen). These currency pairs are also known as Minors. An example:

EUR/JPY, EUR/GBP, EUR/CHF, AUD/NZD, NZD/JPY, GBP/JPY, AUD/JPY, GBP/CAD, etc.

In the end, there are the “Exotics” that are made up of a major currency paired with the one of an emerging or a strong but smaller economy from a global perspective such as Singapore, South Africa or European countries outside of the Euro Zone.

These currency pairs are not traded as often as the majors or crosses, so the cost for making trading with these currency pairs can be higher, due to the lack of liquidity in these markets. An example:

USD/SGD, EUR/SEK, USD/RUB, EUR/TRY, USD/ZAR, EUR/DKK, USD/NOK, USD/MXN, etc.

The major players in the Forex market are the Central Banks, investment banks, institutional investors and hedge funds which, thanks to their economic capabilities move the entire market. With them, in recent years, thanks to the advent of the internet have been added the private investors (retail) which are, however, a very small part, from the point of view of the capital held, compared to the big banks or hedge funds.

Precisely because these retail investors are so small that they become, for the big speculators, preys, with the possibility of being hunted. The most novice trader or without experience suffer their losses because they are focused on a wrong way respect to the market. So with predictable stop or inexperience errors, as the size of the input in the market inadequate to their account or the position management.

How do we pass from being a prey to be a trader who follows what the large investors do, and thus to be profitable over time? At the start of my trader life, there I have proven many tactics and strategies, but most of them had limits in practice. They were based on tools (indicators) that are based on a mathematical calculation, but that they could not evaluate the evolution of the market. I was facing the evolution of a market (Forex, Stocks, Commodity, etc.) always seeing it in the same way.

It is as, making an example if a person is dressed all year in the same manner. But the time evolves, changes, there are hot and cold seasons. The same is true in the Forex and trading in general. How would the indicator address these situations? Always in the same way, because it is based on unchanging statistical and mathematical calculations. So it may not be the most appropriate method for all situations that arise when we operate on the market.

How we can, therefore, approach this market and be profitable by having at least the statistics on our side. Moving in the currency market, having some very important benchmarks. I am talking about the Central Banks (which you will see in one of the next chapters), the true market maker in Forex which moves in a realistic way the value of the individual economies, (not speculative).

Whenever there is the meeting of the central banks, these captures the attention of all the major players and they generate data that are the mirrors of the true potential of individual economies. They are given important input and fundamental boundaries to distinguish what is speculation and what is the real strength of individual currencies.

These considerations are based on the method that I use in Forex trading.

 

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