Forex trading is driven by supply and demand. The players on the market include banks, brokerages and investment companies. Thanks to the advancement of technology, individual traders have also entered the market. It makes for a unique blend of trading. It is also the reason why anyone can now trade on the foreign exchange.
Trading Speed and Portfolio
You may have noticed that the exchange rates change throughout the day. What you may not know is that the rates change more than a few times a day; they change approximately every 4.8 seconds. That means that there is a potential profit making trade happening every five seconds.
The Forex trading market is a constant reflection of the growth of international trade and the countries involved. There are several major markets such as New York, Japan, and London but there are other markets that are open as well. Understanding the market is not the only thing that you need to know when it comes to being a Forex trader. You also need to have a good understanding of your portfolio. It is also a good idea to understand how the market’s relative unpredictability will affect it. One of the best ways to do that is through correlations.
All of the currencies when you are Forex trading are traded in pairs. You are purchasing one against another. You are making a prediction based on whether or not one of the currencies will move in the way you predicted it would move. If it does, then you earn a profit. If it does not, you take a loss.
For example, if you are forex trading the British pound against the Japanese Yen then you are trading a derivative of the United States Dollar and the Japanese Yen and the British Pound and the United States Dollar. It logically follows that if you are trading the GBP against the JPY you also need to pay attention to what the other two pairs are doing. They are all connected when one of the pairs moves, because they contain one of the currencies in a pair in this example. By extension, the pair you are trading in also moves.
You can use these correlations to track potential movements. Correlations range between -1 and +1. The correlations are important because they will tell you approximately how the various currencies will move in relation to one another. For example, a +1 correlation means that the two currency pairs move in the same direction nearly 100% of the time. The opposite is true for a -1 correlation.
These are not always exact but they are generally accurate. It is always good to verify when things change because almost 100% of the time is not the same as 100% of the time. Forex trading is risky, so while it is good that you have a solid idea of what might happen only experience will give you the insight necessary to know if those ideas are going to bear fruit or if you need to take a risk.