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The Secrets of Forex Trading

Updated on April 8, 2008

Secrets of Forex Trading

If you have experience in stock trading, and want to learn to make money with Forex, then you may be interested in some tips that I have learned about trading on the foreign exchange. In many ways, once you appreciate the differences in the way that trades are made, you can use your knowledge of the psychology of trading to help you with your selections and timing, but there are one or two less obvious tricks that will get you up to speed more quickly.

If you are considering taking up the Forex challenge, you may have been attracted by the differences from regular stock market investing. For instance, the Forex market doesn’t shut down each night, and therefore reveal the inevitable opening surges every day that the stock market does. These are fine if you read them the right way and are positioned correctly in advance, but they can also devastate you before you can get out. On the other hand, you can get out of your Forex trade at any time, rather than waiting for the markets to open. You have a more even market in the Forex. You may also like the idea that there are no liquidity problems due to the size of the market, which is many times larger than all the world stock markets put together. One final point is that the Forex market allows you to get tremendous leverage on your money, at 100:1 or better on your margin account, opening the door to large profits.

So what moves the currency markets? You can be sure that no one investor has the money to be able to influence the values, such as can happen with stocks and shares. The Forex market is reckoned to trade about $3.2 trillion dollars every day! But political and economic factors that can be changed by a few people can make the exchange rates vary. For instance, Ben Shalom Bernanke, the Chairman of the Federal Reserve, can change interest rates in the US, and this affects the desirability of the dollar – with less interest, investors may choose to move their money into other currencies where interest rates are sustained.

However, as a stock trader, you already know more than you think about how to follow and anticipate the fluctuations of the foreign exchange market. For instance, if you know about the Nikkei 225 index, you already know how the USD/JPY currency pair will move, because they move in the same way. The Nikkei index is full of Japanese exporters such as Sony, Toyota, etc., as you might expect. When the yen is falling, these goods are more attractive, especially to the American consumer market. The Nikkei index goes up when the dollar goes up (relative to the yen). The opposite is also true. If you look at the charts, you will see that as the USD/JPY goes down, the Nikkei is also falling.

There are other charts that mimic each other. One that isn’t so obvious is the link between the Dow and the EUR/JPY (the Euro v. the Japanese yen). Why should that be? Because the companies included on the Dow Jones Industrial Average get over half their income from abroad, when the dollar falls, the earnings from abroad are worth more, and thus the companies’ shares go up. When the dollar falls, the euro also rises in value – the euro is worth more dollars. The yen in the currency pair just gives a third value, to reflect the changes in the dollar and euro.

There are some relationships that you may not know that you do not know. For instance, the Australian dollar tends to follow the price of gold in US dollars. When the price of oil goes up, the value of the Canadian dollar also rises. And if stocks are falling, then the Japanese yen is a safe currency to park your money – just look at the way the USD/JPY has dropped recently. That means that if you had put your money into yen a few weeks ago before the Dow plummeted, your yen would now buy back more, if you brought it back into dollars.

Of course, there is no real cross linking between the markets as noted above, so if they don’t always work, consider it the exception that proves the rule. As always, you must take charge of your own trading decisions, and not expect that you have a no work magic formula for guaranteed success. You can see how the foreign exchange market can be an exciting place to trade, and it responds to some study. You can get help with studying Forex trading from www.insightsupport.com, where they only do trading, and have a free course to try out.

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