Meta description: Forex traders buy and sell currencies. They use fundamental, technical, and sentiment analyses to make their trading decisions.
Of the financial markets in the world, the Forex market is the largest and most liquid. It is a financial market whereby traders buy and sell currencies and attempt to profit from fluctuations in their exchange rates. Approximately $5 trillion is traded in it every day.
The highly liquid financial market is on 24 hours every day and for five days in a week. However, in the day, there are specific sessions during which traders in different parts of the world are active in it. These sessions are the European, Asian, and North American sessions.
Here are the important details to know about the most dynamic financial market the world has got.
What is Forex?
Forex is the short expression for Foreign exchange. It is the global market—not restricted to a single country—where currencies of different countries in the world are exchanged for one another. The market has a massive daily trade volume of $5 trillion.
People exchange currencies for different reasons all the time. If you have been to another country before, you would have had to change the currency of your home country to that of your destination. There are currency desks at airports to help with this.
Depending on the rate at the time, you could have got more or less in exchange. When you did this, you were participating in the Forex market. In Forex terms, you traded currencies: bought one and sold the other.
Who Trade Forex?
The Forex market has different kinds of participants. There are the banks, pension and hedge funds, corporations, and retail traders. Banks trade between themselves via the interbank foreign exchange market which, because of its volume and net worth, drives most activity across the entire market.
Pension and hedge funds pool capital from clients and trade large accounts on their behalf. They, however, do not trade just currencies; they invest in stocks and other liquid assets, too. Finally, retail traders are individuals who trade Forex from diverse locations all over the world just with internet-enabled computers.
These different categories of traders have different shares of the $5 trillion daily trade volume. However, the banks, pension and hedge funds, collectively referred to as institutional investors, have the largest. Retail traders, on the other hand, account for the least: a meager 5-6% ($300-400 billion) of the overall daily trade volume.
How to Trade Forex
There are many strategies for trading Forex. However, all of them are based on the three popular methods of analysing the Forex market. These are:
- Fundamental analysis
- Technical analysis
- Sentiment analysis
Fundamental analysis is the tool Forex traders use to understand nations’ economies and how they fare in relation to one another. Consequently, they use economic indicators such as interest rate, inflation, public debt, and geopolitical news and events to make their trading decisions.
Technical analysis, on the other hand, uses resources such as charts, patterns, indicators, and other similar tools to assess the market and form opinions about it. To them, the price is the most important detail to note so they devote themselves, using aforementioned tools, to analysing it.
Sentiment analysis attempts to gauge, at every point in time, the direction of the market. It seeks to know if it is bullish or bearish, that is, the prevailing trend of it, and then profit from it. However, it is important to note that these methods do not have to be mutually exclusive and so can be successfully combined.