How Does the Forex Market Work?

In the forex market, you trade one currency for another. The two currencies being traded are known as a currency pair. Here are some examples: USDJPY - buy Japanese yen with US dollars JPYUSD - buy US dollars with Japanese yen USDCHF - buy Swiss francs with US dollars CHFUSD - buy US dollars with Swiss francs

The main currencies

The main currency used in forex is the US dollar; 40% of transactions involve the dollar. Other major currencies include the following: Japanese yen Swiss francs British pounds Euros Canadian dollars Australian dollars New Zealand dollars

Although the US dollar still predominates, cross rate trading is increasing in Europe. This is where currencies are traded without using the dollar as an intermediary; for example, you can trade euros for British pounds or yen directly.

Types of transaction
There are five main types of forex transaction: Spot - 48% of the market Swaps - 39% Forwards - 7% Options - 5% Futures - 1%

Making money
Most traders work in spot forex. This is where currencies are exchanged directly. Here's an example: You want to trade US dollars and Swiss francs The instrument for buying Swiss francs with US dollars is USDCHF You buy when the rate is 0.7700 and get 770 Swiss francs for $1,000 You wait until the Swiss franc goes up You sell at a rate of 0.7690 Your profit is one Swiss franc or $1.32 You only had to invest $10 because you had 1:100 margin You have made a 13.2% profit
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In the example above, the price changed by 10 points a point is 1/10,000 of a currency unit. Prices normally change by between 80 and 150 points per day, so you can make large profits. If the price above had changed by 80 points, you would have made $10.56 for a $10 investment. However, the exchange rate can also move in the wrong direction, in which case you will lose money. That's why it's important to analyse the market before you buy, and to keep a close eye on your open positions. You can also set stops, which place a sell order automatically when a specific exchange rate is reached. That way, you can lock in your profits and limit your losses

The best time for trading

There are no hard-and-fast rules for when to trade, but the following are general guidelines.

Specific currencies

For some currencies, there are preferred trading windows: 8:00 - 20:00 is best for British pounds, Swiss francs and Euros 01:00 - 06:00 and 13:00 - 20:00 are best for yen (by CET time)

Economic news
Economic news can affect exchange rates, and its released according to a calendar. When news is going to be published, you can do the following: Place your orders just before the news is released if you want to speculate on it Stay out of the market if you want to avoid the effects

Time intervals
When you track the market, you can use different time intervals. Specific codes are used for these intervals, as shown in the table below.
Code Interval

D1 H4 H1 M30 M15 M5

1 day 4 hours 1 hour 30 minutes 15 minutes 5 minutes

D1
There is no best time for D1. However, you should check the new candlestick quickly after an interval ends.

H4
Again, there's no best time. You should check every 4 hours and look for buy and sell signals.

H1, M30, M15 and M5

The best time is when the market is fluctuating the most. This normally happens at the following times: 03:00 - 05:00 10:30 13:00 16:00 -19:00 peaks occur at 16:45 and 18:30

How to make profit?

One of the most difficult things for forex beginners to understand is how you make profits trading currencies. At the same time, since we don't charge commissions, many people don't understand how we make money either. Here are the answers!

How do you make money?

Let's take an example based on the graph below: You open an Classic Account with 2,000 You think the Euro will go down against the US dollar You decide to sell 200,000 Euros once the bid price reaches 1.2850 US dollars Because you are on 1:100 margin, this costs 2,000 we provide the other 198.000 There is no margin left in your account at this point

The Euros you sold are worth $257.000 US dollars You decide to buy Euros once they go down to an ask price of 1.2750 US dollars The Euro ask price reaches 1.2750 US dollars and you buy This costs $255,000 US dollars You have now sold 200.000 Euros for $257.000 and bought them for $255,000 The difference is $2,000 US dollars or 1568 Euros Your profit for a 2,000 investment is 1568 Euros a 74.43% return!

Here's another example: This time you think the Euro will go up You open a Cent Account with 20 US dollars You decide to buy 1500 Euros when the Euro ask price goes down to $1.2750 It does and the cost is $1912.50 Because you have 1:100 margin this only costs you $19.12 we provide the rest The Euro then goes up to 1.2850 US dollars You sell your 1500 Euros for $1927.50 Your profit is $15.00 a 75% return on your $20 investment!

How do we make money?

You've made money trading Euros and dollars. We don't charge any commission, so how do we make money? Notice in the example above that we talked about bid prices and ask prices. These aren't the same: The bid price is what you pay when you're buying currency The ask price is what you get when you're selling - and is less than the bid price

The difference between the two is known as the spread. This is where we make our profit. In the first example above, the spread is 0.0002 or two points, and so our profit is about $30 on $200,000.

Managing your risk

In the examples above, the dollar moved in the direction you expected. However, it could move in the opposite direction, and you could lose money. There are a number of things you can do to manage this risk: Change the default 1:100 margin for your account - 1:10 for low risk or 1:500 for high risk Manage your money by spreading it over several investments

Use a number of other risk management methods

Forex currency market

The word value comes from the Latin valeo, I stand. Valuable currencies today are: Monetary units of countries with indication of type (paper, gold, silver);

Monetary units of a number of foreign countries, including payment and credit documents expressed in such monetary units and usable for international accounts (cheques, bank bills etc.)

Basically, the Forex currency market is the sum of all transactions made by its participants (banks, exchanges, funds, investment, brokerage and external trading firms, as well as private persons, i.e. traders) to exchange some types of currency. Each second, the Forex market processes thousands of transactions, bringing profit to participants. The Forex currency market has the following classification of currency types: Freely convertible currencies have no limit on financial transactions of any kind, may be used by residents and non-residents of a country, and can be converted into any foreign currency; Partially convertible currencies are usually those with a number of restrictions on use by non-residents and a specific range of allowed transactions. Thus, most Western European currencies are partially convertible; restrictions on use by non-residents were removed in 1958, and now any amount on an account in such currencies may be converted to a freely convertible equivalent; Non-convertible currencies have restrictions for both residents and non-residents barring a number of financial transactions. They are not convertible and are used only inside their specific countries. For instance, nonconvertible currencies are used in developing and dependent countries, and tied to the currency of a metropolitan country that sets exchange rates to give itself an advantage. Non-convertible currencies are not used on the Forex market.

The Forex currency market has two types of operations: buy and sell; each currency has demand and supply, allowing transactions with no real restrictions on volume or time. The Forex currency market also entails regulation of the exchange rates of various countries by balancing supply and demand. The Forex currency market has a number of so-called primary currencies most daily transactions are conducted in these: USD the U.S. dollar. No doubt the backbone of the Forex market. Traders often call the USD the buck, the greenback, the dolly. EUR the euro, common currency for the European space, second on Forex in terms of popularity. Before the euro, the DEM Deutschmark, Germanys national currency, took its place. GBP (Great Britain Pounds) the pound sterling, Britains national currency. Financier slang also includes the names sterling, pound, and cable. CHF the Swiss franc. The slang term swissy is used alongside the official name. JPY the Japanese yen. The Forex currency market also uses: AUD the Australian dollar, often referred to as the aussie by financiers. AD the Canadian dollar. NZD the New Zealand dollar, also known as the kiwi among Forex currency market traders.

Another incredibly important concept on the currency market is the currency exchange, which is a key link in the chain of currency market trading services. Essentially, the currency exchange is a place where transactions are made. In this case, the currency is in free trade, shaping the process of constant currency exchange fluctuations. The main characteristic of the currency exchange is that exchange rates are shaped and noted as part of its operation, through the effect of supply and demand on the selling and buying of currencies. This very process is the main objective of the Forex currency exchange: shaping the exchange rates based on objective effects of the economic factors of specific countries. The currency exchange essentially regulates exchange rates. With the development of technology, more and more people today use the currency exchange online, trading in real time via an internet connection. The online currency exchange fulfils a number of functions besides affecting exchange rates: it lays the technical groundwork for free trade, creates and applies the rules for trading participants to enter (covering e.g. funds, business reputation), and creates the conditions and rules for making the transactions themselves. The obligation of monitoring observance of these conditions lies with the currency exchange as well.

The largest currency exchanges are in London, New York and Tokyo. Thus, the online currency exchange can cover practically the entire world and provide nearly equal conditions for all currency market participants. This has made the Forex currency exchange the largest exchange in the world, with a turnover of more than several trillion dollars per day.

Forex strategies
Each beginner on the international currency market approaches their operations with utter seriousness. The very first day poses a very justified question: what is the way to play in order to at least avoid loss in the long term? Forex trading strategies will help.

Forex strategies: programmes for functioning on the market

By applying a specific algorithm applicable to a specific market situation, the Forex strategy determines a traders action on the market. On the internet, you will find a number of various Forex strategies invented by traders that will guarantee profit given a specific market state. Successful traders have their own Forex strategies which they will obviously never share with the public because this is their own income mechanism, honed over the course of months if not years.

Newbies and Forex strategies: is success guaranteed?

There is another obvious fact as well: not even the most loss-proof play methodology will bring a new user millions straight away. The market always changes, and newcomers simply cannot adjust to the new situation here in time. Forex strategies are based on success and failure, on chasing profits along a road that is known for its pitfalls.

What Forex strategies to use

There are a number of universal Forex trading strategies that allow you to stay afloat for a long time without going in the red. Overall, using some Forex strategy on the market is required, because random bets will not bring a positive result. This has been proven time and time again. Of course, sometimes this may turn into a very successful deal or two, but stable profit becomes impossibility over time. The experience of professional traders shows that a personal Forex trading strategy is the most efficient and comfortable solution for a trader. You will no doubt agree that an active, risk-taking person and their more cautious, risk-aware colleague who scrutinises the situation before making a move are unlikely to use the same methods. Only by trying out new things will you be able to select a path that suits you the most. You will see that rules that clash with your own values are hard to follow.

How to make your first deal

Choose your currency pair
Analyse the market and select a currency pair that you want to trade. Decide which currency you think will go up, and which one will go down.

Decide on your deal volume

Choose the amount of currency you want to trade. The more volume you trade, the more you can earn or lose. If you're a beginner, we recommend that you make small trades.

Set your profit goals

When you make a trade, you should set a profit target. When this target is reached, your position will be closed automatically, and your profit and original stake will be transferred to your account.

Set your loss limits

Similarly, you need to decide how much you're willing to lose. Set this and once again your position will be closed automatically once the price reaches this limit. Your remaining stake will be transferred to your account. Remember not to risk all your money.

Check again and place your order

Look at the parameters you've just selected. Make any changes that are needed. Confirm that the price you wanted is still available; the price is only available for a short time and may have changed. If it has changed, decide if you still want to trade. If you do, place your order.

Get confirmation
As soon as you enter your order, the data is sent to our servers. We check the details and execute your order right away. Once the deal is made, we send you a confirmation, and your open position appears on your trading terminal.

Close your position

Once the price reaches a point where you want to sell, close you position and we will transfer the money to your account. Note that your account balance does not reflect your profit or loss until you do this. Your position will be closed automatically if the price reaches the profit or loss limits you set.

Multiple deals
You're not limited to one open position at a time. You can open as many as you like, as long as you have enough money in your account. To do this, repeat the steps above for each trade you want to make.

Market tips
At Forex4you, we want you to succeed with your forex strategy. Our experts give you the most accurate and up-to-date market data, and back this up with expert analysis and forex tips. When you open a Forex4you account, you get the following valuable information: Currency rate forecasts prepared by our expert analysts several times a day Comprehensive analysis of forex market trends Short-term forex tips Long-term forex trading recommendations Valuable hints on forex trading techniques

Rely us for the latest forex market tips, news, trends and insights. Start building your forex strategy today!

Forecasting the market

There are four main ways of forecasting the market and building your forex strategy: Fundamental analysis Technical analysis Wave analysis Complex analysis

Here, we're going to take a closer look at the first two of these: fundamental analysis and technical analysis.

Fundamental analysis
The forex market is affected by real-world political and economic events, just like any market. Here are some simple examples: A country's currency is likely to drop if traders think it might default on its debt Raising interest rates makes a currency more attractive to investors lifting the price Exposure to risk such as an imminent bank failure can reduce the value of a currency

Fundamental forex analysis is when you track these factors, analyse their impact and make currency rate predictions. You can then use the results as part of your forex strategy. In practice, much more subtle forces can affect the value of a currency. To make things more complicated, events also interact with each other; the effect depends on the circumstances. Our financial specialists use their practical forex experience and financial acumen to predict the impact of these complicated trends on currency rates, and give you the results to use in your forex strategy! Get free fundamental analysis and forex tips from Forex4you.

Technical analysis
The forex market is not just driven by world events and major economic trends. The market is made up of people, and these people respond to the behaviour of the market itself. Market movement depends on human psychology; if you can predict what people will do, you can make money. Here's a simple example: The market drops a small amount People who are affected rush to sell The market drops further because people are selling More people rush to sell and the slide continues Other investors start buying as the price becomes attractive The market goes up again

Technical analysis uses detailed market data to predict these trends. Different technical indicators are calculated and plotted over time to give a view of market behaviour. These charts contain signals that indicate if the price is likely to go up or down, which you can use to decide when to buy or sell. Become a Forex4you client, and use our technical analysis tools to maximise your chances of success: Our forex experts produce daily technical analysis and forex tips free of charge Use our MetaTrader 4 trading platform to carry out your own analyses

Click here for more information about technical analysis and indicators.

Forex strategy
Join Forex4you and develop your own forex strategy! A forex strategy is a set of well-defined rules that tell you when to buy or sell currencies. This includes fundamental and technical analysis, but there's much more to forex strategy than that. You need to take into account your own temperament and your own strategy: Conservative or aggressive Comfort with risk Patience Narrow or wide focus The way you react to situations

Developing a forex strategy can take a while when you're a beginner, and you won't become an experienced trader overnight. We understand this, and have created our Cent Account to help you develop your forex strategy. With a Cent Account, you can do the following: Trade with real money Make trades for as little as two cents each Get the same tools and advice that all our traders get Develop your forex strategy with minimal risk Share your forex strategy with other traders Upgrade to a Classic Account when you're ready

Wave fractal analysis

Younger time intervals up to and including H4 Older time intervals starting from H4 Articles

Elliot wave analysis is one of the ways to technically analyse a market. I was developed by Ralph Nelson Elliot in 1934.

Fundamentals of wave forex analysis

If we look at price development graphs, we may observe that they are repeated across several models. In turn, each large model consists of other, smaller ones. Elliot himself was able to describe most such models. He defined the law of eight waves. According to this law, if the market develops as five waves in the direction of the general trend and three other waves going in the other direction, given that the direction has specific periodicity, then the graph contains a complete market cycle with rising prices. In the reverse case, there is a market cycle with falling price.

Particulars of wave market analysis

First, wave market analysis allows a forecast of how the financial graph will develop. It serves as a tool that identifies market changes at various time periods. Second, it should always be considered that this is simply a forecast rather than a precise picture of the market. Third, wave forex analysis reflects the financial picture of the market at a given point only. All forecasts based on Elliot waves shift with time. Fourth, a trader on the stock market cannot make actionable decisions based only on a wave analysis. It is only a simplified graph with a hypothetical price change trend.

Technical analysis
Get daily technical analysis from our experts, and understand what's really happening in the forex market. To make profits trading currencies, you need to predict whether the market will go up or down. Technical analysis is one of the key ways of doing this, along with other techniques such as fundamental analysis. Technical analysis provides deep insights into market behaviour. Technical indicators are calculated from recent market data, and are then plotted over time. These charts contain signals that show what the market is likely to do; traders use these signals to decide when to buy or sell.

Market Psychology
The forex market is driven by fundamental factors, such as world events and economic performance, but human psychology plays an even larger role. People behave in certain ways, and technical analysis uncovers these trends. Here is an example:

A currency has been stable for a long time There's a small upwards movement Traders start to buy The price moves up further and volumes increase This attracts the attention on more investors The upwards trend accelerates People start to sell to lock in their profits and the trend slows More people see this as a signal to sell and the trend reverses

Fundamental analysis
Get free fundamental analysis from Forex4you! The forex market is affected by world events, political situations and economics trends. If you understand the impact of these, you can predict the market and increase your forex trading profits. Fundamental analysis isn't easy. You need the accurate information about the following:

Banks Other financial institutions Economic performance Political developments Monetary policies

National interest rates World events Stocks and bonds

It's not possible for one trader to make sense of all of these:

There's a huge amount of raw data Factors interact in complex ways Similar events can cause different results depending on the circumstances Understanding the data needs deep, multi-faceted analysis You need to know how the market reacted in the past

Money management
You need to manage your money when trading. The goal in forex is to make profits without risking all your money. There are a number of money management methods you can use.

No money management
Some traders don't use money management; it some cases, it's part of their strategy. We don't recommend this, especially if you have limited funds. You could lose your entire deposit or even end up being bankrupt.

Multiple open positions

As a forex trader, you may want to open multiple positions; for example, you may trade both EURUSD and EURGBP at the same time. Here are some things to keep in mind: Multiple open positions can magnify your profits and losses Your profits and losses may balance out but you can't rely on this to reduce risk

Invest a fixed sum

Don't invest all your money at once; decide how much you want to invest when you open a position. Risking everything isn't a good idea; if you start to lose money, you could get a margin call.

Invest a percentage
This is similar to investing a fixed sum, except that you invest a fixed percentage of your account balance. If your account balance goes up, the amount you invest goes up as well. If your balance goes down, you invest less.

Keep track of closed positions

Keep a history of your closed positions. Analyse and act on these: Determine where you made and lost money Look for patterns - such as profit runs and large profits followed by a series of losses Adjust your trading strategy and volumes based on your analysis

If you do this, you can increase your profitability.

Use moving averages

With forex trading, timing is everything. If you enter the market at the right time, you'll make money. If you don't, you'll lose. One way of determining the right time to enter is to use moving averages: A moving average is the average price over a number of trading intervals A large number of intervals gives the long-term market behaviour A small number of intervals gives the short-term behaviour

Use the difference between the short-term and long-term moving averages to time your market entry: Open a position if the short-term average is above the long-term average Wait if the short-term average is lower

Risk management methods

There are four main ways of limiting your losses: Placing stop orders Managing your money only invest part of your funds Following market trends Sticking to your strategy don't let your emotions take control

Once you have opened a position, stop orders are the best way to limit your risk. A stop order is an order to sell automatically when the market reaches a specific price. There are several types of stop order, each of which provides different benefits.

Initial stop signal

Before you open a position, establish how much you're willing to lose. Determine the corresponding price and set an initial stop signal at this level. If the price drops to this level, your position will be closed automatically, limiting your loss.

Take profit
Similarly, you should determine how much profit you want before you make a trade. Determine the price, and set a profit stop at this level. Once the market reaches this price, we will close your position and lock in your profit.

Trailing Stop
If you think there's a trend developing, use a trailing stop to follow it. The stop is set initially at a fixed distance from the current price. As the price improves, the stop follows it. However, if the price deteriorates, the stop doesn't move. Here's an example: The US dollar to euro exchange rate is .7040 You spend $1,000 and get 704 You set a trailing stop of .0050 points This means that your position will be closed if the rate reaches .0790 If it did, you would get back $992.95 a loss of $7.05 The rate actually goes to .6990 - the trailing stop is adjusted to .7040 The rate then goes to .7020 the trailing stop stays at .7040 The rate changes again to .6950 the trailing stop is adjusted to .7000 Finally, the rate changes to .7000 your position is closed automatically You get $1005.71 a profit of $5.71

Timed Stop
This is a simple order to close your position at a specific time if no other stops have been triggered.

How to build your own trading strategy

Each forex trader has their own strategy. Some use well-established forex strategies, some build their own from scratch and others use a combination. It's important to develop your own approach. You have to be comfortable with your strategy, and it needs to deliver results. Beginners often find this a daunting prospect, so here are some basic rules to get you started.

Filter your inputs

Not all forex advice is good advice. Figure out where the advice has come from, and how much you trust the source. This is particularly important when using the internet. There are a lot of amateurs out there who think they know what they're doing, but they don't.

Test and modify

When you develop your trading strategy, you'll start with a set of recommendations from analysts and other traders. Try these out on your demo account, and modify them to see what happens. It's important to create your own formula for success, as this will improve your trading skills.

Don't reinvent the wheel

You can learn from forex analysts and experienced traders. They are still in the market because they are successful. Study their strategies and learn from them. Don't follow them blindly, but test out what they are saying and see if it works.

Look at long-term trends

Some traders make money from short-term market fluctuations, but if you want to understand where the market is going, look at longer time frames. Short-term data contains a lot of noise and can't be relied on for overall market predictions.

Don't stick to one time frame

Analyse the market using different time frames. Opportunities may emerge when you are looking at daily data, and not show up when analysing hourly intervals. Conversely, you can profit from short-term anomalies even if the long-term trend is different.

Include fundamental analysis

Technical analysis shows the likely market direction based upon internal forex market factors, such as the number of buyers and sellers in the market. However, the overall direction of the forex market is heavily influenced by the real world. Study economic events, such as growth figures and interest rate changes, and decide how these will affect the forex market. Our forex experts carry out extensive fundamental market analysis and produce daily reports and recommendations. You can use these when formulating your forex strategy, but keep in mind that these are recommendations, not rules.

Set stops
You can't watch the market 24 hours a day, so set stops on your open positions. These are orders to sell when the ask price of a currency reaches a specific value. You can use these to lock in your profits and limit your losses. Even if you are online, you should still set stops. Decide on these before you open a position. It's often tempting to keep a position open once you hit your original limits, and setting a stop will make you think twice.

Look for volatility

Certain currency pairs are very volatile; the price can jump up or down suddenly. When you're trading a volatile currency pair you should do two things: Trade in small amounts to limit your exposure Set the stops far away from the support and resistance lines

Be careful entering just before the market closes

At the end of Friday trading, the American market can be very volatile. There's a lot of news at this time, and many traders are closing their positions. The same applies at the end of the month. This is not an exhaustive list. You may choose to ignore some of these rules and to add others as you become more experienced. However, we would recommend following this list when you're starting out, as doing this will help you avoid some of the most common pitfalls.