Important Foreign Exchange Terms

ABA - A 9-digit code used by the American Bankers Association to define a specific bank. Each institution has its own unique number code.

Ask price - The price at which a seller offers or it is willing to sell a currency to a buyer; also known as the offer price.

Annualized - The extrapolation of the behavior of a certain measured factor (such as rate, volatility, etc.) from a given period of time to the expanse of one full year.

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Base currency - The currency in relation to which other currencies are quoted; the first currency listed in a currency pair; this is most often the currency of the home market in which the investor is trading.

Basis point (or BPS) - A financial unit of measure that describes the percentage change in value of a security. One basis point is equal to one one-hundredth of one percent, i.e. 0.01%, or as a decimal 0.0001 (see Pip). For example, a change of 4.20 percent to 4.85 percent is a move of 65 basis points.

Bid price - The price at which a buyer offers or is willing to pay to purchase a currency from a seller.

Central bank - A particular country's governmental body that controls the nation's monetary policy and currency creation.

Consumer Price Index (CPI) - A measure of the average price that a typical U.S. consumer pays for a standardized basket of goods and services as compared to the average price paid for that same basket of goods and services in an earlier base year.

Cross rates - The foreign exchange rate between two currencies other than the U.S. dollar, which is the currency in which most exchanges are typically quoted. Thus, the cross rate would be expressed as the ratio of the dollar rates of the two currencies.

Currency - the lawful denominated medium of exchange of a country. In the foreign exchange market, each country's currency is represented by a unique three-character ISO code. For example, United States dollars are identified USD, Euros are designated EUR, etc.

Currency pair - The exchange rate relationship between two currencies whereby one currency is expressed in terms of the other. The first listed currency of the pair is called the base currency, and the second currency is known as the quote or counter currency. For example, USD/EUR is a common currency pair, and is pronounced "U.S. dollars per Euro."

Day Trading - A highly specialized type of investing in which market positions are opened and closed with the same day (or within a few days at most). This type of trading is usually speculative in nature.

Discount Rate - The interest rate that a private banking institution pays for loaned funds received from the U.S. Federal Reserve System.

Exchange rate - The amount of a particular currency needed to buy a standardized amount of another currency.

Exchange rate risk - The potential loss that an investor faces from a movement in bid/ask prices (i.e., exchange rates) that is adverse to the investor's open market position.

Euro - The currency adopted as a result of the European Economic and Monetary Union (EMU); it replaced those of the following member countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.

Exposure - The risk that an investor accepts from any open investment position; the amount that can be lost; also known as market exposure.

Federal Reserve System - The central bank of the United States, which has the responsibility of implementing the country's monetary policy and regulating the system's member banks.

Fixed exchange rate - The official exchange rate set by the monetary authority of a country, typically its central bank.

Floating exchange rates - Exchange rates that are determined by supply and demand.

Foreign exchange - The exchange or trading of foreign currency (also known within the industry as Forex or FX); also, transactions that cause a change in the foreign currency position of a financial institution. Foreign currency is bought and sold on the foreign exchange market either for immediate (known as spot) or forward delivery.

Foreign exchange market - An area (not necessarily confined to physical borders or boundaries) where buyers and sellers are in contact for the purpose of trading foreign currencies.

Forward contract - A purchase contract that locks in the exchange rate for delivery on a specified future date. The buyer is typically required to put up a deposit (or margin) for the privilege of buying the future currency at today's rate of exchange.

Hedging - A strategy used by traders and investors to protect an investment or portfolio against loss. With regard to currency transactions, a current sale or purchase would be offset by the investor contracting to buy or sell another financial instrument at a specified future date in order to the eliminate a profit or loss on the current sale or purchase by balancing it out. In this manner the risk due to price fluctuations is substantially negated.

Interbank prices - Market rates that apply to currency prices for transactions of one million U.S. dollars or more; these prices differ from retail market rates.

ISO - International Standards Organization, a global standard-setting body.

Long position - A market position in which the investor has purchased a financial instrument (stock, commodity, currency, etc.) that he or she did not previously own, with the expectation of an increase in value (also known simply as long); opposite of short position.

Margin - An investor-contributed cash percentage of the market value of securities held in a margin account; a cash deposit provided as collateral by the purchaser of a forward contract position.

Market maker - An individual or financial institution that provides consistent buy and sell quotations for a particular security or securities. A market maker must carry an inventory of the securities quoted or have ready access to the quoted amounts.

Offer price - See Ask price.

Open position - Any market transaction (whether long or short) that has not yet either been settled by physical payment or effectively balanced out by an equal and opposite transaction for the same date.

Overbought - A market circumstance in which the movement of a currency pair price has risen at least 150 percent more violently than normal, overreacting to net buying activity. As a result, a price correction will generally be expected to soon take place; in other words, investors will expect the price of the currency pair to presently fall.

Oversold - A market circumstance in which the movement of a currency pair price has fallen at least 150 percent more violently than normal, overreacting to net selling activity. As a result, a price correction will generally be expected to soon take place; in other words, investors will expect the price of the currency pair to presently rise.

Point (or Pip) - The smallest incremental move that an exchange rate can make. Because most currency pairs are priced to four decimal places, the smallest incremental move possible would be a change of 0.0001, which is equivalent to one Basis point. For example, a currency that has moved from a price of 1.4580 to 1.4583 has risen three points (or pips).

Portfolio - The total selection of securities held by an investor or financial institution. A primary function of the portfolio is to manage and minimize investment risk.

Price movement - The change in price of a particular currency over a given period of time.

Retail prices - Market currency prices that include commissions and other charges which exchange agencies or banking institutions levy in order to convert currencies for non-corporate (i.e., private) clients.

Risk - The chance that an investor's return-on-investment (ROI) will be different from that expected, including the potential for loss of part or all of his or her investment funds.

Settlement - The final stage or culmination of a transaction, identified by the physical exchange of one currency for another.

Short position - A market position in which the investor has sold a financial instrument (stock, commodity, currency, etc.) that he or she did not previously own, with the expectation of a decrease in value (also known simply as short); opposite of long position.

Spot - A transaction that will reach settlement within two days.

Spot price - The current market price of a spot transaction.

Spot rate - A spot transaction's current rate.

Spread - The difference between a currency's bid and ask prices.

Stop-buy - A buy order that is executed when an investor-specified price (which is above the current ask price) is reached; used to enter the market when prices are expected to continue to rise.

Stop-loss (or Stop order) - An order that is executed when an investor-specified price is reached to close the market position by either buying or selling (depending upon whether the position is long or short) to limit the investor's loss from a damaging price move.

Trend - The direction of the market; generally identified as either a major, intermediate, or short-term trend. A trend's direction may be upward, downward, or sideways.

Volatility - A measure by which prices are expected to fluctuate or have fluctuated during a given period of time.

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What do Successful Day Traders have in Common?

What do Successful Day Traders have in Common?

When asked about the attributes of successful day traders, most experts come up with lists that include self-discipline; the abilities to maintain control of ego and to accept loss; a flexible, agile mind; patience; and a passion for the market. And although these traits will not necessarily guarantee your success as a trader, without them, you're virtually assured of never becoming successful in the trading markets. Let's take a brief look at each trait.

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Self-discipline

The one trait that's most often mentioned by traders themselves as being the single most essential ingredient of successful trading is self-discipline. It is the one common trait exhibited by every good trader, and it's the catchphrase of every tutorial and seminar you'll ever take on the subject and every day trading book you'll likely ever read.

What exactly is self-discipline? It's defined as "training to act in accordance with rules" and "a regimen that develops or improves a skill." In trading, you must first discipline yourself to learn everything you need to know about trading and the markets; then you must discipline yourself to create your own rules and trading plan; and on a daily basis you must discipline yourself to follow the rules that you've set forth in your plan.

Mercifully for all of humanity, self-discipline is not a talent; it can be learned by anyone. It's a process of learning how to take conscious control of your actions, of operating outside your belief system in order to effect change upon a belief that may be standing between you and your goal. In a very real sense, self-discipline is like a muscle – the more you use it, the stronger it gets. Learning self-discipline should be the main goal in your endeavor to becoming a successful trader.

Master your ego

When it comes to trading, your ego can quickly become your own worst enemy. The reason is that it can prevent you from taking responsibility for a losing trade. Most people don't like to admit that they're wrong about something (and many have a distaste for admitting being wrong about anything), and an oversized and unmanaged ego can compel one to great lengths in order to keep from admitting an error. Nevertheless, it must be realized that being wrong is part of the trading game. (This holds true for all types of investing; for no experienced investor of any longevity has ever been right with each and every decision.) Even successful traders are wrong 50, 60, 70, or even 80 percent of the time. They can be wrong most of the time and still be successful because they keep their losses small and they let their profits run.

But in order to do this you must be able to control your ego and take responsibility for your trades. When a trade turns bad, you can't blame it on the market, because is the market is necessarily neutral. And you can't blame it on the company whose stock you bought, because the company has no direct control over stock prices. Nor can you blame it on the head trader or mentor whose advice you took. If you let someone else call your shots for you, then you've handed over your control to them. So who's left? A quick trip to the nearest mirror will answer that question rather succinctly. You are responsible for your own trades – you, and you alone.

Taking responsibility for successful trades is not difficult at all. But admitting to a bad trade goes against the grain. However, to keep a small loss from growing into a big one, you have to be able to admit when you're wrong, and pull the plug. Cutting losses short is one of the surest earmarks of successful traders.

It's often difficult to give up on a trade because of our perception of the market's endless potential for gain. If our stock (or currency, commodity, or whatever's being traded) is down a point or two, there's always the possibility that it will not only reverse its direction and recover those points but that it'll also increase beyond our break-even point and turn our loss into a profit. Thus, we hold out hope, because it could happen. In this manner so many H&P traders are born – hoping and praying that the trade will somehow turn around. It only takes a small dose of pragmatism injected here to come back to the realization that there will be other opportunities. And as long as we cling to that H&P mindset, our money remains unavailable for of those other opportunities when they avail themselves.

But winning can also be a dangerous event if you give way to your ego. You've heard the old saying, "Success breeds success." Winning builds upon itself; that's what we've all been taught. And in most areas of life, it's a great philosophy to have; but in trading, it's not necessarily true. A big win can give you a false sense of power over the market, a feeling of omnipotence. It can make you feel as if you've beat the market, which puts you in an adversarial frame of mind, so that winning again – and, ultimately, being right again – becomes your goal. But remember, you won't beat the odds; and no matter how successful you become, it's very likely that you'll be making many more losing trades than winning ones.

Controlling your ego is probably one of the hardest things that you will ever have to do, but to become a successful trader you must set yourself to do it. One method of controlling it is to learn to keep an open mind, to be flexible and let the market lead the way.

Keep an open mind

An open mind – which is synonymous with mental flexibility – is a common strong point of successful traders. To more clearly illustrate this quality, let's take a look at two different traders.

Trader Jim has an open, flexible mind. He approaches the market each day free of any and all expectations. He observes various market indicators to get a feel for what the market might do today. He keeps abreast of the news and tunes in to any speech that the powers that be might be making, but his whole direction is wrapped up in the attitude of 'let's wait and see what the market does.' And when the market invariably leads the way, he follows. If it heads down, and the security that he's trading trends downward, he goes short. If it trends upward, he goes long. If he can't discern any trend at all, he stays on the sidelines and waits for a trend to appear. When he makes a trade, she sets his stops and lets his profits run. If the security reverses and triggers a stop, he exits the trade without compunction and waits for the next setup. Jim doesn't really care about being personally right or wrong, and things aren't clouded or jaded for him. He moves into and out of market positions with ease and without remorse, cutting any losses short to make himself both mentally and physically available to grasp the next opportunity that comes along.

Trader Tom, on the other hand, has a closed, rigid mind with opinions about the market that may as well be chiseled in stone. He's already decided that the big speech will have a negative impact on the market, so he sits on the sidelines. He remains there as the market climbs (because it has already discounted the speech's negative comments in a minor correction the day before, but Tom didn't know that because he doesn't really keep a watchful eye). When he finally decides to jump on the bandwagon of his favorite stock, which is trending unmistakably upward, he sells on a minor downtick after a one-point gain because he still believes the market is headed for a fall and so misses the subsequent five-point rise in the stock. When the stock tops out and heads down on an intraday swing, he doesn't even think of shorting it because he believes that the only way to trade is to go long. And what does he do on a losing trade? He hangs on to it, of course, while his losses mount because he 'knows' that the stock will finally recover and give him back all his losses and more.

Mental flexibility allows you to see the market clearly and go where it takes you. It keeps you from trying to control the market (because you can't) or second-guess it (ditto, again!). Mental flexibility arises from a thorough understanding of the markets, which you get can only obtain with much study and practice, and from letting go of your assumptions and beliefs about the market and instead go where the market takes you. Relinquishing ourselves in that fashion is not an easy thing to do, however. By nature we typically trade our beliefs about the market, and once we've made up our minds about those beliefs, we're not likely to change them. Getting rid of those biases and letting go of the assumptions and beliefs that bound the mind are two important steps on the road to successful trading.

Mental Agility

An agile mind is closely akin to an open and flexible mind, but it's not the same thing. You may be open and flexible but still require a lot of pondering and thoughtful reflection to arrive at a decision. This might make you a shrewd investor but a terrible day trader. A day trader must be able to absorb and quickly analyze an abundance of rapidly changing data.

Can a person develop mental agility? Perhaps not. The best day traders seem to have come from careers that required quick, flexible minds. These people are used to thinking on their feet and responding quickly to the changing conditions around them, such as pilots or salespeople. Doctors, according to one professional trader, make the worst traders. Although a doctor must have an open mind to let the patient's symptoms lead the way, they are generally so accustomed to being right that they find it immensely difficult to admit to being wrong.

Patience

Patience is one of the less heralded qualities of a successful trader; indeed, it's probably one of mankind's most underrated virtues. It creates the ability to wait for the most opportune circumstances before you act. Patience allows you to refrain from overtrading. It's not easily developed, but at the same time it's not really a matter of 'either you have it or you don't,' either. A well-thought-out trading plan – along with the discipline to follow it – can greatly facilitate its development.

A passion for the market

Having a passion for the market – indeed, a love of the game itself – is also ingrained in the makeup of successful traders. They're very keen for and enjoy greatly what they do and can't imagine doing anything else. This type of passion might appear to be in direct conflict with self-discipline, but upon closer examination it's quite the contrary. Passion shows itself to be the fuel that propels the trader to learn the market inside and out. It's the energy that they draw on to effect the mental changes necessary to become a great at what they do. And it spawns the resilience necessary to recover from losses and, more importantly, to learn from them.

To be a successful trader, you're going to need practical knowledge of the markets and a well-thought-out trading plan, but the psychological demands of trading should be explored before you make any commitment to a career in day trading. Preparing yourself for these psychological challenges is the most important thing that you can do. It should indeed take precedence over market insight, trading styles, finding currencies or stocks, or memorizing trading rules.

As a matter of fact, trading rules are simply meaningless platitudes unless you have a grasp of the psychology behind them. Transforming the atmosphere of your mind regarding trading can be done concurrently with studying the nuts and bolts of trading. Just don't neglect it or you may end up in the 80 percent losing arena of failed traders. Because developing the right mental attitude is of paramount importance in your journey toward highly becoming a successful day trader.

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Operating in the FOREX Market

Although the purpose is the same, trading and operations of the FOREX market are slightly different from those of other equity markets. There are a few things which the new FOREX investor must become familiar with. For instance, concerning the specifics of buying and selling on FOREX, it’s important to note that currencies are always priced in pairs. All trades, therefore, will result in the simultaneous purchase of one currency and the sale of another. When operating in the FOREX market, you would execute a trade only at a time when you expect the currency which you are buying to increase in value in relation to the one that you are selling. If the currency that you bought does increase in value, you must then sell the other currency back in order to lock-in your profit. Therefore, an open trade, or open position, is a trade in which the investor has bought or sold a particular currency pair but has not yet sold or bought back the equivalent amount in order to close the position.

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Currency traders must also become familiar with the way in which currencies are quoted. The first currency in the pair is considered the base currency; the second one is the counter- or quote currency. The majority of the time, the U.S. dollar is considered the base currency, and quotes are expressed in units of “US$1 per counter currency” (for example, USD/JPY or USD/CAD). The only exceptions to this are quotes given for the euro, the pound sterling and the Australian dollar; these three are quoted as “dollars per foreign currency”.

FOREX quotes always include a bid- and an ask price. The bid is the price at which a market maker (or broker/dealer) is willing to buy the base currency in exchange for the counter currency. The ask price is the price at which the market maker is willing to sell the base currency in exchange for the counter currency. The difference between the bid and the ask prices is called thespread.

The cost of establishing a position in the market is determined by the spread, and prices are always quoted using five figures (136.70, for example). The final digit of the price is referred to as a point, or pip, which is the smallest price change that a given exchange rate can make. For instance, if USD/CAD was quoted with a bid price of 136.70 and an ask price of 136.75, that five-pip spread is the cost of trading into this position. The trader, therefore, must recover the five-pip cost from his or her profits, necessitating a favorable move in the position in order to simply break even.

Margin on the FOREX is not a down payment on a future purchase of equity as in other markets, but a deposit made to the trader's account that will cover against any losses in the future. A typical currency trading system will allow for a very high degree of leverage in its margin requirements, up to 100:1 or more. The system will automatically calculate the funds necessary for current positions and will check for margin availability before executing any trade.

As you can see, trading in FOREX requires a slightly different mindset than that which is needed for equity markets. Yet, for its extreme liquidity, the multitude of opportunities for large profits and high levels of available leverage, the currency markets are quickly growing in popularity among investors. Traders should always be aware, though, that with such potential for gain there is also significant risk for loss; they should therefore quickly become familiar with various methods of risk management.

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Introduction to FOREX Trading Now

The term FOREX, which is an acronym for Foreign Exchange, refers to an international exchange market where currencies are bought and sold. The contemporary market began in the 1970’s with the introduction of floating currencies and free exchange rates, where supply and demand strictly determine the price of one currency against another.

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The FOREX market is unique for a number of reasons. It is, for instance, virtually free of any external controls, making it almost impossible for anyone to manipulate it. It is also the largest liquid financial market, with trading reaching nearly 2 trillion US dollars daily. With this volume of money moving frequently, it’s not difficult to understand why any single investor could significantly affect the price of any major currency. And because of its liquidity, positions in the market can be opened and closed extremely quickly.

Some investors participate in the FOREX market for long-term hedge positions, while others utilize marginal trading to try to obtain large short-term gains. The combination of small but generally constant daily fluctuations in currency prices creates an attractive environment for a wide range of investors with differing investment strategies.

There is no central FOREX exchange which handles all trading. Transactions take place all over the world via telecommunications. Trading is conducted twenty-four hours a day, from Monday 00:00 GMT to Friday at 10:00 pm GMT. (This equates to late Sunday afternoon through Friday afternoon in the U.S.) FOREX dealers operate literally around the globe, quoting the exchange rates of all major currencies. Investors can purchase currencies through these dealers. It’s a common practice for investors to speculate on currency prices by obtaining a credit line (which is available with as little as $500), thus vastly increasing their potential for gains, as well as losses. This is called marginal trading.

Marginal trading simply means trading with borrowed capital. It has its appeal in the fact that FOREX investments can be made without a huge supply of capital. This allows traders to invest much more money, establishing bigger positions in the market, with much smaller amounts of actual money. This makes FOREX trading very easy to enter into for the new investor.

Marginal trading in an exchange market is quantified in lots. The term lot designates approximately $100,000. This amount can potentially be obtained with as little as one-half of one percent down, or $500. Here’s an example: You believe that signals in the market indicate that the British Pound will go up against the US Dollar. You open 1 lot for buying the Pound with a 1 percent margin at the price of 1.49889, and then you wait for the exchange rate to climb. At some point in the future, your predictions prove accurate; the exchange rate climbs, and you decide to sell. You close the position at 1.5050, thus earning 61 pips, or about $405. So, on an initial capital investment of $1,000 you realized over 40% in profits. When you close a position, the deposit that you originally made is returned to you and a calculation of your profits or losses is performed. This profit or loss is then credited to or debited from your account.

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Getting Started in the FOREX Market

The FOREX market is the largest trading market in the world, and growing numbers of individuals are being drawn to it. But before you begin trading in it, be sure that the broker you choose meets certain criteria, and that you take the time learn the market and find a trading strategy that works for you. The best way to learn to trade FOREX is to open up a demo account and trade with it.

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Just as in equity markets, the two basic types of strategy in the FOREX market are Technical Analysis and Fundamental Analysis. But among FOREX traders the most common strategy used by far is Technical Analysis. Let’s compare the two.

Fundamental Analysis in the FOREX market is often very complex, and it's usually only used to predict long-term trends; some investors, however, do trade short-term based strictly upon news releases. There are many different fundamental indicators of currency values, and they’re released at various times.

But these reports are not the only fundamental factors should be watched. There are also a number of meetings that are held periodically, from which come quotes and commentaries, and they can have a very definite effect on markets as well. These meetings are often called to discuss interest rates, inflation, or other issues that affect currency valuations. Even changes in wording when talking about certain issues can cause spikes in market volatility.

Reading these reports and examining the commentary can help FOREX traders using Fundamental Analysis to obtain a better understanding of long-term market trends. They can also help short-term traders to profit from extraordinary events. If you choose to use a fundamental strategy, be sure to keep an economic calendar close-by so that you’ll know when these reports are released.

Technical analysts in the FOREX market evaluate price trends. The only real difference between Technical Analysis in FOREX and Technical Analysis in equity markets is the time frame: FOREX markets are open around the clock,24 hours a day. As a result, some forms of analysis which factor in time must be modified in order to work in the 24-hour FOREX market. Some of the more common forms of technical analysis used in the FOREX market include Elliot Waves, Fibonacci studies, and Pivot points. Many technical analysts combine these studies in order to make more accurate predictions. The most frequent combination is that of the Fibonacci studies with Elliott Waves.

Most successful traders develop an investment strategy, and with repeated use, perfect it over time. Some people focus on one calculation or study; others may utilize a broad range of analysis tools to determine their investments. Most experts suggest using a combination of both Fundamental and Technical analysis. It is the individual investor, however, who must decide what fits and works best for him or her. This is usually accomplished through trial and error.

Here are several suggestions to consider as you get started in the FOREX market: 1) Open a demo account and paper trade until you are comfortable and confident that you can make a consistent profit. In other words, isolate your learning mistakes to the time in which they won’t cost you. 2) Trade without emotion. Don't keep mental stop-loss points. Always set your stop-loss and take-profit points to execute automatically and don't change them unless it’s absolutely necessary. Make your decisions and stick with them. 3) Stay with the trend; if you go against it, make sure you have a very good reason. Movements in the FOREX market tend to be in trends more than anything else; you therefore have a higher chance of success in trading with the trend.

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Choosing a FOREX Broker

When you are trying to choose a Forex broker, there are a number of things that you are going to want to look at. Here are some things to look for when you are trying to decide on a Forex broker.

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Low Spreads

One of the most important things that you will want to look out for is low spreads. Every broker is going to have different spreads and you want to find the broker that has the lowest spreads out there. Most Forex brokers are compensated with the spread on each trade. Therefore, if you can get a lower spread, this means that you will be able to keep more of your profit on each trade. While it might seem like a small price to pay, it can really add up over the long-term. You will also want to pay attention to what type of spread you are getting with your broker. The spreads could be fixed or they could be variable. If the spreads are fixed, you will know exactly what the spread on each currency pair will be at all times. If the spreads are variable, they will fluctuate with market conditions.

Account Types

When you are looking at the different Forex brokers out there, you also want to see if they have the type of account that you want. Forex brokers can offer standard accounts, mini accounts, and micro accounts. Depending on how much you have to invest, you will need to make sure that they have the proper account for you. For example, most standard accounts are going to require you to invest somewhere between $2000 and $10,000 to get started. However, if you want to start out with only $100, you could potentially find a broker that offers micro accounts.

Deposits and Withdrawals

You will also want to pay attention to how the broker handles deposits and withdrawals. Some brokers have very elaborate systems that are used whenever you want to make a deposit or withdrawal. You might have to open an account with a third-party broker that is located in some other country and wire money to them to get your account funded. Other brokers allow you to fund your money through a bank wire transfer or PayPal. Make sure that the deposit and withdrawal method is to your liking before you sign up with them.

Execution

The Forex market moves extremely fast. Because of this, you want to be able to get your orders executed whenever you want to place them. If you have to place an order and then wait for 30 seconds, you may not be able to take advantage of the trading opportunity. You want to find a broker that has instant execution the majority of the time. Make sure that the broker has the proper liquidity providers in place so that order execution is not going to be a problem for you overall.

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FOREX Fundamentals

The use of Technical Analysis in the FOREX market is much the same as in other trading markets: price is believed to already reflect all news which would have had an effect on the currency’s value. But since countries don’t normally have balance sheets, how can Fundamental Analysis be conducted on a nation’s currency? Since this type of analysis involves looking at the intrinsic value of an investment, its application in the FOREX market will entail the study of the economic conditions that influence the valuation of the country’s money. Here are some of the major fundamental factors that play a role in the price movement of a currency.

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Economic indicators are reports that are released by the government or a private organization which detail the country's economic performance. These reports are the means by which a nation’s economic health is measured. (It must be kept in mind, however, that a great many factors will influence a country’s economic performance.) These reports are released at scheduled times, thereby providing a readable marker of whether a nation's economy has improved or declined. Some of the reports, such as unemployment numbers, are well-publicized. Others, like housing statistics, receive very little media coverage. However, each indicator serves a particular purpose, and can be very useful. Four major indicators are listed below:

• The Gross Domestic Product (GDP) is considered to be the broadest measure of a country's economy, and it represents the total market value of all goods and services produced by that country in a given year. Since the GDP figure itself is a lagging indicator, most investors focus on the two reports that are issued in the months before the final GDP is released: the advance reportand the preliminary report. Significant revisions from one report to the next can often cause considerable market volatility.
• The Consumer Price Index (CPI) is a measure of the change in the prices of consumer goods across 200 different categories. This report, when compared to a nation's exports, can be used to determine whether a country is making or losing money on its products and services. The exports must be carefully monitored as well, however, because their prices often change relative to a currency's strength or weakness.
• A country’s Retail Sales report measures the total receipts of all retail stores. This report is particularly useful because it’s an indicator of broad consumer spending patterns, and is adjusted for seasonal variations. It can be used to predict the performance of more important lagging indicators. It’s also valuable in assessing the immediate direction of a country’s economy. Revisions to advance reports of retail sales can cause significant volatility.
• The Industrial Production report shows the change in the production of factories, mines and utilities within a nation. It also reports their 'capacity utilizations', which are the degrees to which the capacities of the factories are being utilized. Traders using this indicator are usually concerned with a nation’s utility production.

There are many other important economic indicators, and still more private reports that can be extremely useful in evaluating FOREX fundamentals. It's important to not only look at the numbers, but to also take the time to know and understand what they mean and how they affect a nation's economy. When properly used, these indicators can be a valuable resource for the FOREX investor.

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Introduction to FOREX Trading

Most small- to medium-sized investors in the FOREX markets use the form of investment strategy known as Technical Analysis. This technique stems from the assumption that all information about the market and a particular currency's future fluctuations can be found in the price chain. In other words, all of the factors which have an effect on the price of the currency have already been considered by the market and are therefore reflected in the price. The investor who uses Technical Analysis bases his investment decision on three essential suppositions: that the movement of the market inherently considers all factors; that the movement of prices is purposeful and directly tied to these events; and that history repeats itself. This investor considers the highest and lowest prices of a currency, its opening and closing prices, and its volume of transactions. He or she does not try to predict long-term trends, but simply looks at what has happened to that currency in the recent past, and supposes that the small short-term fluctuations will generally continue as they have before.

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An investor who utilizes Fundamental Analysis studies the current situations in the country of the currency, including such things as economy, political situation, and other related information. A country's economy can be quantifiably defined by measurements of its Central Bank's interest rate, its unemployment level, its tax policy and the rate of inflation. The prudent investor also knows, however, that less measurable conditions and occurrences can also impact a nation’s economy. He or she must furthermore keep in mind the expectations and anticipations of other market participants. Just as in any stock market, the value of a currency is also based in large part on the perceptions of and anticipations about that currency, and not solely on the reality of its condition.

While the risk certainly is substantial, the ability to conduct marginal trading in the FOREX market allows for potentially enormous profits relative to the initial capital investments that are required. The sheer size of the FOREX prevents virtually all attempts by anyone to influence the market for their own personal gain. This has the effect of making the investor feel quite confident that when trading in foreign currency markets he or she has the same opportunity for profit as do other investors around the world. It must be stated, however, that, as with any investment, losses are a possibility. They can, and do, occur. And for the same principle that gives marginal trading its potential for huge gains, the possibility of huge losses is just as great.

Although investing in the FOREX using short-term strategies requires definite assiduousness, experienced investors who utilize a technical analysis can generally feel confident that their ability to read the daily fluctuations of the currency market are sufficient enough to supply them with the knowledge necessary to make informed and prudent decisions.

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