Forex Trading UK for Beginners

Currencies are essential for global trade as they enable buying and selling commodities, products, and services locally and worldwide. It provides a means for international trade. For instance, if you’re living in the UK and want to buy an imported car from the US, you might need to pay in US dollars. That means you must convert your British Pound into US dollars to pay the bills for this purchase.

One unique characteristic of the FX market is that there is no centralized marketplace where foreign exchange can happen. It is conducted electronically via connected networks rather than on a centralized exchange as the stock trade happens. Secondly, the FX market operates 24 hours a day and five days a week in major financial centres, such as London, Tokyo, and New York. It can be traded around the clock because of time zone differences. For example, when trading sessions end in New York, it begins in Singapore and Tokyo. In sum, the forex market never sleeps.

Foreign Exchange Brief History

The history of the forex market is as old as the world’s trading history. In the beginning, people bartered goods and later used precious metals and stones to buy and sell goods and services. However, the present foreign exchange is a relatively modern phenomenon.

The modern forex history begins with the establishment of Bretton Woods in 1944, where selected currencies were pegged against the US dollars. By 1971, more currencies were included in the currency basket. Each currency derived its value based on demand and supply.

Most of the trading happens via commercial and investment banks, which trade on behalf of their clients. Retail investors also speculate on the currency values to earn a profit. They can profit via two options, either through interest rate differential or making money from changes in the exchange rate.

Investors keep shorting their currencies with lower interest rates in exchange for currencies with higher interest rates. For instance, if the US Federal Reserve increases the interest rate, those holding Japanese yen can sell their yen for US dollars.

Forex trading used to be difficult for retail investors before the internet. MNCs, hedge funds, or high-net-worth individuals were the leading players as currency trading required significant capital. However, things started to change around the 1990s as the internet made it easy for individual traders, as brokers and banks provided access to electronic trading. Today, online brokers enable retail investors to place a trading order with a very minimum amount known as leverage.

3 ways to trade forex

There are three main ways to trade in foreign exchange: spot, forward, and future.

Spot market

The spot market is also known as the ‘cash market,’ where currencies are bought and sold and delivered on the spot. The price of a currency in the spot market is determined by demand and supply. That means the more the demand for a currency higher the value of that currency.

However, it’s not that simple. Some countries intentionally keep the currency values low to make export cheaper or attract foreign investments. The currency value is calculated on many factors, such as interest rate, market sentiment, political change, and economic news.

The final deal between one party that sells an agreed-upon currency price and the other that buys that agreed-upon exchange rate is known as a ‘spot deal.’ Once you close the position, you receive the specified amount of that currency in cash. Although the spot deal is considered spontaneous, the cash settlement usually takes two days.

Forward market

A private agreement between the two parties to buy a currency at a future date and the pre-agreed price is a forward contract. Let’s take an example to understand how a forward contract works.

Assume that a UK car company wants to secure a contract for a future purchase of spare parts from X, which is located in the US. The UK company signs an agreement with the US company to buy the spare parts after six months.

Both agree for a future exchange rate of 1 GBP = 1.3700 USD, and at the time of the agreement, 1 GBP is equal to USD 1.3700. Now suppose, after six months, the value of one dollar drops to 1.3800. That means the importer will benefit by USD 0.01 per unit of the exchanged currency. Now reverse the situation, the price of one dollar increases to 1.36.

In this case, company X (exporter) will benefit from the forward contract to hedge their risk. The vital thing to note is that currency value can move in any direction, either up or down. Who benefits from a forward contract depends upon the value of one currency against the other after six months.

Future market

A future agreement is similar to a forward contract; the only difference is that the latter is a standardized contract. The futures contract is a standard contract that specifies the quantity of a particular asset at a pre-determined price and delivery date.

For example, suppose Indian Oil signs a future contract to import 1 million barrels of oil with an oil producer based in Saudi Arabia. The oil producer promises to deliver the specified quantity in twelve months at a pre-agreed price of $75 per barrel.

So even when the price of one barrel falls to $70, the importer is obligated to pay the premium. The same is true when the price reaches $80; the oil producer will deliver the quantity despite the changes in the spot price.

How are currencies traded on the exchange?

All currencies are represented with a three-letter symbol—Euro as EUR and American dollar as USD. Forex trading always involves a currency pair, such as EUR/USD or USD/GBP.

The most traded currency pairs accounting for 75% of total forex volume are:

• Euro/US Dollars (EUR/USD)
• USD/ Japanese Yen (USD/JPY)
• Great Britain Pound/USD (GBP/USD)
• Australian Dollar/USD (AUD/USD)
• Canadian Dollar/USD (CAD/USD)
• Swiss Currency/USD (CHF/USD)
• New Zealand Dollar/USD (NZD/USD)

As you can see, every major currency pair involves the US dollar; that is the reason why American dollars are called ‘Global Currency’. The US dollars account for roughly 88% of the global trade payment as per BIS Report in April 2019.

How are Currencies Quoted?

Let’s take an example to understand how currency pairs are quoted in forex trading. You can apply this understanding to every currency pair. We will take USD/GBP for our example.

• On the left is the base currency (USD) and the quote currency (GBP) is on the right.
• The base currency is always expressed as one unit, while the quote currency varies depending on its value for a unit of the base currency. In the USD/GBP example, the exchange rate tells you how much the British Pound will require to buy one American dollar unit.
• If the current exchange rate of USD/GBP is 0.71, that means 0.71 GBP can be exchanged for 1 USD. Generally, the Pound is quoted as GBP/USD, so at the exchange rate of 1.36, you can exchange 1 British Pound for 1.36 US Dollar.
• • If the exchange rate rises, that means the value of the base currency has increased. In contrast, when the exchange rate falls, that means the value of the quoted currency has increased. For example, if the GBP/USD rises to 1.40, it means that the British Pound has become more valuable compared to the US Dollar.

Standard Forex Terms to Know Before Trading

1. Currency Pair:

As shown in the above example, forex trading always involves two currencies. Generally, the currency pairs are divided into three categories: major, minor, and exotic.

A currency pair comprises two currencies namely the base currency and the quote currency. The currency that the traders intend to buy or sell is called base currency while the currency that is exchanged in return for base currency is called quote currency. In EUR/USD currency pair, EUR is the base currency and USD is the quote currency.

There are seven major currency pairs, including EUR/USD and USD/JPY. EUR/USD is the most traded currency pair globally.

Those currency pairs that don’t involve US dollars are known as minor pairs. For example, EUR/GBP, EUR/AUD, and GBP/JPY are some of the most traded minor currency pairs in forex trading. The Japanese yen, Euro, and British Pound hold the most significant chunk of minor pair trading.

Lastly, when a major currency is paired with a currency from a developing country, it is called exotic currency pair. Examples are EUR/Turkish Lira, USD/Hong Kong Dollars, and others. If you’re new to forex trading, stick with major and minor currency pairs.

2. Pip (Percentage-in-point):

Pip is the standard measurement of changes in the value of a currency pair. This is the most basic mathematical measure you must understand before trading. A pip represents the last decimal of the quote currency. By convention, every quote currency is expressed as four decimal points. However, there are exceptions like JPY which is quoted with just two decimals.

For example, if the value of 1 EUR changes from 1.3455 to 1.3456 USD, that means one pip change in the currency pair. A pip is the smallest possible change in the price of a currency pair.

3. Bid-ask Spread:

The difference between the buying and selling price of a currency offered by a dealer is called the bid-ask spread or simply a spread. The bid is the price a broker is willing to pay for a currency, while the asking price represents the broker’s maximum selling price of the same currency. Wider spreads mean higher profits for the broker and lesser gains for the traders. Spreads are commonly represented in pips.

Suppose EUR/USD is trading at 1.2100/1.2102. In this example the spread or the difference between the bid and ask price of the EUR/USD currency pair is $0.0002 or 2 pips. This means that on every unit of EUR traded in return for USD, the broker or the liquidity provider will earn a revenue of $o.0002.

The spreads are variable and depend on liquidity and market conditions. However, some brokers may offer fixed spreads. Each forex pair can have different spreads at different times of the day. Traders should look out for regulated brokers that offer low or narrow spreads.

4. Lot:

Currency pairs are always traded in lots. In forex trading, one Standard lot equals 100,000 units of a currency. Additionally, there are also Micro Lot – 1000 units and Mini – 10,000 units of lot sizes.

If you are trading 10 Standard Lot, it means that you are trading 1,000,000 units of the currency. Similarly, if you are trading 5 Mini Lots, you are trading 50,000 units of a currency.

5. Leverage:

Leverage enables you to trade in large volumes with minimal marginal money. In simple terms, a forex broker provides a certain amount of money if you fulfil the initial margin requirement. For instance, if a dealer offers 10:1 leverage, you can trade ten times each deposited dollar in your trading account. Forex traders use leverage to place large orders and profit from small price changes in a currency pair.

For example, if you intend to place a trading order for one standard lot of USD/EUR using the 10:1 leverage. That means if you deposit $1000 in your trading account, you can open trading positions worth $10,000. Beginners should tread the leverage water very carefully because it can amplify both profits and losses. That’s why experts call leverage a double-edged sword.

It must be noted that the majority of retail forex traders lose money. All the FCA-regulated forex brokers are required to mention on their website the exact percentage of retail traders who lose money with that broker while trading CFDs.

6. Margin:

The amount you put in your trading account to use leverage is called margin. Suppose if your broker offers a leverage of 1:10, you need to have $1 in your account to open a position worth $10 at a given leverage ratio.

7. Long/Short:

Forex trading allows clients to make profits or losses on bullish as well as bearish market trends. Going long means traders will earn a profit when the price of quote currency increases while short means profit on bearish trends.

Suppose a long and short position on EUR/USD is opened at 1.2000. Traders with a long (short) position will earn a profit if the price of 1 EUR moves above (below) $1.2000 USD.

Market Trading Terms

Some terminologies are based on market activities and traders must acknowledge these to understand price movements in the forex market.

1. Bull Market

Bullish trend or bullish market is a commonly used term in financial markets to denote appreciation in the price of the asset. For example, a continuous rise in prices of a commodity or stock for a prolonged period will be called a bullish trend.

In a forex pair, a bullish trend can be due to appreciation as well as the depreciation of one currency with respect to other. For example, a bullish trend in EUR/USD currency pair represents an appreciation of EUR and/or depreciation of USD.

2. Bear Market

A bearish trend or bearish market is exactly the opposite of a bullish trend. Continuous depreciation in the price of an asset is commonly denoted as a bearish trend.

In the forex market, appreciation of quote currency and/or depreciation of base currency can be called a bearish trend on a currency pair.

3. GDP

GDP or Gross Domestic Product is the total value of all the goods and services produced in a country in a particular time period. It is a popular indicator that represents the overall health of a nation’s economy.

Growth in GDP can be compared with other nations to predict the increase or decrease in the price of a currency pair. For example, in a hypothetical currency pair ABC/XYZ, the GDP of the country with ABC currency increases more than the GDP of XYZ nation. This means ABC is growing faster than XYZ and the price of ABC in terms of XYZ is very likely to increase.

4. Inflation

Inflation means a rise in prices in a nation over a time period. There are multiple factors in an economy that can increase or reduce inflation. Each country has different inflation rates at a particular time interval.

Inflation rates of two currencies involved in a currency pair can be compared to predict the price movement of a currency pair. The country with a higher rate of inflation will lose its value against the one that has a lower inflation rate.

5. Interest Rates

The interest rate of a country that is also known as the repo rate is the basic rate at which the central bank will provide loans in a particular nation to commercial banks. Interest rates also depict the rate at which investors can earn through fixed deposits in the country.

Interest rates are decided by the central bank or the monetary authority of a nation. Interest rates can be comprehended to predict the price movements in a currency pair.

Latest Development and Technological advancement in Forex Trading

The latest developments and technological trends in Forex trading with the use of AI as of 2024 are quite groundbreaking. Here’s an overview of the key advancements:

Automated Trading Systems and AI Traders: AI-driven automated trading systems have become more prevalent, accounting for a significant portion of forex transactions. These systems are capable of analyzing large datasets rapidly, identifying market trends and executing trades with remarkable speed and efficiency. This has led to the emergence of autonomous AI traders, which can react to market changes and news events almost instantaneously, providing an edge over traditional human traders.

AI-Driven Market Sentiment Analysis: The use of Natural Language Processing (NLP) and machine learning algorithms in sentiment analysis has become a critical tool. By analyzing news articles, social media, and online content, AI can gauge public sentiment towards different currencies, offering traders valuable insights for making more informed decisions.

Virtual and Augmented Reality in Trading: The integration of AI with Virtual Reality (VR) and Augmented Reality (AR) technologies is reshaping the trading experience. This includes immersive environments with interactive forex data visualizations, AI-generated alerts in AR overlays, realistic forex training simulations, and collaboration in virtual spaces.

Real-Time Big Data Processing: The ability to process and analyze large datasets in real-time has become crucial. Big Data technologies enable traders to stay updated with the latest market movements and news, allowing them to make quicker and more informed decisions.

Hyper-Accurate Forex Analysis and Predictive Analytics: Advanced machine learning techniques are transforming forex analysis, making it possible to predict price movements with higher accuracy. Predictive analytics using historical data and statistical algorithms are providing traders the ability to anticipate market trends and currency fluctuations more accurately.

Democratized Access for Retail Traders: AI and Big Data are leveling the playing field for retail traders by providing access to advanced analytics and trading signals. Online forex brokers are offering AI tools that can analyze charts, market news, and identify trading opportunities.

Automated Risk Management: AI systems are capable of conducting rapid automated risk analyses, including real-time evaluation of risk exposures and volatility modeling. This enhances safer trading practices.

Increased Transparency and Regulation: With the rise of AI and automation, forex markets are facing stricter regulations for transparency and control over autonomous systems.

Personalized Trading Experience: AI algorithms are enabling a more personalized trading experience by learning from each trader’s behavior and preferences, offering tailored trading advice and strategies.

Growth of Social Copy Trading: Social trading platforms are being enhanced by AI, enabling smarter trader selection, dynamic copy trading, and predictive analytics for better trade filtering.

Always-Learning Algorithms: Self-improving AI algorithms are on the horizon, which will continually adapt and optimize trading strategies, making real-time adjustments to market changes.

These advancements are transforming the Forex trading landscape, making it more efficient, accurate, and accessible. The integration of AI in Forex trading is not just enhancing existing methodologies but also creating new opportunities and paradigms for traders at all levels.

Let us understand the complete process and working methodology of the forex market with the help of an example.

Online forex trading is done through the trading platform which is software that can be downloaded on electronic devices. The trading platform connects traders to brokers, liquidity providers, and other forex traders.

Traders place buy or sell orders through trading platforms on their preferred trading instruments. The exposure and profit/loss depends on the volume traded and the leverage involved.

A leverage of 1:10 will allow you to open a position worth $100 exposure with $10 in your trading account.

In this example, we will take the leverage of 1:10 on the EUR/USD currency pair. The supposed market price for EUR/USD is 1.2100/1.2102. This means that the bid price is 1.2100 (the price that the dealer is willing to pay) and the ask price is 1.2102 (the price at which the dealer is willing to buy) and the spread is 2 pips (difference between the bid and ask price at 4th decimal).

First, we will place a buy order for 1 standard lot (100,000 units of the base currency). To place a buy order of 1 standard lot in EUR/USD, the following will be the calculation of the required account balance.

$1.2102 * 100,000 * 1/10 = $12,102
(ask price) * (units of base currency) * (leverage ratio) = (minimum account balance required to open the given position)

Now suppose the price of EUR/USD went up by 100 pips and reached 1.2200/1.2202. By closing the buy position at this price, the following will be the profit.

(1.2200 * 100,000 * 1/10) – $12,102 = $12,200 – $12,102 = $98
(bid price * units of base currency * leverage ratio) – (exposure) = Profit/Loss

Now let us understand the same scenario with a short position on EUR/USD with 1 standard lot at the current market price of 1.2100/1.2102. Following will be the exposure amount in a short position.

$1.2100 * 100,000 * 1/10 = $12,100
(bid price) * (units of base currency) * (leverage ratio) = (minimum account balance required to open the given position)

Now suppose the price of EUR/USD went down by 150 pips and reached 1.1950/1.1952. By closing the position at this position, the following will be the profit.

$12,100 – $(1.1952 * 100,000 * 1/10) = $12,100 – $11,952 = $148
exposure – (ask price * units of base currency * leverage ratio) = profit

It must be noted the exposure amount ($12,102 in the long position example and $12,100 in the short position example) will be at risk of capital markets. If the leverage is high, the profit/loss amount will move more with the change in the pip value of the underlying asset.

1. Learn about the currencies you want to trade

Anything you learn requires knowing a little about the subject. The same is true about currency trading. Beginners may be tempted to start trading with anything that moves. Using leverage unwisely and random trading is the two trading traits you must avoid.

Spend time educating yourself about the currencies you are going to trade. Understanding the currency pairs can have a significant impact on your earnings. For example, the Japanese currency is moving upwards after a large fall. Or, a currency is falling rapidly due to bad economic reports over the months. These are typical examples of how underlying causes can cause currency movements.

To better understand, pick just a few major currency pairs and see how they perform over a few days. Meanwhile, keep an eye on the financial news for the countries involved. You can develop a good sense of currency movements.

2. Get familiar with trading platforms/software

A trading platform enables you to place trading orders, track their performance, and monitor your trading account offered by a broker.
Every trading software comes with basic features like real-time quotes, charting tools, and others. Some premium software may offer a tailored trading solution for customers. The ideal platform will offer efficiency, confidentiality, and timely execution.

Each trading software has different qualities suitable for the individual trading style and level of expertise. Here are the three most popular software:

• Meta-trader 5 (MT5): MT5 is the most popular trading web platform among brokers and experienced traders. It is best suited for those operating different trading accounts. It has a friendly interface and is very fast and secure trading software.

  It is compatible with various operating systems, including Windows, Android, Mac, and Linux. It also offers a demo account for new traders and supports automated trading. Users can customize its API to create their unique strategies.

  It is perhaps the best all-in-all software that allows trading in forex, stocks, and futures. Beginners can start with MT5 mobile, which is free and suitable for most new traders. However, the desktop software is much better in terms of features and effectiveness.

• MT4: web platform is also one of the most widely used platforms that implement any complexity with ease. It also offers the same trading tools as MT5 but lacks in the number of execution modes, stop orders, and market orders.

  However, it has a friendly interface. Anyone can learn to trade within one or two days. The integrated platform enhances the trading experience by combining mobile trading, trading signals, and market analysis. MT4 Mobile is ideal for new traders as it provides a multilingual interface, newsfeed, and technical analysis and is compatible with Android and iPhone.

• cTrader: is popular among traders for its modern design and comprehensive tools. It is best suited for experienced traders. It allows faster execution, order processing, and level II pricing and also offers automated trading via its proprietary Algorithmic Trading Solution. Among these three platforms, MT4 can be an excellent choice for those new to forex trading.

3. Start with a demo account

Every successful athlete spends more time in training than participating in a competition. Similarly, if you want to be a successful trader, you need to practice your strategies before risking your money. Many brokers offer a demo account to let you familiarize yourself with the ins and outs of their trading platform.

The best part is that you don’t have to put any real money in your trading account. It would help if you continued trading with a demo account until you develop an excellent winning strategy and become comfortable with the platform.

4. Choose a trusted broker

You don’t want to put your hard-earned money with an unscrupulous broker. Choose a forex dealer who is regulated by a trusted authority. It’s ideal if your national regulator regulates the broker; if not, choose a currency dealer with Tier I and Tier licenses from ASIC, FCA, or CySEC.

For traders based in the UK, you must only trade with forex brokers that are licensed by Financial Conduct Authority (FCA). You can search for the broker’s license no. i.e. the ‘Firm Reference Number’ (FRN) on the FCA’s public search page.

On the page, you can search the brokers by their Entity Name or their Reference Number. The FRN number of the registered brokers is generally mentioned in the footnote of their official website. If you cannot find it, you can ask for the regulation details through customer support services.

For ex. XTB has a firm name of XTB Limited & Reference Number is 522157.

You first need to make sure that you ask the broker for their FCA Reference Number. Once you have that, you can then search if that broker is actually licensed or not from FCA’s search. Everything the broker is authorised to do in the UK can be checked through the FCA website.

Another important thing to note is that brokers may falsely claim to be licensed while they are not. They may target clients of genuine brokers by using their license numbers as their own. So, it is really important to check the ‘ Authorized Website’ of the broker for the public search & avoid the clones of fake brokers.

After ensuring the safety and FCA regulation of the brokers, clients must check and compare the fees and other trading conditions that can affect the trading experience. The chosen broker must accept preferred deposit and withdrawal methods and offer good support services. The trading platforms and available instruments must also be checked before opening the account.

Traders must do their own research to choose the best-suited brokers for themselves. Reviews from experts and existing clients can be useful but the final decision should be based on your convenience, preference, trust, and user-friendliness.

5. Understand the essential forex tools

Please make yourself aware of trading software and how they function. The trading platform is where traders spend most of their time and they must be comfortable with the trading platform. MetaTrader and cTrader are the most commonly chosen forex trading platforms but some brokers offer their proprietary trading platforms. The most common trading tools you should know are:

• Charting software: It is an analytical tool that produces interactive currency price charts along with various technical indicators for traders. You will use a lot of charts and graphs while trading in forex.
• Economic calendar: It helps you keep up with the important time and date of financial data releases that can impact the currencies. You can customize the calendar for the most important events such as central bank meeting dates, GDP, employment, and inflation numbers.
• Financial news: Any economic news can influence the exchange rate of a currency. Keep an eye on the essential economic information to make adjustments in your trading position.
• Journal: Some brokers offer a trade journal that gives insight on your past performances and learn from your winning and losing orders.
• Copy-trading: Many platforms let you copy the trading strategies or orders of an experienced trader.
• Time zone: Understanding the time-zone differences between different forex markets is essential for forex traders. For instance, when New York closes its office at 5 PM, the Japanese and Singapore become active. The best time for forex trading is two or more trading sessions are overlapped.
• Volatility calculator: It is an effective tool to see the historical performances of a currency pair. You can also customize the calculator to include different time frames for historical volatility. It will give you a beforehand idea of the risk involved in trading that specific pair.

6. Difference Between CFD and Forex Trading

Contract for differences (CFD) is a derivative instrument that is widely used in online trading of financial instruments. Most of the retail forex trading with leverage are done in the spot market as CFD. Forex, commodities, energies, metals, indices, stocks, cryptocurrencies, etc are commonly traded through CFD.

When trading via CFD, only the price difference between the opening and closing of the position is speculated to book profits. There is no physical buying and selling of the underlying assets. Most of the brokers that offer online forex trading in the UK use CFD for forex trading.

Steps to Open a Forex Trading Account in the UK

The account opening process at every FCA-regulated broker is nearly similar. However, the process and time required to open the live account can vary from broker to broker. Following are the steps to open a live trading account in the UK.

Step 1: Select a Broker

Traders must check and compare every aspect of the broker and choose the most suitable broker with regulations, low fees, availability of desired instruments, helpful customer support service, convenient deposit and withdrawals, and a user-friendly trading platform.

Step 2: Visit their Website or Download the App

After choosing the broker, you need to visit their official website or download the application to open the account.

Step 3: Enter Basic Details

The first signup process involves providing basic details like name, phone number, email, and country of residence. Some brokers may ask for a few more details.

Step 4: Select Account Type

Most forex and CFD brokers offer more than one account type with different pricing structures, trading platforms, or trading conditions. Traders must choose the most suitable account type while opening their accounts.

Step 5: Document Verification

After configuring the account and answering a few basic questions related to forex trading, traders are required to verify their documents by uploading soft copies. Brokers will ask for name and address proof which can be done with a passport, national identification document, etc. Each broker can take different times to verify the document ranging from 2 hours to 24 hours on business days.

Step 6: Deposit Funds

Once the account has been verified, clients can deposit funds through the accepted methods from the website or application of the broker. It is important to check the associated fees and time required to process the transaction.

Step 7: Download the Trading Platform and Start Trading

Once the deposits are visible in the account equity, you can open trading positions on available instruments through the trading platform. The trading platform can be downloaded on mobile and desktop devices and can also be accessed through the web.

Fundamental Analysis

What economic factors will impact the demand and supply of a currency? Welcome to Macroeconomics 101, the law of demand and supply. If the demand for a currency is increasing, the trader may assume the prices will rise. On the other hand, a demand reduction may be an indication of an eventual fall.

However, it’s not that simple! There are many factors such as economic health, political stability, global events, and others that influence the expansion and contraction of a particular currency. For instance, the US Sub-Prime Lending Crisis in 2008 caused a massive breakdown of financial systems worldwide.

The fundamental analysis generally involves the following economic indicators:

1. Economy:

In addition to global economic events, the localized changes in a national economy can also influence the currency prices of that country. For instance, the increased commodity prices globally can strengthen the Canadian dollars.

2. Political Changes:

Although government changes are not a frequent affair, currency prices can be affected during a transition period. The developed countries have relatively stable regimes in comparison to developing countries. Political instability is the main reason why the currencies of many African countries are so unpredictable.

3. Monetary and Fiscal Policy:

Central banks use monetary policy as an effective tool to control the demand and supply of a currency. They can reduce the interest rate in an economic slowdown and can increase to curb the inflation caused by economic growth. The fiscal policy entails taxation and government spending. Higher taxes can drive slower credit and economic development. Both government policies can have a significant impact on the national currency.

4. Activities of Major Participants:

Main participants such as banks, financial institutions, or hedge funds may buy or sell a specific currency to up or down the prices. You will be in much better positions if you have an idea about the main speculators of the forex market.

5. Economic data and reports:

Main participants such as banks, financial institutions, or hedge funds may buy or World governments publish statistical data and reports that reveal the economic health and performance over a period. Many financial reports like employment data, inflation rate, GDP, and foreign exchange reserve can indicate regional economic conditions, which can dramatically impact the local currency. A forex dealer can use an economic calendar to avoid unwanted surprises from the release of new data.

Technical Analysis

Charts and graphs are the primary tools of technical analysis. Charts help traders identify historical performance, ongoing trends, and price movements and calculate risk to maximize gains from currency trading.

Understanding different charting formats such as line, bar chart, and candlestick is essential to develop a solid trading strategy for beginners. The following are important terminologies associated with technical analysis.

1. Bar chart:

It is the most basic charting which helps users select a currency and its performance for a fixed period. The bar chart shows the highest and lowest currency price points and average performance over the period chosen.

2. Candlestick:

It also displays the same information: open, low, high, and close. However, the representation of data is very different from the bar chart. It becomes easier for users to see the highest and lowest peaks of the currency movements with thin vertical lines.

3. Price Trends:

Trend is a term used in technical analysis of capital markets that depicts the direction of the price. Generally, the price of the underlying instrument moves in a particular direction until a trend reversal is witnessed. The tops and bottoms of the charts can be analysed to identify the price trend at a given time.

Trendlines and trend reversal are very important components of technical analysis. A higher-high price action followed by a higher low represents an uptrend (bullish) while a lower low and lower high depict a downtrend in price movement.

4. Support and Resistance

Support and resistance are the prices at which the trends are likely to reverse or stop moving further in that direction. There can be multiple support and resistance levels for a single financial instrument.

Support is the lower limit at which the price trend is likely to reverse or stop moving further below. Resistance is the upper limit on the price trend. Whenever a resistance or support level is broken, the price moves significantly. These limits are created due to trend reversals and stagnancy of prices in the price at that same particular level. A support or resistance level gets stronger every time it resists the price movement.

5. Moving Average

As the name suggests, the moving average is an important indicator that depicts the average price movement in a given time. A moving average indicator creates a series of averages of different subsets of the full data sets of prices in a particular time interval. Current prices below the moving average depict a buying opportunity while the prices above the moving average may benefit the sellers.

6. Fibonacci Retracement

Fibonacci retracement levels are based on the Fibonacci sequence and are used to identify potential support and resistance levels. Traders use these levels to determine potential price retracement areas during a trend.

7. Bollinger Bands

Bollinger Bands consist of a moving average (typically 20-day SMA) and two standard deviations above and below the moving average. They help traders identify periods of high or low volatility and potential price breakouts.

8. Candlestick Patterns

Candlestick charts display price data in a visual format using candlestick patterns. Traders analyze patterns such as doji, engulfing patterns, and hammers to identify potential trend reversals or continuation.

9. Volume Analysis

Volume analysis examines trading volume accompanying price movements. It helps traders understand the strength or weakness of a price trend and identify potential reversals or breakouts.

10. Chart Patterns

Chart patterns, such as head and shoulders, double tops, and triangles, are formed by price movements and can indicate potential trend reversals or continuations.

There are hundreds of strategies that are used in the technical analysis of financial instruments. Technical analysis works well on instruments with high liquidity like the forex market.

Experienced traders often use technical analysis in combination with fundamental analysis to understand why the value of a currency rises or falls for the selected period. For example, if the fundamentals indicate that the US Dollar will strengthen against the Euro due to policy divergence, and the technical analysis also indicates the same, then it is much more likely that your strategy may be successful as compared to incomplete research.

You can use simple mathematical tools such as moving averages, trend lines, and others for technical analysis. You can learn about more advanced concepts like Elliott Wave Theory, Fibonacci Studies, and Pivot Points as you progress.