Forex guide

The term Forex is the short form of Foreign Exchange. Any type of financial instrument that is used to make payments between countries is taken to be foreign exchange. Electronic transactions, paper currency, checks and signed, written orders called bills of exchange are all instruments of foreign exchange.

Forex indicates increased or decreased value of an investment caused solely by currency movements. For instance finding US dollar weak or going down, an investor might purchase German money markets.

There are quite a few forex indicators. For instance

1. Average Directional Movement Index (ADX)- ADX is used when we need to know the direction in which the market trend is going i.e. either downward or upward and how strong the trend is. When ADX readings over 25 indicate a trend with higher values indicating stronger trends.

2. Moving Average Convergence or Divergence (MACD)- MACD presents the momentum of the market and the liaison between two moving averages. When MACD crosses the signal line it shows a strong market.

3. Stochastic Oscillator- Stochastic Oscillator indicates the strength and weakness of a market by comparing a closing price range over a period of time. Stochastic reading above 80 depicts the currency is overbought while its reading below 20 indicates that the currency is oversold.

4. Relative Strength Indicator (RSI)- RSI or the Relative Strength Indicator is a scale of 100 that indicates the maximum and the minimum prices over a specified period. The price rising above 70 implies overbought while the price falling below 30 means oversold.

5. Moving Average- Moving average Forex indicator is the average price for a given time interval in relation to other prices during the similar time periods. For instance the closing prices over a 5-day period would have a moving average of the total of the five closing prices divided by five.

6. Bollinger Bands- Bollinger bands comprise of a majority of a currency's price. There are three lines in the bands out of which the upper and the lower lines stand for the price movement while the middle one represents the average price. When high volatility prevails in the market, greater distance is witnessed between the upper and the lower bands. The time when a band touches one, overbought and oversold conditions are depicted.

Highest liquidity is observed in the forex market. The forex market absorbs trading volumes and per trade size higher than any other market. This liquidity and the freedom to enter and leave the market anytime attract investors to forex.

Forex market is known for its round the clock trading. When Asian market sleeps the European and American markets are awake and vice-versa. This enables the forex traders to take stands despite of time and place.

Another wonderful feature of forex is that in this trading a small margin deposit can control a much larger total contract value. 200:1 leverage makes forex traders buy or sell $100,000 worth of currencies with $500 margin deposit. Thus the traders often end up making hefty profits. Following the principle of ‘buy low and sell high' forex trading allows traders to generate outstanding profits.

Forex trading is quite cost-effective in the sense that there are much lower transaction costs than other investment products.