Trade Bull or Bear in the Forex Markets

Trade Bull or Bear in the Forex Markets

Effective long and medium-term trading strategies in all markets typically involve identifying the major underlying trend and then trading with the trend’s overall direction.

This tends to hold true regardless of whether the trend consists of an upward trend or bull market, or a downward trend that is otherwise known as a bear market.

Bear Markets and Stock Trading Regulations

Because of the regulation which many traders consider to be excessive, stock traders are often limited in their ability to take short positions in stocks. This can significantly affect the scope of their trading opportunities, especially in bear markets.

The reason for these numerous rule changes involves the stock market’s various crashes which have occurred historically. These regulations have the overall effect of making the shorting of stocks increasingly difficult in declining markets.

Basically, traders are only permitted to short a stock on an uptick in its price. This so-called short sale rule has even been expanded recently to prohibit the shorting of financial stocks altogether when the market has declined by a certain percentage.

In addition, because of the fact that currencies trade in pairs, all currencies cannot decline simultaneously in the forex market. This differs from stocks, which can all move down simultaneously in a typical bear market crash scenario. This is the primary reason that the short selling regulations were instituted in the first place.

Trade Bear Markets in Forex Easily

Unlike the stock market, the forex market is comparatively unregulated. This allows traders to sell short regardless of the direction of the last sale, which is how this regulation works in the stock market. In essence, the forex market allows traders to go short any currency pair as long as a bid price can be found in the amount they wish to deal.

Because of the lack of restrictions in the forex market, bull and bear markets remain equally easy to trade. Also, because of its unregulated nature, moves in the forex market are usually dictated by the levels of supply and demand in the market, although at times central banks may intervene to stabilize their currency.

Basically, the forex market allows traders a more equitable and efficient marketplace in which to operate. This makes trading just as easy in a bear market as in a bull market.

The U.S. Dollar’s Trend Creates Bull and Bear Forex Markets

In the stock market, individual stocks will tend to trend according to the company’s prospects and for the market generally.

Nevertheless, stocks which perform poorly will still rise in a bull market, while high performing stocks with strong earnings will still decline in a bull market, although perhaps to a lesser degree than the overall market.

The rough equivalent of the overall stock market for forex traders is the performance of the U.S. Dollar. Because of the Dollar’s status as the world’s premier reserve currency since the end of the Second World War, the majority of large moves seen in the forex market will either be in favor of or against the U.S. Dollar.

Basically, since the U.S. Dollar often plays the role of market leader, its value will rise and fall against a number of other currencies simultaneously depending on economic conditions in the United States in relation to the rest of the world.

This tends to give the impression of bull or bear markets for all currency pairs which include the U.S. Dollar as the fortunes of the United States rise or fall respectively.

Forex; Alternative to the Stock Market

Forex; Alternative to the Stock Market

The forex market has often been the choice for many professional traders who had previously traded in the stock and commodity markets. Some reasons for their switch are rather simple: the forex market offers greater liquidity, longer trading hours and more trading opportunities.

Furthermore, with the advent of forex electronic trading available by connecting to the Internet, in combination with the recently available online forex retail accounts, small investors can now access and trade the multi-trillion dollar forex market that was previously only available to banks and large corporations.

Before the Internet, small traders were largely restricted to trading stocks or commodity futures and options, where retail accounts have, for the most part, always been available.

Also, currency futures were not made available until just after exchange rates began to float in 1972. For many years, currency futures were the only way that retail traders could participate in the foreign exchange market.

The forex market has some clear advantages for traders which cannot be found in other markets such as the stock market. Some of these features that the forex market offers traders compared to the stock market include:

Liquidity

The forex market makes up the deepest and most liquid market on the planet.

Currency trading occurs around the clock by the world’s largest banks and financial institutions and helps ensure that a market maker or dealer will always be available to take either side of a trade.

Conversely, trading in the stock market is limited to certain hours of the day, and liquidity can become almost nonexistent in some of the smaller stocks.

Trading Hours

The forex market remains open continuously from Sunday afternoon until Friday afternoon EST. This means that currency traders enjoy the longest continuous trading hours of any financial instrument.

Stock trading is limited to certain hours of the day, with some highly capitalized stocks which may be traded on overseas markets.

Expense

Trading stocks can be quite costly, especially for active traders since commissions can build up significantly.

Trading currencies is considerably less expensive in comparison since most forex dealers only charge a part of the spread instead of charging a straight commission.

This means the cost savings in trading forex over trading in stocks can be considerable.

Leverage

One of the best reasons to trade in the forex market consists of the amount of leverage a trader can use. Trading in stocks requires 50% of the purchase price, or a 2:1 leverage ratio, while forex trades can be leveraged by as much as a 500:1 ratio.

Because a trade in the forex market represents an exchange of equivalent assets, there is no initial cost in establishing a position. This differs from the stock market where one is actually purchasing an asset.

Fewer Choices for a Trading Vehicle

In contrast to the stock market, where thousands of stocks exist, the lion’s share of trading in the forex market occurs in just eight major and minor currency pairs quoted against the U.S. Dollar and several active cross rates pairs.

This makes choosing a currency pair to trade substantially easier than picking from among the thousands of choices in the stock market.

High Number of Participants in Forex

Not only is the forex market the largest financial market worldwide, but it also includes a high number of participants.

One of the primary benefits of having more active participants in a market is that it usually contributes to greater liquidity in that market.

Advantages of Liquidity

The basic idea behind liquidity involves how quickly you can convert an asset into cash. Of course, with currency trading, you can turn your spot trade into cash within just a couple of business days.

When a market is highly liquid, that implies that it operates in a very efficient manner. Usually dealing spreads would also be quite competitive, with relatively low transaction costs.

Read our previous article: Winning Forex Trade with Major Currencies

Another advantage of high liquidity is the ability of a market to handle large transactions without the price moving too far as a result. Liquidity also generally means that orders will tend to be executed well, with minimal slippage on stop losses.

When it comes to liquidity, the huge forex market easily comes out on top when compared to other financial markets like those for stocks, bonds, and commodities. It also offers 24-hour trading during the business week.

Forex Participants That Help Provide Liquidity

The main participants in the forex market that assist in providing liquidity generally fall into one of the following basic types:

  • Major Commercial and Investment Banks:
    These are the big professional players in the forex market. By acting as both speculative traders and as market makers to clients and one another, their activities provide substantial liquidity to the forex market.
  • Governments and Central Banks:
    These institutions can have a major impact on the forex market as they intervene to manage the exchange rate of their nation’s currency or shift currency reserves. At especially volatile times, central banks will often provide liquidity to help stabilize the forex market.
  • Large Corporations:
    Many companies engage in business in other countries and this often requires that they participate in the forex market. Their hedging activities of foreign currency exposures often help provide considerable liquidity in the forex market, and they generally participate by acting as a large bank’s customer.
  • Hedge Funds:
    These players largely act as speculative trades in the forex market to enhance their funds’ profits. Their large transactions can significantly increase trading volume and hence liquidity in the forex market.
  • Investment Funds:
    When the managers of these funds invest internationally or shift investments from one nation’s market to another’s, they need to use the forex market to convert currencies. Usually acting as customers of large banks, their often large forex transactions, and orders, as they enter, exit and protect their foreign investments, can add significant market liquidity.
  • Individual Traders:
    Such participants can range from wealthy individuals, who can often trade forex using credit lines that banks extend to them, to retail traders who participate on margin via online forex brokers. This group of participants provides an increasing amount of liquidity in the forex market.
  • Interbank and Retail Forex Brokers:
    These firms act as intermediaries in forex transactions. Interbank brokers will generally only handle sizeable transactions between large banking counterparties, while retail forex brokers tend to provide access to the forex market for much smaller individual accounts. This access has made the forex market available to a much larger segment of the population and has significantly increased both the breadth and liquidity of the forex market.

Few Profitable Currencies to Follow

One of the reasons that many savvy traders consider forex the best market to trade is the little effort required to assimilate the knowledge required for trading.

Also, the fact that most currency trading activity is limited to a handful of key currencies and currency pairs, commonly referred to as the majors, is a distinct advantage relative to other markets.

This makes trading currencies a much simpler trading process, with only eight major and minor currencies to follow. The following sections provide a list of these primary currencies and descriptions of their most active pairs traded in the forex market.

Check our previous article: How to get Forex latest market Information

The Major and Minor Currencies

The so-called major and minor currencies are listed below after their standard ISO 4217 three letter code. They are listed in order of importance as determined by their average daily trading volume seen in the forex market.

  • Majors
  1. USD – United States Dollar
  2. EUR – European Union Euro
  3. JPY –  Japanese Yen
  4. GBP – Great Britain Pound Sterling
  5. CHF – Switzerland Franc

 

  • Minors
  1. AUD – Australian Dollar
  2. CAD – Canadian Dollar
  3. NZD – New Zealand Dollar

 

According to a 2017 survey by the Bank of International Settlements or BIS, the major and minor currencies listed above account for over 87% of all daily currency trading volume.

In addition, the U.S. Dollar acts as either the base currency or counter currency in over 85% of all forex trades and so clearly dominates forex trading activity.

The Primary Currency Pairs

Below find a brief description of all the currency pairs which make up the main currency pairs traded in the forex market:

 

  • EUR/USD – The European Union’s Euro quoted in U.S. Dollar terms. The E.U. has the largest economy in the world by GDP, followed by the United States. This currency pair accounts for 27% of all forex transaction by trading volume.
  • USD/JPY – The second most active currency pair, the USD/JPY currency pair accounts for 13% of daily forex trading volume. The USD/JPY pair is one of the most liquid, and the dealing spread can be as low as one pip.
  • GBP/USD – Number three on the list is Cable or GBP/USD. The pair received its nickname at the end of the 1800’s from the Trans-Atlantic cable used to transmit the rate between New York and London. Cable makes up 12% of overall daily trading volume.
  • USD/CHF – The U.S. Dollar against the Swiss Franc. While not the most liquid currency pair, it still accounts for over 5% of total daily forex volume.
  • AUD/USD – The Australian Dollar versus the U.S. Dollar and nicknamed the Aussie. This pair reacts to commodities prices primarily because Australia is a major mining goods producer. China is one of the main markets for Australian exports.
  • USD/CAD – The Canadian Dollar versus the U.S. Dollar. Nicknamed the Loonie after Canada’s national bird that appears on its one dollar coin, the Canadian Dollar also acts as a commodity currency and so reacts to movements in both crude oil and gold.
  • NZD/USD – The New Zealand Dollar versus the U.S. Dollar and nicknamed the Kiwi. Not as actively traded as other commodity currencies, this particular currency pair accounts for less than 4% of forex trading volume. Nevertheless, it is a popular currency to trade among speculators.

Conclusion:

Basically, a trader has a whole lot less to watch and hence less to worry about when trading in the forex market versus other capital markets. Having a limited number of currencies is clearly an asset that forex traders can use to their benefit.

Forex Information Availability

Because of the largely unregulated nature of the forex market and the fact that it involves national currencies, most information affecting the market is made available instantly worldwide. This provides a major advantage for forex traders.

Also, this widespread information available in the forex market differs considerably from the way information is released that can affect individual stocks in the stock market.

As a result, insider trading, as it is commonly understood in the stock market, does not really exist in the foreign exchange market.

Read our previous article: Twenty-Four Hours Forex Trading

Information Availability in the Forex Market

Most of the information that affects the currency markets involves the release of economic data from different governmental sources in each currency’s home country.

In addition to world current events, which tend to influence currency movements, forex traders also watch price charts and technical price indicators. Technical traders believe these analysis tools give them an edge when trading, and they can readily be obtained via software that has access to the Internet.

A notable exception to the general openness of information available in the forex markets involves order flow. Generally, the only parties that are privy to large transactions occurring in the forex market are the two parties conducting it.

The Internet Leveled the Playing Field Considerably

With the exception of the aforementioned order flow data, the majority of forex traders obtain their market and economic information from the same sources. Essentially, news which influences the currency markets is now available to anyone with Internet access and the knowledge about how to obtain it.

At the dawn of the modern electronic age and before the Internet had become widely available, technical price data and information feeds from companies such as Reuters and Telerate (Associated Press/Dow Jones) would cost a fortune that only banks and wealthy individuals could afford.

Thankfully, the Internet has helped level the playing field in the forex market by bringing all of this information and the capability to trade the forex market to millions of individuals. Many of these people would not otherwise have been able to afford access to this huge market and its key information sources.

How News Affects the Forex Market

Most of the economic data and other information released by these sources are already anticipated by the various professional observers analyzing the economy. Nevertheless, news that differs significantly from the consensus expectation in the market can have a substantial impact on the forex market.

For example, if the Gross Domestic Product or GDP for a nation came out at 1% when the market was expecting 2%, that would tend to provoke a sell off in that nation’s currency.

Other currency pairs demonstrate notable sensitivities to the price of one or more commodities. For instance, a sharp increase in the price of crude oil would tend to produce a negative effect on the USD/CAD exchange rate. The reason for this involves the fact that Canada is a major exporter of oil to the United States, which is a net importer of oil.

Read next: Few Profitable Currencies to Follow

Forex Trading on iPhone and Android Devices

Taking the world with you is an understatement when it comes to Forex trading on an iPhone or Android device. These days, mobile trading is becoming so popular, like IMMFX, many brokerage firms are developing their own mobile trading platform, so that you can literally trade from anywhere in the entire world, at any time.

In this article, we’ll see exactly how far mobile Forex trading has come, and whether or not you can rely on the new technology to place trades and update positions on the go.

Forex Trading for iPhone

Ever since Apple released the iPhone back in 2005 / 2006, millions of consumers worldwide have entrusted the device with their sanity. Things which were once only done on a computer have now become portable and completely mobile.

For example, take a look at the following tasks which can now be done from anywhere:

  • Reading email and composing new messages.
  • Reading Word documents and creating Excel spread sheets.
  • Chatting to friends through messenger programs, in real time.
  • Checking your bank balance and transferring funds between accounts.

Each of these tasks has been simplified thanks to the “apps” which are now created by third parties, and allowed to be installed on the iPhone.

Forex trading on the iPhone is no different. Where you might once have had to sit at your computer for hours on end, staring at the screen and reviewing charts; the iPhone is now able to provide you with an alternative tool to trade.

Specialty Forex platforms allow you to make trades, review positions, and make adjustments all from the comfort of your car, lounge suite, or friend’s house. If you want to get involved in mobile Forex trading, you can easily choose to trade with IMMFX broker since it has a dedicated iPhone trading platform as part of trading platforms.

Forex Trading on Android Devices

Much like Forex trading apps for the iPhone, Android has its own range of Forex trading platforms. Android is a development from Google, which was released much later than the iPhone from Apple. Despite this, development of trading programs specifically for Android has not been slow or missing.

As one of the leading Forex brokers in the industry, IMMFX allows you to download special applications for your Android device, which allows to you trade from absolutely anywhere.

iPhone trading is almost expected these days; however, Forex trading for Android devices is still a “bonus” in many cases. Learn more about IMMFX Mobile Trading.

How to Make the Most of Forex Hedge?

If you are an active trader, then hedging is an important derivative option that can be availed. Hedging gives you an option to control your future by taking an opposite or equal stand in order to book profits or prevent losses that may occur in future. The fundamentals of hedging remain the same, whether you exercise them in forex market or commodity market.

The only cause for concern in the case of a Forex hedge is that you are dealing with currencies. Currency is undoubtedly one of the most volatile asset class right now. As a forex trader, it is important to ensure that while protecting yourself from the downfall of one currency, you do not end up exposing yourself to the pitfall of another. It is almost like a double-edged sword and hence, steps should be taken with caution.

Take Steps with Care

In the case of hedging, one needs to be extra cautious. The fact that you are buying and selling at the same time means that while on one hand, you are ensuring that you do not incur losses, you are also ensuring that if the market rises, you do not earn profit beyond a certain limit. This phenomenon is being caused, as you are setting a ceiling for your investments. So, under no circumstances can you earn more profits than the amount that you have already decided for yourself. Although, it is good in many ways the hitch comes with the fact that you have already curtailed the amount of profit that you can make out of this deal. Deciding the amount and number to buy is called Spread and the amount of profit that you will earn depends on your Spread type.

In the case of Forex, trading is done in pairs. For example, you buy dollars against Yen and so on. The moment you are not comfortable with the pair you are holding, you can hedge them against another currency that you think is promising, like Euro. Hedging would indeed help you to keep your losses at bay and also give you more confidence to trade frequently and generate profit.

However, if the above-mentioned steps are not taken properly, then you may end up in trouble. This is because of the simple fact that while curtailing your exposure in Yen market, you have ended up exposing yourself to the Euro market and so on. In short, it is a tricky situation that might go wrong unless you take calculated steps.

Conclusion

As a novice, you should try and stay away from the clutches of Forex hedging. As already mentioned, Forex hedging is a calculated move that should only be tried by the experienced and not novices who are trying to understand the market. Always ensure, that you consult your Forex broker before opting for hedging or you can also opt for the more easier options like call and put.

Simplifying Forex Trading

If you allow it, currency trading can be simple. A new trader complicates things more than is essential and in the end, he loses his confidence to trade and makes bad decisions. This leads, and rightly, to the feeling that he does not know anything. As a result, he is on the lookout for tips to trade. Though a beginner will find difficulty in trading, he must realize that the people from whom he is asking for tips learnt through their mistakes and converted their bad decisions to knowledge.

Technical and Fundamental Analysis

Learning Technical and fundamental analysis is the first step that you must take to learn currency trading. It is this mathematical prediction that draws the line between forex trading and gambling.

Technical analysis follows the belief “The trend is your friend”. The followers of this school of thought believe that a trend does not change unless it is given a reason to do so. There has to be a reason like a news announcement or maybe an event that affects the financial world. The trader has to read charts and then determine the direction of the overall trend.

Fundamental analysis, on the other hand, is based on news and major events. It is believed that no trend lasts forever. It comes to a stop sooner or later.

To succeed, the Forex trader must keep an eye on the charts as well as the news.

As a trader, you have to learn both these kinds of analysis if he wants to correctly predict the trend and earn profits. Though charts are an essential part of predicting the trends, you can never predict the overall trend until you read them in combination with fundamental analysis.

[ Learn: Trading Approach; Fundamental or Technical? ]

System Hopping

All good trading decisions are a result of lessons learnt from experience.

When the trader is not confident about his skills, he begins to switch from one system to another and keeps changing indicators without understanding how either works. All he knows is that he has to buy a currency when it crosses a mark. The calculation involved in this is beyond his comprehension. When he understands this theory, the calculation begins to make sense.

Another thing that leads to system hopping is the trader’s fear of losing money. All traders are in the market to earn profits. They forget to enjoy the game and are always looking for wins.

Beginners know that they cannot earn profits and there will be losses too. But though they know this intellectually, they are not equipped to accept it emotionally. As a result, this fear of loss leads to add one indicator after another to their system, so that they are on top of the market. They can now read the indicators and where they are pointing but are unable to see the price trend.

When you pile indicators, you will be more confused because each indicator is telling you to do something different.

This is because, while an M.A.C.D indicator may indicate that selling is the right thing to do, other indicators like ADX may indicate that it is a good time to buy. This becomes complicated and you will only become more confused and as a result, make bad decisions.

[ Learn: Forex indicators – a brief overview ]

Read the Charts

This is where Technical Analysis comes in. Follow the charts and with the help of technical and fundamental analysis, see where the overall trend is heading. Is it going up or down? When the trend is moving from the upper hand left corner to the lower right side, then the trend is moving down and vice versa. Figure out the trend and focus on it. That is the only way to avoid a lot of complication and trouble.

When you learn to read the charts and figure out the direction of prices, you will look back on your trading career one day and wish that you had sold the USD/EUR while you had time.

Taking a look at the weekly chart will help you determine the direction of the trend.

Some traders only check the overall trend and refuse to take any risks by going in any other direction. These are the safe players. They need patience but in the end, their patience pays off and by simplifying their trade, they are able to rest easy.

Conclusion

Remember that Forex trading is not gambling. Gambling is all about luck, whereas Forex trading is about being able to read charts and predict trends by using logic. Forex experts are rarely wrong when they make predictions. Rather than asking for tips and depending upon the experience of others, it is best to learn how the indicators and system work. Make trading simple by following the trends and move on when you find something that you do not understand.