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Defining Characteristics of Forex

From the research that I have done, I have discovered that the forex market has several key characteristics that make it an exciting platform on which to trade (and hopefully make some money):

  • Liquidity - The cash forex marketplace is huge. Literally trillions of notional dollars are traded each day. Granted this is notional amounts so how much real equity is being moved I am not sure. The liquidity is measured by the size of the bid-ask spread. Since there is no central clearing for forex transaction, each broker is free to set its own spread size (but they are pretty consistent due to the competition among brokers). Due to the sheer dollar volume of the transactions, the liquidity in most forex pairs is pretty good, which serves to keep spreads quite low. The bid-ask spread on all the 'majors' is usually five pips or lower (but sometimes can get ridiculous - e.g. 9 pips for GBP/JPY in some cases!). By far the most liquid of all the pairs is EUR/USD, which often has a 2 pip spread (or less at some brokers).

  • Volatility - The forex market is notoriously volatile. If you were following the stock market during Q308, Q408, and Q109, you know a little bit about what high volatility is (and how bad it can be for your health). Fortunately (sic), the forex market is even more volatile (see Trendiness). The reason? Both the supply and demand sides of the currency market are affected by the same fundamentals (interest rates, inflation, etc). Thus, anytime anything changes, we get a double whammy. Of course this is what the economists say. My personal view is that so much speculative activity is occuring in the forex market that pretty much all the moves are generated by traders (either making news or reacting to news, or just small-time retail speculators playing the price action).

  • Trendiness - No, I don't mean the item du jour. I mean that the forex market tends to move in trends quite often (and as we say, the trend is your friend, until it bends at the end). The reason for this is not quite clear to me; my guess that it is a mixture of psychology and fundamentals (mostly psych). Honestly, though, I don't really care. All I know is that, from looking at hisotical charts of forex pairs, trending happens all the time. This is a very key element of why I like forex so much. All we have to do is follow the trend and watch the pips roll in (heh if only it were so easy).

So, is there any technical analysis that can be done on the forex market? Of course you already know the answer, because this site (and hundreds more with more info) exists. In fact, there are a handful of sites that specialize in nothing but invention and discussion of forex trading systems (makes the stock market systems discussion look like child's play).

In the following pages, I offer a couple of simpe technical methods that I have found to be profitable. Understand one thing, though - losing money is a given in forex (even more so than in stocks - did you read the note on risk?) As usual, the trick is to lose less than you make, and do this consistently over and over every year :)

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