Forex
Guide
by Mansi Aggarwal
FOREX
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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.
Mansi Aggarwal recommends you
visit Forex
for more information.
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