Trading Forex

by Koos van der Merwe

So you want to trade the foreign exchange market, do you? Have you really thought this through?

If trading forex is what you really want to do, then the first thing is for you to decide how you want to trade. Do you want to trade short term, medium term, or long term? Whatever you choose, you must first understand what the forex market is. The foreign exchange industry exists whenever one currency is traded for another. The currency market is the largest in the world in terms of cash value traded, and that includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. Trading volume is extremely high and since the market is traded all over the world, that makes it a 24-hour commercial forum. Its liquidity and the fact that the market is always open are what attract short-term traders to the forex market.

All successful forex traders, whether long-term or short-term speculators, analyze world news and take a bet on a currency based on their interpretation of that news. The best example of this is the 1992 trade by George Soros. He came to the conclusion that Great Britain would be rejected by the Economic and Monetary Union (incorrectly known as the European Monetary Union)(Emu). He then placed a $10 billion short position in the market.

The Bank of England tried to stabilize the pound’s value by intervening and depleting all of its foreign currency reserves, but in spite of its efforts, on September 16, 1992, known around the world as Black Wednesday, the pound plummeted as Great Britain was forced to withdraw from the Emu. And thus, in one day, George Soros earned $1 billion.

There are many other examples of forex speculators reading the news, coming to a correct conclusion, and walking away with a huge profit. And for just as many who lost their own money, there are those who lost the money of the institution for which they worked. But they are the ones you don’t hear about for the most part.

...Continued in the December issue of Technical Analysis of Stocks & Commodities

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