Before you start to play any game, you learn the rules. If the victory is what you came for, you enter into every detail and master the strategies to get the strength. Beginners often lack knowledge of how Forex trading works, or if it works at all. Some traders start trading with wrong motives, unrealistic goals, greed or haste, they lack the effort so they fail consistently. This article will help traders to puzzle out the complicated picture of Foreign Exchange trading.
Main article section
- Supply and demand
- The map of the trading industry
- How things work on the international market
- Analysis for better performance
- Avoiding common trading mistakes
- How does Forex trading work from a practical standpoint?
- About Forex price quotes and liquidity
- Forex trading mechanics
Supply and demand: The carrot cake pattern
Supply refers to the number of goods that are available. Demand refers to how many people want those goods. When the supply of a product goes up, the price of a product goes down and demand for the product can rise because it costs less.
Imagine you're going to buy some carrots for the carrot cake on a gloomy Sunday. There is the only vendor in the area with the right amount of them. You bargain, agree on the price and exchange a set amount of money for a bunch of crunchy carrots. Customer and Vendor have got precisely what they've intended.
The next day the weather changes and there are two vendors with carrots. Supply today is higher, two vendors Vs one customer. The competition between vendors pushes the price down since both of them realize: you will probably buy cheaper ones assuming all other features are equal. A new price leads to a deal with one of the vendors.
Or alternatively, you are on a carrot hunt again: the dessert was so yummy, that your kids asked you to repeat. Your neighbour, who came over for a dessert, also did like the cake and now dies to buy carrots and make the carrot cake. The vendor seeing both of you hustling near carrot baskets increases the price knowing there's the only greengrocer's open this day.
Also, if one of the carrot vendors goes out of business this season, both you and your neighbour can expect the price of carrots to rise before you even show up at the greengrocer. This pattern illustrates the ABC of economics.
If we apply the carrot cake pattern to the Foreign Exchange market, we will see: every time a particular currency is bought, a surplus demand appears, pushing the price higher and ruining the balance. Otherwise, when the currency is sold, a surplus supply appears instead, pushing the price down.
The amount of impact depends on the trading volume per deal. Actually, it is directly proportionate. Significant players, like national banks, are able to cause a disequilibrium by interfering the supply of their home currency. Less significant players, like retail traders, can only influence the market so slightly, but still, manage to do it through their sheer numbers.
The permanently changing supply and demand balance is the driving power of Forex charts. The essence of price balancing is the key insight into how online Forex trading works since all economic events in the world are relevant to the market and affect the supply and demand formation of the asset.
The map of the trading industry
The Forex Market has a diversity of traders taking part in every interaction. Let's call them by categories.
- Giants (national banks, multinational companies, hedge funds). It is their monetary policy and trading decisions that have the greatest impact on the market, misbalancing prices the most.
- M-size companies (private investors, private banks, companies needing hedging)
- Small players (financial brokers, small banks and investors)
Most of the participants have direct access to the Forex Interbank because they are over a certain threshold of funds. Forex Interbank operates all the currency exchanges and participants can trade on this level with each other without middlemen engagement.
The purchasing power of a casual trader (that is probably where you are) is usually limited, and here goes a Forex Broker or a Bank providing a financially leveraged account and access to the market via trading services. A pure vision of the market flow should prevent you from fail and train a necessary caution for trading.
As you know now, it is not only the ability to analyze trends and estimate the risks that can make you a good trader but also patience, discipline, and consistency. There are enough books on how to not to crash on the pitfalls, and the main precaution is: don't get into the deep water if you are not a good swimmer yet. Here is a ring buoy, try deep water with MTrading support, a free demo account.