Your Shortcut into Forex Issues

The underlying cause of price movement in any market is fundamentals—those factors that affect the basic value of that market. For many markets, the focus is on supply and demand as free-market forces determine what is “expensive” or “cheap,” depending on how much is available and how badly someone wants lo buy or sell it. Forex markets go far beyond basic supply and demand figures.

In fact, the amount of information can be overwhelming. Tin- challenge for the forex trader is nut finding information but determining what is most significant from the enormous amount of information available and interpreting the likely effects on the markets. Although it is more difficult to trade forex on the basis of fundamentals, forex traders do need to be aware of key fundamental factors.

Traders may have a trading strategy that they should buy the euro tomorrow, but tomorrow may also happen to he the day when a monthly U.S. employment report is scheduled to be released, or perhaps it is a day when the Federal Open Market Committee is scheduled to meet.

Such events can cause volatile market action that may influence how traders implement their trading strategy. Knowing about the possibility of potential adverse volatile movement as a result of some fundamental factor might, for instance, affect when to place a trade, what type of order to place, or whether to trade that day at all.

COPING WITH THE UNKNOWN

If a trader does not know something is going to happen, it is naturally pretty hard to prepare. How could a forex trader have prepared for the terrorist attacks of September 11,2001, or for a massive tsunami, hurricane, or other natural disaster? Such shocks, though part of trading in the real world, fortunately are still infrequent. Even if traders could anticipate such events, they probably would not he able to predict how and io what extent the markets might react. The mass psychology of the marketplace sometimes does unexpected things. It is hard to trade unknown, untimed shocks.

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Every Forex trade involves the simultaneous buying of one currency and the selling of another currency- These two currencies are always referred to as the currency pair. The base currency is the first currency in the pair and the second currency in the pair is called the quote currency. The exchange rate defines how much the base currency is worth in terms of the Quote currency.

A common practice in the trade is to describe currency pairs as major currencies, minor currencies or cross rates. Cross rates are those currency pairs in which neither currency is the U.S. Dollar (USD). In major and minor currencies either the base currency or the quote currency is the USD.

Minor currencies are defined as those currency pairs with low trading activity, while the major currencies are those currency pairs with the highest trading volume. Different currency brokers list different pairs as being major or minor. On the average, major currencies cany a slightly lower transaction cost due to their high liquidity.

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