The foreign exchange, sometimes referred to simply as Forex, is a market that many individuals have made their fortunes in. However, understanding what the Forex market it and how it works can take more than some casual research to fully grasp. The basics can be explained relatively easily, however.
What the Foreign Exchange Market Is
Anyone that’s traveled out of his or her home country knows that, when they get where they’re going, they have to exchange their home currency for foreign currency. Depending on where the person is from, and where they’re traveling, the home currency could be worth more or less than the domestic currency. That is, in essence, the basis for foreign exchange markets; some currencies are worth more and some are worth less. But the rate is rarely constant.
Say, for instance, that an American Forex broker was pretty sure that yen were going to increase in value very shortly. The broker would then purchase a large amount of yen at the lower price that it has today, and when the yen increase in value in the future the broker would then sell it off and convert it back into dollars. The result is that the broker made money, even though all that happened was that he or she happened to manipulate numbers and to ride the waves of foreign exchange rates.
The Biggest Market on The Planet
Many people try to compare the Forex market to the stock market, but while the same strategy of buy low and sell high applies, there’s really no other comparison that can be made. Stocks deal with companies, and while a company might grow huge, it still isn’t a country. The Forex market deals with countries, and the amount of profit or loss that can be made is like the ancient game of noble houses; politics and money are intertwined so that world events directly influences a broker’s bottom line.
The flip side of using currencies though is that it can be hard to make a profit without some serious leverage. Barring truly serious events like civil war, the rates of exchange between countries are relatively stable, and don’t fluctuate in huge amounts. Because of that, brokers need to be able to put a lot of cash into the market in order to make some serious profit. However, where there’s potential for big gain, big loss is also present.
Market Sentiment in Forex
In any market the sentiment of the market participants is always important. However, when it comes to the daily multi-trillion dollar foreign exchange market (forex) the ability to accurately gauge market sentiment is considered essential to devising and carrying out a successful trading strategy.
What exactly is market sentiment anyway? In the broadest sense, it is the sum total of the attitudes expressed by the actions of every participant in the market. For example there may be a dominant trend in favor or against a particular currency that can tell you not only what the market currently feels about a currency, but can help you to predict where the market is going next.
The evaluation of market sentiment is not an exact science. In fact, sometimes the behavior of the market can appear completely irrational, although that irrational behavior itself may contain valuable clues to market sentiment and future behavior. Generally however, there are obvious real world and fact based influences behind market sentiment, usually based on an economic report or a political event that can be expected to have a positive or negative effect on the currency being traded. Such things as interest rate changes, economic growth numbers or political events can all influence market sentiment. Even such things as natural disasters can have an influence on market sentiment if it has major economic repercussions that will influence the currency of the nation where the disaster takes place.
The trick in following market sentiment is to go with a profitable trend as soon you can spot it and then get out of the trading “herd” when the trend reverses. Unfortunately there is no way to know exactly when the best point of entry or exit is, nor are there any foolproof ways to identify trends reflecting market sentiment early on. The best you can do is to follow the market and the developments that influence it as closely as possible.
Because of its size and complexity, the forex market it can be difficult to evaluate market sentiment on a continual basis. Such sources as the Commitment of Traders Report can help one to follow market sentiment, but in general it is best to trade in forex with the help of a broker, preferably one with extensive experience with forex trading. They can then help you to identify trends consistent with your own trading strategies, acceptable risk and financial goals.