All about Forex: definition, history of creation and why trading on the news is one of the most stable ways to earn money

Forex black android smartphone turned on screen

What is Forex

Forex (Forex, from the English foreign exchange — “currency exchange”)  is a trading platform where traders exchange currencies in order to make money on exchange rate changes.

There are no official exchange rates and restrictions on prices and volumes of transactions in Forex. Exchange rates are formed based on the supply and demand of market participants. The demand for currency depends on economic, political, and natural factors.

Forex currencies are traded in pairs. If a currency becomes less in demand, it becomes cheaper, and accordingly, another currency becomes more expensive relative to the falling one. The price of one currency expressed in another is called a quote.

Forex is the largest financial market. Every day, transactions with a total value of several trillion US dollars are made on it. Trading takes place around the clock via the Internet, except on weekends and holidays.

How Forex appeared

The value of the first money was the material from which they were made. Since there was a shortage of precious metals due to the increase in the marketable mass, money began to be made from cheap materials and the question arose of the value of one currency in relation to another. Therefore, at the beginning of the 19th century, a gold standard system was adopted, according to which a certain amount of gold was assigned to each currency.

According to the Bretton Woods Agreement of 1944, the main world currencies were pegged to the dollar, and the dollar to gold, at a price of $ 35 per troy ounce.

In 1971, US President Richard Nixon announced the abolition of the fixed dollar exchange rate due to the dollar crisis.

In 1976, the Jamaican Conference was held, which adopted the transformation of the monetary system. Many countries have abandoned the binding of the national currency to gold. Exchange rates became floating and began to be determined by supply and demand. This is how the international currency market was formed.

Initially, Forex was created to exchange one currency for another, but gradually it began to speculate. With the development of the Internet, it has become easier to attract customers: the movement of money and the trading process have accelerated. Now Forex is an electronic version of the free stock market, based on global banking systems, but managed by brokers who provide trading platforms to investors.

How to trade Forex

To trade Forex, you need to choose an intermediary, open an account with him and download the terminal. You should always choose a broker after thorough research, you can check out the fxcc forex reviews here.

The point of trading is to buy cheaper and sell more expensive. To do this, you need to predict the growth or fall of the exchange rate at the right time. A trader buys or sells a currency and waits for its price to rise or fall. If the price of the purchased currency has increased, the trader makes a profit. If the trader’s forecast does not come true and the currency falls, he loses money. To minimize the losses, they can take professional advice on FX Risk Solutions.

Forex intermediaries are dealers and brokers. Brokers make transactions on behalf of clients, and dealers act as counterparties and sell or buy currency on their behalf. Unlike the stock market, Forex is mainly used by dealer companies. Some brokers offer bonuses for working with them. You can opt for a deposit bonus forex trader for your trades.

Many experienced traders and beginners choose for themselves a trading strategy based on the news. Its essence is to open a position based on the news published in the economic calendar. Important macroeconomic statistics have a great impact on the market, so a trader has the opportunity to make money on volatility and emerging trends during this period. If the news is important, then there is no doubt that the market reaction will follow immediately. Therefore, trading on forex news is one of the most stable ways to earn money. But, before proceeding directly to trading, you need to decide what types of news there are.

Types of news

They usually talk about the important templates or non-standard news.

Templates include those that are published according to a predetermined schedule. They are expected and have a clear format. Such news can include, for example, data on GDP or the unemployment rate. The macroeconomic indicators of the USA and the EU are of the greatest importance from the point of view of trading in financial markets.

Non-standard news includes unexpected data without a clear format that can be published suddenly. Usually these are statements of important officials, news about some events, etc.

Key macroeconomic data

  • News trading will not be successful without knowledge of the most important macroeconomic statistics. It includes:
  • Meetings of central banks and decisions on monetary policy. It is quite easy to predict the market reaction in response to this news. An increase in the rate entails an increase in the currency, and a decrease – its decrease. If the regulator decides to leave the rate unchanged, then most often there is a bullish trend in the market, but not as pronounced as when the rate increases.
  • Quarterly data on GDP growth rates. If the real value does not coincide with the predicted one, then you can wait for an impulse movement at the time of publication. In addition, volatility may increase. But usually market participants have time to assess the overall picture even before the publication is published on the basis of other data, so the price already includes the published data.
  • The inflation rate. In particular, we are talking about the level of consumer prices. Usually, each country has its own rules for publishing this data. For example, monthly indicators are considered in the States, and annual indicators are considered in Europe. For most countries, the benchmark is 2 percent inflation in annual terms. The central bank may tighten monetary policy if this value is exceeded, or soften it if the consumer price level is below 2%.
  • Business activity index. Traders are usually interested in indices of activity in the service sector and in the production sector.
  • The level of employment. It can be judged on the basis of several indicators. This is the number of applications for unemployment benefits, the unemployment rate, the number of new jobs outside the agricultural sector. The market reacts with growth to a decrease in the unemployment rate and a decrease to its growth.

Which currency is better to trade on the news

To trade on the news, it is better to choose highly liquid pairs. Usually these are the ones that include the US dollar. Most traders prefer EUR/USD and GBP/USD, but you can choose any of the major pairs.

Important rules of news trading

News trading has a number of features related to the forex opening times, which are caused by a certain reaction of the market to the release of a particular news. It is necessary to distinguish two basic rules:

  • You should not open a position 15 minutes before and 15 minutes after the news release. The reason is that the market may behave completely inappropriately both at the time of waiting for the news, and immediately after its publication. After 15 minutes, the price usually reverses.
  • This rule is a more conservative version of the first one: do not enter the market 30 minutes or 30 minutes after the news release. The reason is again in the expectations of the market and the inadequate reaction after the publication of the news.

Market behavior before and after the news release

As mentioned above, the market always reacts to important news. There are several stages in his behavior.

  • The waiting stage. It starts some time in advance, sometimes several days before the data is published. Usually at this stage you can see expert forecasts, which allows traders to form certain expectations about future data. For example, if experts predict a decrease in the US trade deficit, then against the background of this positive news, you can see the growth of the US dollar.
  • Trading on expectations. Based on experts’ forecasts, market sentiment is fueled by certain expectations, which forces some investors to open positions even before the data is published. The reason for such a premature opening is obvious: if the forecast is justified, it will be very difficult to buy an asset at the time of publication of the data. The forecasts of such expert giants as Bloomberg and Reuters are the most trusted. You should not ignore analytics from brokerage companies, where specialists not only analyze the market, but also offer ready-made solutions to traders.
  • The market reaction preceding the publication can range from several days to a week, as many investors seek to get ahead of the rest. As a result, all market movements are based solely on expectations.
  • Olympic calm. Since many investors prefer to open positions long before the data is published, prices rise or fall in advance. But at the time of the news release, the market demonstrates Olympic calmness, since the participants have already earned and are ready to exit the market, even before reaching the planned profit level. It turns out that the very moment of news release is often not as important as the stage of waiting for it.

Market reaction to the news publication

The behavior of the market after the news is published largely depends on the behavior of market players that preceded it, but it is also more important what the data is relative to the forecast. There are three possible scenarios:

The data justified the forecast. On the one hand, this is positive news that should provoke a price increase. But, it must be remembered that many traders have already made a profit by opening positions in advance, based on expert forecasts. The potential for growth is drying up, and investors are starting to take profits. On the chart, this can be observed in the form of a price decrease. Nevertheless, the decline is going to a certain level, as some investors continue to hold positions, hoping that in the longer term the price will rise.

The data is below the forecast. In this case, we can expect a reduction in the price. Most market participants are in a hurry to get rid of the asset, which pushes the quotes down. Sometimes the decline occurs within a few hours.

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