The Ever Expanding Foreign Exchange Market

The term Forex (short for Foreign Exchange) refers to the ever- expanding market where people from all countries go to exchange each other’s currencies. Investing in this market can be a profitable way to make money— but only if you do your homework first, for as with any monetary investment, there is always a certain degree of risk involved. Forex investing strategies, therefore, will be the primary topic of this article.

The first important thing to remember is that no one investor can influence the price of his own nation’s or any other currency. The forex market is the most liquid of any market on earth. Another thing to know is that all currency is bought and sold under the assumption the currency bought will increase in price, while that which is sold will decrease.

All Forex investing strategies fall under two basic categories— technical analysis and fundamental analysis.

Technical analysis— the strategy preferred by small investors— means analyzing those factors which are affecting the exchange market. The assumption on which this method is based is that the present price of a given currency reflects whatever is going on in the market, from supply and demand to economic policy, and that it is possible to predict future market trends from those of the past and present.

Fundamental analysis, on the other hand, takes into account those factors which can affect the forex market, regardless of whether or not they actually do so. Thus, fundamental analysis involves studying the economic and political situations of the countries whose currencies are being bought and sold– the gross domestic product, monetary policy, retail sales, business cycles, and consumer prices indexes.

Forex investing strategies can also be grouped in other ways, which may produce even better results when used in combination. These methods include (1) moving average crossover, the simplest, which means following two moving averages, and trading when they intersect; (2) stochastic high- low, also known as “swing trading,” which involves using the “stochastic support level,” buying when the price approaches that level below the market, and selling when it approaches above it; and (3) RSI (relative strength index) high- low, which shows the strength of the current price with regard to past values. These methods work best, respectively, on a trending, non- trending, and uncertain markets.