The “forex” or “foreign exchange” market is a global marketplace for exchanging different currencies. It is similar to currency exchange that people do while traveling abroad. A forex trader buys a particular currency to sell another based on an exchange rate that fluctuates constantly based on market demand and supply. The currencies are traded in the forex market, open 24 hours a day, five days a week, and conducted over the counter. Hence, it is called OTC or over-the-counter trading, meaning there is no physical exchange for forex trading activities.
Forex trading has been around for centuries, in the most traditional sense, when people used to exchange goods or currencies to purchase other goods and services. However, forex trading (as we know it today) is a comparatively modern invention that involves buying and selling currencies by actively speculating on them to earn a profit. After the collapse of the Bretton Woods accord in 1971, more foreign currencies were allowed to be traded freely in the forex market.
Forex trading has become immensely popular among the top forex brokers in the Philippines and worldwide. It offers a host of advantages over other forms of trading. It includes a globalized marketplace, greater flexibility, full transparency, various trading options, low transaction costs, market volatility, leveraged trading, and a high-tech marketplace. However, like all forms of trading, forex trading also involves risks such as leverage, interest rate, transaction, counterparty, and country risks, to name a few.
In this article, we will delve deeper into the basics of forex trading, including fundamental analysis, technical analysis, how to develop a forex trading strategy, and tips on making successful forex trades in the Philippines.
Forex Trading Basics
Currency pairs are traded in the forex market, allowing buying, selling, and converting currencies for international investments and trading. A currency pair includes the base/first currency and the quote/second currency. For instance, the currency pair EUR/USD has EUR as the base currency and USD as the quote currency. The currency pair denotes the exchange rate, which is the rate at which one currency is exchanged for another, affecting trades and money movements between countries. The exchange rate is commonly quoted using the acronym of any national currency. For instance, USD stands for US dollars, and EUR stands for European euro.
There are three main types of forex markets – Spot market, which allows an immediate exchange of currencies at the current exchange rate; the Forward market involves two parties agreeing to trade a particular currency for a set quantity and price at a future date; The Futures market is similar to forward market but with the main difference is the use of centralized exchanges where there is no counterparty risk, ensuring a highly liquid market compared to forward market.
Traders will require a forex broker in the Philippines to trade foreign currencies. Many platforms have been established with the rising popularity of forex trading in the Philippines. It has made different investment options available to Filipinos. As forex trading continues to increase, traders are finding it more challenging to find the top forex brokers in the Philippines that offer reliability but also accept their currency, the Philippine peso (PHP). However, before opening a forex trading account with any broker platform, traders must ensure that they are regulated by the country’s main regulatory body, Bangko Sentral ng Pilipinas (BSP).
Fundamental Analysis for Forex Trading
Fundamental analysis is a methodology for assessing the intrinsic value of any currency. It combines external influences, industry trends, events, and financial statements to provide the best possible opportunity for forex traders. Fundamental analysis helps identify a currency’s main attributes and actual worth by considering various micro and macroeconomic factors.
The key economic indicators used in the fundamental analysis that affect forex prices include economic data, such as gross domestic product (GDP), inflation, unemployment, central bank announcements, political and geopolitical events, seasonality, and natural disasters.
Political changes within a country are vital in how the forex market behaves. For instance, a new president may make things harder for forex traders or invest heavily in new infrastructure, affecting currency prices. Geopolitical events are also important to consider, as events taking place worldwide may also substantially affect a country’s currency. For instance, increased conflicts in the Middle East may stress the oil supply, increasing prices. As a result, businesses relying on oil may witness weakening profits.
Technical Analysis for Forex Trading
Technical analysis is another discipline employed to assess investments and identify the best trading opportunities by analyzing statistical data and trends accumulated from historical trading activities to predict future price movements. Unlike fundamental analysis, technical analysis mainly studies trade volumes and prices. It forecasts the price movements of virtually any currency or asset subject to market demand and supply forces.
Technical analysts use common indicators and tools, including price trends, volume and momentum indicators, chart patterns, moving averages, support and resistance levels, and oscillators. It attempts to study the market sentiments behind price trends by looking for trends and patterns instead of analyzing the currency’s fundamental attributes.
Technical analysis tools are often used to generate short-term signals by using various charting tools and patterns that help improve the assessment of a currency‘s strength or weakness in relation to the broader forex market. Fundamental and technical analysis are major schools of thought used in forex trading. Both schools are used for forecasting and researching future trends in currency prices. However, they have their set of advantages and disadvantages. While fundamental analysts study the entire economy, including market conditions, financial conditions, and management of companies, technical analysts do not measure a currency’s intrinsic value but use charts to identify trends and patterns, suggesting how a currency will perform.
Developing a Forex Trading Strategy
Developing a forex trading strategy is crucial by which traders enter or exit the forex market. Successful forex trading strategies can boost profits while minimizing risk factors in trading and uncertainties. A well-designed forex trading strategy includes –
- Defining trading goals and risk tolerance – A trading strategy must have well-laid-out trading goals that are specific, attainable, relevant, timely, and measurable. The level of risk is another crucial aspect to consider that helps traders make tailored decisions.
- Selecting trading styles – Depending on the traders’ trading goals and personality, various trading styles can be selected, including day trading, position trading, and swing trading.
- Establishing entry and exit points – A trading strategy should also mention entry points based on the trading tools used and exit points determined by the traders’ goals and risk tolerance.
- Managing trades and minimizing losses – Risk management is another important aspect of trading strategy determining the amount of risk a trader can afford. It also includes traders devising strategies that minimize potential losses using stop-loss orders and other instruments.
Tips for Successful Forex Trading in the Philippines
- Staying informed and up-to-date on market news and trends
Traders must keep an eye on the price movements of their chosen currency pairs, along with central bank announcements and decisions, market sentiments, and political news.
- Practicing risk management and minimizing losses
Practicing risk management includes implementing rules to ensure that the negative impacts from forex trades are manageable. Effective risk management minimizes losses by preparing traders for all kinds of uncertainties.
- Keeping emotions in check and avoiding impulsive trades
Traders often get wrecked by human emotions such as greed, temptation, doubt, anxiety, and fear. It is recommended to keep feelings away from decision-making as it could potentially harm the outcome of forex trades.
- Learning from mistakes and continuously improving your strategy
Many traders believe forex trading is a complex process requiring learning by doing. Making mistakes is unavoidable when it comes to trading. However, one must learn from their mistakes to improve their trading strategies.
Conclusion
For forex traders in the Philippines, the forex market is an excellent place to buy and sell global currencies to make a profit. Using the OTC global market, traders can participate in swing trading, day trading, or position trading, whichever suits their trading requirements. Ideally, beginners with limited funds can go for swing or day trading, whereas those with long-term horizons and adequate funds can go for long-term fundamentalist trading to make profits in the long run. Irrespective of the forex trading type one chooses, having a good understanding of technical and fundamental analysis and the basics of forex trading is undeniably essential to profit more in forex trading in the Philippines.
