The ChoosaBroker Trading Academy

1. An Introduction to Financial Markets (Module 1)
1.1. An Introduction to Financial Markets 1.2. Historical Perspective 1.3. Portfolio Management 1.4. Diversification 1.5. Power of Compounding
2. Breakdown of Asset Classes (Module 2)
2.1. Foreign Exchange 2.2. Stocks 2.3. Indices 2.4. Commodities 2.5. CFDs Contract for Difference 2.6. Bonds 2.7. Cryptocurrencies 2.8. Futures and Options 2.9. ETFs
3. Categories of Financial Market Participants (Module 3)
3.1. Speculators 3.2. Investors 3.3. Hedgers 3.4. Arbitrageurs 3.5. Institutional Players
4. Portfolio Management (Module 4)
4.1. Theory and Importance of Portfolio Management 4.2. Asset Allocation 4.3. Risk Management 4.4. Retirement Planning
5. Introduction to Forex (Module 5)
5.1. How the Forex Market Works 5.2. Benefits and Drawbacks of the Currency Market 5.3. Major Pairs and Time Zones 5.4. Basic Forex Trading Concepts 5.5. Leverage and Margin Trading 5.6. Forex Market Strategies
6. Introduction to Stocks and Indices (Module 6)
6.1. How the Stock Market Works 6.2. Commonly Used Terms 6.3. Primary and Secondary Markets 6.4. Regulatory Framework 6.5. Financial Intermediaries 6.6. Clearing and Settlement Process 6.7. Index Composition
7. Introduction to Commodities (Module 7)
7.1. How the Commodity Market Works 7.2. Understanding Derivatives and Futures Pricing 7.3. Global Commodity Exchange 7.4. Agricultural Commodities 7.5. Non-Agricultural Commodities 7.6. Precious and Non-Precious Metals 7.7. Factors That Affect Commodity Prices
8. Introduction to CFDs (Module 8)
8.1. Types of CFDs 8.2. Basic Concepts of CFD Trading
9. Introduction to ETFs (Module 9)
9.1. How ETFs Work 9.2. How to Select ETFs
10. Different Forms of Asset Analysis (Module 10)
10.1. What is Technical Analysis? 10.2. What is Fundamental Analysis? 10.3. News Trading 10.4. Earnings Trading
11. Basics of Technical Analysis (Module 11)
11.1. How to Identify Support-Resistance Levels 11.2. Understanding Trends 11.3. An Introduction to Classical Chart Patterns 11.4. Overview of Candlestick Patterns 11.5. Different Types of Technical Indicators 11.6. Fibonacci Levels 11.7. How to Build a Trading Plan 11.8. Importance of Controlling Risk in Trading
12. Basics of Meta Trader 4 (Module 13)
13.1. How to Get Started MT4 13.2. How to Create and Adjust Charts 13.3. How to Place an Order 13.4. Basic Performance Monitoring on MT4 13.5. Risk Management Tools 13.6. MT4 Webtrader Basics
13. Advanced Meta Trader 4 Tools (Module 14)
14.1. How to Place Special Orders 14.2. Setting Asset Alerts and Rules 14.3. Adding Technical Indicators 14.4. Using Expert Advisors 14.5. Keyboard Shortcuts 14.6. MT4 Mobile Application

5.4. Basic Foreign Exchange Trading Concepts

The foreign exchange market is the world’s largest financial marketplace. Despite its enormous size, when it comes to trading and investing with currencies, the underlying concepts are relatively simple. In this lesson, we will look at the following three basic Forex processes that all traders need to be aware of –

  • Why do Foreign Currency Prices Fluctuate?
  • How Do Yields Impact Currency Rates?
  • What are Carry Trades?

Why Currencies Fluctuate?

Most of the foreign currencies available for trading are bought and sold at exchange rates that fluctuate based on the demand-supply dynamics in the global Forex market. Relatively higher demand for a currency or a shortfall in its supply will cause the price to increase. Contrarily, if supply of a currency is greater than the market demand, the price will decline.

A currency’s demand and supply are linked to a number of entwined factors, the three most important among which are briefly explained below:

1. Interest Rates

Central Banks seek to control the demand for currency circulating in an economy by raising or slashing the benchmark interest rates. When a country offers comparatively higher interest rates, lenders in the economy earn a higher return, which, in turn, attracts more foreign capital and causes the domestic currency’s exchange rate to rise.

2. Inflation Differential

In general, a country with consistently lower inflation than another will see a rise in its currency’s value, while those with higher inflation tend to suffer depreciation in their exchange rate vis-a-vis the currencies of their trading partners.

3. Political and Economic Conditions

The political and economic conditions in a country also have a major impact on its currency price. While investors enjoy higher interest rates and lower inflation, they also value the safety and predictability of their investments. This is why currencies belonging to politically stable and economically steady countries tend to command greater market demand, which, in turn, prompts higher exchange rates.

Carry Trades and Their Functions

In simple terms, a carry trade can be defined as the borrowing or selling of a financial asset with a low interest rate, and then using it to purchase an asset with a higher interest rate. The profit earned is the difference between the two interest rates.

Let us suppose you walk in to a bank and borrow $10,000 at an annual interest rate of 1%. With that borrowed money, you go to a broker and purchase a $10,000 bond that pays 5% a year.

What is your profit? The interest rate differential, which in this case is 4%.

While the 4% may not sound as exciting or profitable as catching a strong swing in the foreign exchange market, when you consider the higher leverage that Forex brokers offer, the returns can get pretty substantial. To give you an idea, a 4% interest rate differential becomes 80% annualized return on an account that is 20 times leveraged.

The Japanese Yen carry trade has been a favourite among big currency traders. Investors borrow the Yen at the near-zero interest rates prevailing in Japan. The Yen are then converted to U.S. Dollars, which are invested in the much higher-yielding Treasury bonds. This creates a “positive carry” for the investor because of the difference in interest rates. The investor gets to make additional profits if the U.S. Dollar rises against the Yen, or the Treasuries appreciate in price. However, if the Yen were to gain in value, the investor would have to obtain more Dollars to pay back the Yen he or she has borrowed, opening up the prospect of a major loss.

The key to building a successful carry trade strategy is not simply pairing the currency that offers the highest interest rate with the currency that has the lowest rate. Far more critical than the absolute interest rate differential is the underlying trajectory of the respective rates. In order for carry trades to work in your favour, you need to buy a currency with an interest rate that is rising against a currency whose interest rate is either stationary or better still, declining.

Final Few Thoughts

The widespread availability of electronic trading networks has made foreign exchange trading more accessible than any time in history. The biggest financial market in the world offers potentially endless opportunities for those investors who are willing to take the time to first understand how the market operates, and then devise strategies to profit from the demand-supply mismatches that often arise. There is a detailed review and summary of the leading forex brokers that is worth a look. If you are serious about day trading Forex check out our broker reviews.

Need a broker? Explore our best brokers for social trading or look at these great CFD brokers!