Speculative trading in the foreign exchange currency market (forex) was once the exclusive domain of large banks, governments and multinational corporations.

Modern technology, the personal computer and the Internet, along with the recent inclusion of smart phones, makes the forex market accessible to the individual. This is referred to as retail forex trading. Forex brokers enable smaller trades for people who wish to participate in the forex market that is currently turning over close to $4 trillion on a daily basis. They do this for a small percentage of the transaction. In forex terminology, this is known as the “spread,” and it is applied to every trade, regardless of whether that trade results in a profit or a loss for the trader. Spread rates are variable according to which currencies are paired together and how much volatility, that is, how fast the exchange rate between two currencies is changing, is present at various times during the trading session.

The effect of the spread means that all trades start off in the hole. For this reason, it is highly advisable that beginning and even intermediate traders concentrate on currency pairs that have low spread rates. This would include all the world’s major currencies, especially the United States dollar (USD), Euro (EUR), British pound (GBP), Japanese yen (JPY) and Swiss franc (CHF).

Fundamental versus Technical Analysis

The two dominant schools of thought applied in the effort to predict future price in the pursuit of profits are fundamental analysis and technical analysis.

A fundamental trader develops expectations about future price levels based on political and economic events, both current and historical, as well as environmental or seasonal factors. Fundamental analysts focus on the big picture and generally make trades with long time frames.

Technical traders believe that the effect of all human and natural events is reflected and accounted for on price charts that depict past prices and form patterns that repeat. This pattern repetition, they claim, gives them an edge in correctly predicting future prices.

Advocates for either approach can supply exhaustive arguments why their method of analysis is superior to the other as well as equally exhaustive reasons why the other is inferior.

A rational approach is to combine elements of both schools of thought. A fundamental trader could do well to respect all-time historical high and low price levels. Technical traders will be well advised to be aware of regularly occurring fundamental economic data releases that can have rapid and unpredictable effects on short-term technical price levels.