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Forex Articles

Structure of the Forex market

The forex is unique among financial markets in a number of ways. One of these is that it was not traditionally used as an investment vehicle. It had, and still maintains to some extent, a somewhat more utilitarian purpose. In today’s globalized economy, most businesses have some international exposure, creating the need to exchange one currency for another in order to complete transactions.

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How Forex Brokers Work

Like any other business in the history of business, your broker’s raison d’etre, is to make as big a profit as possible. There are about as many ways to go about this as there are brokers. For those who are in it for the long haul, however, it is generally best to adopt a set of practices which are deemed fair by their clients: certain boundaries are set, and operating beyond them can cost a brokerage its reputation, and along with it its clients.

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ECN vs Market Maker

This article assumes some knowledge of the way the forex market and forex brokers work. If you are not familiar with this, we recommend that you first read our "Structure of the Forex Market" and "How Forex Brokers Work" articles. Contrary to popular belief, ECN's are not superior to Market Makers in every way. There are advantages and disadvantages on both sides.

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How to Choose a Forex Broker

Choosing a good forex broker is one of the most important decisions you need to make at the beginning (or at any point) of your forex trading career. Do not take this decision lightly, but at the same time don’t stress over it – the process does not need to be complicated – just like in your trading decisions, once you do your homework, things tend to fall into place. Chance favors the prepared trader and everything you need to make an informed decision is listed right here.

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Forex Price Dynamics

In order to gain an understanding of what actually moves the prices, or exchange rates in the interbank market, we must first understand that for any transaction to take place, there must be a buyer and there must be a seller – there must be a counter party for every trade.

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The concept of leverage is really quite simple, but its true meaning often becomes lost in the mountain of marketing-speak most forex brokers dish out at us traders. The misconceptions always arise as a result of the interchangeable usage of the words “margin” and “leverage”. These two concepts are related, but are in fact not interchangeable except in the most extreme (and suicidal) case where a trader decides to use the maximum leverage available to him under the broker’s house rules.

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Mechanics of a Trade

For those who are thinking about entering the forex market for the first time, there is some very basic information that is often overlooked. For example, what exactly is happening when you enter a trade? Well it’s simple really, but important to understand. Say, for example, that you have a shiny new $10,000 account. You find a great entry on EUR/USD that you want to take. You enter a 1 mini lot long position with a 100 pip stop loss and a 200 pip take profit target at a price of 1.2500. What just happened?

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Forex Position Sizing

For many new forex traders, the promise of quick riches is difficult to resist. That is the main reason why every day, so many people from all walks of life begin trading the forex market. While some element of this “keep your eyes on the prize” mentality is necessary to get traders through the tough times, on any given trading day one should really focus on other things first.

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Forex Hedging

There are a number of forex dealers, dare I say even the majority, who allow clients to practice what is commonly referred to as “hedging” in the forex. What this means is that they allow clients to open both long and short positions in the same currency pair, at the same time. Other dealers, on the other hand, automatically close your positions when you enter orders that are exactly opposite to your open positions. There is an ongoing debate among retail traders about whether the practice of “hedging” is useful or not.

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Currency Correlation

Correlation between sets of data refers to the statistical relationship that exists between them. In forex trading, if we take two currency pairs, for example, we can calculate how closely their price is correlated, giving us insight that we may be able to exploit for future profit. This can result in improvements to our trade expectancy by refining our entry and exit strategy through analysis of highly correlated pairs, by optimization of exposure to uncorrelated currency pairs, or by several other means. If you are not sure what that means, it's ok, once you become familiar with the concept of correlation, its usefulness will be very clear. In this article, we will focus on how to calculate the "correlation coefficient", a number between -1 and +1, which indicates how closely related two currency pairs (or any other data sets) are. Follow-up articles will provide a broader study of its possible uses in extracting profit from the forex market.

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Investing in Recession

It has been known for many moons, and over many business cycles, that during every economic downturn, or recession, things follow a similar path. One of the first things we see is a bear market in equities. Short-selling in the stock markets is a bit tricky, however, particularly with regulators around the globe deliberately trying to curtail it, so this is not the equivalent of going long in a bull market. So it came to be known that during recessions, cash is king.

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Fundamental vs Technical Analysis in Forex

The forex market has experienced enormous popularity in the past few years, thanks to technology and the flexibility offered by the genre for the average retail forex trader.  You can trade anytime and from anywhere, but success still depends on knowledge, experience, and emotional control, factors that impatient newcomers to this investment medium are loath to admit before they crash and burn.  Yes, casualty rates are high due to high risks, and specialized training is a must have from the get go.

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What is Macroeconomics

Macroeconomics, as its name suggests, is the study of economics on a large scale, such as on a national level. It was developed as a separate theory from Microeconomics, mainly as a result of the work of legendary economist John Maynard Keynes who postulated among other things, that short-run fluctuations in economic activity can be mitigated by appropriate use of monetary policy.

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Ten Principles of Economics

Economics is the study of the mechanism by which a society allocates its resources. In order to start studying macroeconomics, we must first understand the ten basic principles of economics, as set out by Gregory Mankiw, a well known macroeconomist, and professor at Harvard University. They are further separated into 3 main sections: how people make decisions, how people interact, and how a national economy works as a whole.

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Gains from Trade

As mentioned in the previous article, "Ten Principles of Economics" (the 5th principle, to be precise), trade between people tends to make all the parties involved better off than if trade is restricted or forbidden. We mentioned also that the main reason behind this is the concept of comparative advantage.

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Market Forces of Supply and Demand

The most important concept in economics, without a doubt, is the concept of supply and demand. Most people understand this intuitively: if something is in demand, buyers are willing to pay higher prices for it in order to out-compete others who may be vying for the same item. Sellers are, of course, more than happy to oblige with higher prices. In this, and the next two articles, we will mathematically formalize the concept of these forces of supply and demand, so that we may study their effects and implications from a scientific perspective.

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