Trading 101
Module 2: Understanding the Forex Market
Now that you understand the basics of day trading, it’s time to explore the forex market itself. This module will introduce you to the key players, how the market operates, and the forces that drive price movements. This is where you’ll see the bigger picture behind who moves the markets. Let’s dive into the macro world of forex.
Market Participants
The forex market is the largest financial market in the world, with a daily trading volume exceeding $7 trillion. It’s a decentralized marketplace where all the participants trade currencies. (Dollars, Yen, Euro, Francs) Understanding who these players are is crucial, as their actions shape the price movements you’ll aim to profit from.
Retail Traders:
Individual traders like you, trading through brokers like OANDA.
Use online platforms to guess on currency price movements.
Represent a small portion of market volume but are active in short-term trades.
Commercial Banks:
Major players (JPMorgan, Deutsche Bank, Goldman Sachs, etc.) that facilitate currency transactions for clients and trade for profit.
Provide liquidity by acting as market makers, helping to move the market.
Their large trades heavily influence overall price movements.
Central Banks:
Institutions like the Federal Reserve (U.S.), ECB (Eurozone), or Bank of Japan.
Control monetary policy (Interest rates, money supply), impacting currency values and demand.
Intervene in markets to stabilize or adjust exchange rates.
Example: A Federal Reserve rate change can impact the USD.
Hedge Funds and Investment Firms:
Trade large volumes to profit from currency trends or to hedge other investments.
Use sophisticated strategies, often influencing market momentum.
Example: A hedge fund betting on USD weakness due to Tariff news.
Corporations:
Multinational companies exchanging currencies for international business (e.g., paying suppliers).
Their trades are often for practical purposes, not speculation, but can still move markets.
Example: A U.S. company converting USD to EUR for European operations.
Governments and Sovereign Wealth Funds:
Trade to manage national reserves or stabilize economies.
Their actions (e.g., selling USD reserves) can cause significant price shifts.
Key Insight: As a retail trader, you’re a small fish in a big pond. It’s crucial to understand how these major players’ actions create consistent patterns that you can trade.
What Moves the Market?
Price movements in forex are driven by the collective actions of market participants, influenced by economic, political, and psychological factors. Here’s what moves the market and why:
Economic Data:
Reports like GDP, inflation (CPI), employment, or retail sales affect currency strength.
Example: Strong U.S. jobs data can boost the USD, pushing USD/CAD higher.
Central Bank Policies:
Interest rate changes or quantitative easing impact currency demand.
Example: If the ECB cuts rates, the EUR may weaken, making EUR/USD bearish.
Geopolitical Events:
Elections, trade wars, or conflicts create uncertainty, driving safe-haven currencies (e.g., USD, JPY, CHF).
Example: Brexit uncertainty weakened GBP, creating trends in GBP/USD. Tariff uncertainty weakened USD.
Market Sentiment:
Collective trader psychology can amplify trends or cause reversals.
Example: If traders expect a USD rally, their buying can push prices higher, creating momentum you can trade on a 4-hour chart.
Large Institutional Trades:
Banks and hedge funds moving large volumes can trigger support/resistance breaks.
Example: A bank selling EUR in bulk may push EUR/USD to the next 4-hour support level.
Your Strategy Connection: You don’t need to predict why the market is going to move—just identify momentum on the daily/4-hour charts and look to the next major support/resistance for your exit at those key levels.
Who Wins & Who Loses?
A zero-sum game means one person’s gain is another’s loss.
Is Forex Zero-Sum?
Technically, yes: For every buyer, there’s a seller, and every pip gained by one trader is a pip lost by another.
However, the market isn’t a perfect zero-sum due to:
Spreads and Fees: Brokers take a cut (spread or commission), meaning both sides of a trade can lose slightly to the broker.
Leverage: Amplified gains/losses mean outcomes aren’t always equal.
Market Depth: Large players (banks, hedge funds) dominate, often profiting at the expense of less-informed retail traders. Who Wins?
Brokers: Each trade costs a fee (spread) to enter and the broker collects it.
Institutions: Banks and hedge funds with superior resources, information, experience and execution.
Disciplined Traders: Those with a clear strategy, strict risk management, and emotional control. Traders who take profits at realistic targets rather than chasing unrealistic gains.
Who Loses?
Undisciplined Traders: Those who overtrade, ignore risk management, or let emotions (greed/fear) drive decisions.
Retail Newbies: Beginners without a mentor and without strategy, often entering trades without understanding market dynamics.
Over-leveraged Traders: Using too much leverage and not managing risk leads to large losses on small moves.
Key Takeaway: Forex isn’t just about beating the market—it’s about becoming the best version of yourself so you can beat your own impulses and become one with the market, seeing it for what it is . Learning your strengths and weaknesses and sharpening your skills By sticking to a clear strategy focused on your strengths, while avoiding fear/greed, will separate yourself from the other 90% of retail traders.
*Trading is a way for impatient inexperienced traders to willingly transfer their wealth to patient experienced bankers.
Forex Market Hours
The forex market operates 24 hours a day, five days a week (Sunday evening to Friday evening) divided into three major trading sessions: Asian, London, and New York. Each session has distinct characteristics due to time zones, market participants, and liquidity. Below is a brief explanation of forex market hours and the differences and characteristics of each session:
The forex market is active 24/5, starting Sunday around 5:00 PM PST (when Asian markets open) and closing Friday around 2:00 PM PST (when New York markets close).
Sessions overlap, creating periods of higher volatility and liquidity.
Times are approximate and may shift slightly due to daylight saving time (DST).
1. Asian Session (Tokyo Session)
Hours: 5:00 PM – 4:00 AM PST
Key Financial Centers: Tokyo, Sydney, Hong Kong, Singapore.
Characteristics:
Liquidity: Lower liquidity compared to London or New York, leading to tighter ranges and less volatility for most currency pairs.
Currency Focus: Strong focus on JPY (Japanese Yen) pairs (e.g., USD/JPY, EUR/JPY) due to Tokyo’s influence, and AUD (Australian Dollar) pairs due to Sydney.
Market Movers: Japanese economic data (e.g., Bank of Japan decisions), Australian economic releases, and regional news.
Trading Style: Often characterized by range-bound trading, with fewer breakout opportunities. Ideal for scalping or range trading strategies.
Volatility: Lower, though volatility spikes during Japanese economic releases or unexpected news.
2. London Session
Hours: 1:00 AM – 12:00 PM PST
Key Financial Centers: London, Frankfurt, Paris.
Characteristics:
Liquidity: Highest liquidity, as London accounts for ~43% of global forex trading volume. Overlaps with the Asian session (early hours) and New York session (later hours).
Currency Focus: Heavy trading in EUR (Euro), GBP (British Pound), and USD pairs (e.g., EUR/USD, GBP/USD). Also significant activity in CHF (Swiss Franc).
Market Movers: European economic data (e.g., ECB policy, UK GDP), geopolitical events, and bank activity.
Trading Style: High volatility, especially during the overlap with New York (8:00 AM – 12:00 PM EST). Ideal for breakout and trend-following strategies.
Volatility: Highest during session overlaps, with large price movements possible due to news and institutional activity.
3. New York Session
Hours: 5:00 AM – 2:00 PM PST
Key Financial Centers: New York, Chicago.
Characteristics:
Liquidity: High liquidity, second only to London, with ~19% of global forex volume. The London-New York overlap (5:00 AM – 9:00 AM PST) is the most active period.
Currency Focus: Dominated by USD pairs (e.g., USD/JPY, EUR/USD, USD/CAD) due to U.S. economic influence.
Market Movers: U.S. economic data (e.g., non-farm payrolls, Fed decisions), corporate earnings, and Wall Street activity.
Trading Style: Fast-paced with strong trends during the overlap with London. Afternoon trading often slows as European markets close.
Volatility: High during the morning overlap with London; tapers off in the afternoon.
Key Differences
Liquidity: London > New York > Asian.
Volatility: Highest in London-New York overlap, followed by London, New York, and Asian sessions.
Currency Activity: Asian focuses on JPY and AUD; London on EUR and GBP; New York on USD.
Trading Opportunities: Asian suits range trading; London and New York favor breakout and trend strategies due to higher volatility.
Additional Notes
Session Overlaps: The London-New York overlap (5:00 AM – 9:00 AM PST) is the most liquid and volatile, ideal for high-volume traders.
Market Closures: The market is least active during the weekend, though some trading occurs in smaller markets (e.g., Middle East) with low liquidity.
Time Zone Impact: Traders must adjust for local time zones and DST, which can shift session times by an hour.
Key Takeaways
Market Participants: Institutions, central banks, hedge funds, and corporations drive the forex market, not retail traders.
Trading Sessions: The 24/5 forex market has three sessions (Asian, London, New York).
Market Movers: Economic data, central bank policies, geopolitics, and sentiment create price movements you can trade.
Zero-Sum Nature: Forex involves winners and losers, with disciplined traders and institutions often coming out ahead.
Your Edge: Read price action (support/resistance on 4-hour/daily charts) and time entries on lower timeframes, staying disciplined to avoid common pitfalls.
In Module 3, we’ll dive into technical analysis, covering how to identify setups, and time your entries.
My Market Beliefs
I believe all markets are rigged. They are heavily weighed in the direction of banks, institutions, and the interests of billionaires. Retail traders don’t have the power to move the market, so it’s best to align your views to match the views of the market movers.