Complete Guide to Forex Technical Analysis

Technical analysis is the study of historical price movements in order to identify patterns and determine the probability of future market movements. As far as foreign exchange is concerned, it is a question of finding price patterns that can provide clues to future price movements. 

Technical analysis is a technique used to predict future price movements of financial products based on historical price and movement patterns.

It is largely based on the idea that history is repeating itself and that stock market patterns are repeating themselves.

Technical analysts find similar trends that have emerged in the past and thus develop business strategies that assume that price will behave the same way it did before.

The technical analysis of the market can help in determining when and where to get in and out and when to get back in and out. It is crucial for a forex trader to use technical analysis to predict changes in the market.

There are a number of technical analysis tools and indicators that can help you identify possible trading structures and trade based on the long-term price behaviour of a currency.

Aside from fundamental and sentimental analysis, technical analysis is one of the most common forms of analysis in any currency market. This is especially true of the foreign exchange market, where many traders rely solely on technical analysis to draw conclusions about future price movements of a currency pair.

Analysing the Currency Exchange Market

The currency exchange market can be analysed in two ways: Technically and fundamentally. 

Forex Technical Analysis is a purely mathematical way to examine price charts in order to find patterns and to construct a trading process accordingly. The concept of modern technical analysis of currency markets dates back to the end of the 19th century, when the founder of the Wall Street Journal, Charles Dow, introduced a theory named after himself. 

Technical

According to Dow’s theory, the price of the asset is a full reflection of the value of the asset. Simply put, as long as you know the price, you don’t need to look at any additional aspects that might have influenced it.

In addition, Dow suggested that price always moves in the direction of trends. As if it had begun to rise, it would most likely continue to rise for a certain period of time until it reverses and begins to fall. The technical analysis focuses on capturing these trends and using them to the advantage of the trader. Forex is known to run its patterns and repeat its own history, which serves as the basis for technical analysis: observe, learn from, and plan your future actions accordingly.

Analysing the Currency Exchange Market

Fundamental 

Fundamental – the other type of Forex analysis – kind of reviews the side that the technical analysis overlooks. Specifically, the factors that caused the market to behave the way it did. This usually includes a detailed study of current political, social and economic situations around the globe. 

Currency trading, which is primarily based on fundamental analysis, definitely has its advantages, but a large number of traders would argue that the approach to technical analysis is superior. 

Differences

Some of the advantages of technical analysis over fundamental analysis are:

  • Technical analysis can be mastered by anyone, including traders with no prior knowledge of the market. While fundamental analysis must be carried out by professional analysts with a deep understanding of world politics and the economy. The best solution for those who would like to carry out a fundamental analysis of their trading activities is to obtain free daily updates from market experts.

     

  • In contrast to fundamental analysis, technical analysis can be fully automated. Since all processes are strictly mathematical, this process can be carried out by specially designed pieces of software, such as online analysis services or automated trading robots.
  • There is a wide variety of tools available when it comes to technical analysis. The different options include Metatrader 4 platform for working with charts, as well as over 50 easy-to-use indicators which can make life much easier for any trader. The best thing about having so many choices is that there is a chance to change your analysis process to suit your personal trading style and preference.

     

  • If you perform the analysis correctly, the positive results are almost guaranteed. As long as you account for all possible variables, you should be able to develop a comprehensive action plan to achieve your objectives. In addition, one of the existing trading strategies based on Forex technical analysis can always be chosen.

Technical analysis is a good practice to be used during currency trading. Knowledge is the key to effective market analysis. Therefore, knowing all the required aspects of Forex analytics is critical before attempting to read the charts and formulate a strategy.

Now, let’s get a little more technical and discuss the exact procedure for carrying out a technical analysis of the Forex market.

Technical Analysis: A Broader View

In the world of currency trading, a chart is usually the first thing that comes to mind when people say technical analysis.

Technical analysts use charts because they’re the simplest way to visualize historical data. When you can look at previous data, it can help you find correlations that could help you determine many great trading opportunities.

What’s more, with all traders depending on technical analysis out there, these market trends and measures appear to be self-fulfilling.

Technical research includes the identification of trends in the maps. Traders use historical data, based largely on price and volume, and use this information to decide trading opportunities based on general price trends.

Technical Analysis-A Broader View

Different indicators are used on charts to determine entry and exit points for traders to maximize trade potential at good risk-reward ratios.

While advocates of fundamental analysis believe that economic factors are the main contributors to market movements, technical analysis traders argue that past trends can help predict future price movements. Since these trading types can vary, knowing the differences between fundamental and technical analysis – and how to balance them – can be extremely beneficial.

As more and more forex traders look for certain price levels and chart patterns, the more likely these patterns are to appear in the markets.

You should know, however, that technical research is very subjective. Two traders might be studying the same indicators or currency chart setup, but come up with different ideas of the price movement.  

The main thing is that you understand the terms in the technical review so that you don’t get your fingers burnt. 

Technical Analysis: Using Historic Data

Technical analysis has become an increasingly popular trading method, which is largely as a result of advances in charting packages and trading platforms. However, understanding technical analysis – and how it can help predict market trends – can be daunting and challenging for a novice trader.

Technical analysis is the study of price fluctuations in a market, through which traders use historical chart patterns and indicators to forecast future market trends. It is a visual representation of a market’s past and present results, which enables the trader to use this knowledge as price action, indicators and patterns to guide and inform future trends before trading.

Technical Analysis-Using Historic Data

It’s a form of pattern recognition that depends on the idea that humans work in a relatively consistent manner.

One of the most important things required for the successful operation of technical analysis is a large number of historical data, hence why the forex market is a great opportunity for those who want to to use technical analysis in their trading.

Since the forex is open round the clock and has the highest daily turnover on any money market, it is ideal for traders who use technical analysis as their main type of analysis.

Technical research allows traders to search for patterns rather than opportunities for arbitration. It’s not about the profits that can be made right now but knowing the likely movement of a currency in the future and responding with foresight.

The future currency rate would depend on the movement of capital based on economic, political and psychological factors. Technical analysis supposes that all fundamental knowledge in the current exchange rate is already discounted, making the chart a trader’s best friend.

Forex Market Charts and Chart Patterns

In order to analyse the market, the trader must first gather data to work with. The information on the chosen currency pair is usually shown in the chart – a graphical model of all price values for the defined period of time. 

The three most popular types of Forex charts are line, bar and candle. Here is a brief overview of each of these: 

Line Charts 

Line charts are exactly what they sound like – linear graphs where the line connects all closing prices within the timeframe chosen. While some traders use line charts as their main source of information, it is strongly recommended that they are used in combination with another type of chart for cross-checking.

A simple line graph draws a line from one closing price to the next closing price.

When linked together with a line, we can see the general price movement of a currency pair over a period of time.

This type of chart is an ideal tool if you want to see a “big picture” view of price movements.

Some traders find closing rates to be more relevant than the open, high, or low levels. By paying attention to just the close, market fluctuations during the trading session are overlooked.

Bar Charts

Bar charts are a bit more complex as they consist of more information. It displays the opening and closing rates, as well as the high and low rates.

The lowest traded price for that time period is shown at the bottom of the vertical bar, while the highest price paid is displayed at the top bar. The vertical bar itself shows the highest and lowest point of trading of the currency pair as a whole.

On the left side of the bar, the horizontal hash shows the opening price and the closing price on the right side.

A bar is just a section of the time, whether it’s a day, a week, or an hour. When you see the term ‘bar’ going forward, be sure to consider the time period you’re referring to.

Bar charts are often called “OHLC” charts because they show the Open, High, Low, and Close charts for that specific currency.

The major difference between the line chart and the OHLC chart (open, high, low, and close) is that the OHLC chart can show fluctuations.

Open: The small horizontal line on the left is the opening price. 

High: The top of the vertical line defines the highest price of the time period.

Low: The bottom of the vertical line shows you lowest rate of the time period.

Close: The closing rate is the small horizontal line on the right.

Each bar consists of a vertical line that can differ in length with small horizontal points at the bottom and edge of the bar. The points or markings, at their open and close, show the highest and lowest currency values.

A trader may determine the current market situation and schedule the following transactions by judging by the position of the markings and patterns created by a number of bars.

The Candlesticks

The most popular type of chart is the candlestick. It comprises vertical rectangles along with vertical markings at the bottom and top (the name derives from the way it looks).   

The way the candle work is similar to the bars: they can indicate the lowest and highest values at the open and at the close of each period. As you begin to operate with candlestick charts, you will notice that some of them are referred to as bullish or bearish. 

These names are simply a way of identifying what was higher: the opening price or the closing price. That way, bears occur when the opening price is higher and bulls when the closing price is higher.

Candlestick charts display the same price details as a bar chart, but in a better, visual format. Many traders like this chart because it’s not only neater but easier to read.

Candlestick bars often display a high-to-low spectrum with a vertical line. However, the larger block (or body) in the centre of the candlestick chart shows the difference between the opening and closing rates.

Typically, if the block in the centre is filled or coloured, it means the currency pair closed lower than it opened. If the closing price is higher than the opening price, the centre block will be either “blank” or empty or unfilled.

The aim of the candlestick charting is purely to serve as a visual aid as the exact same information appears on the OHLC bar chart. Using candlestick charting gives you the following benefits:

  • Candlesticks are ideal for beginners to start their forex chart analysis as they are simple to read.

  • Candlesticks are really easy to use! Your eyes are almost instantly adjusted to the details in the bar notation. Plus, research shows that visuals help to learn, so they could help with trading as well!

  • Candlesticks and candlestick patterns have cool names, such as the “shooting star,” which makes you understand what the pattern means.

  • Candlesticks are excellent at recognising market turning points – flipping from uptrend to downtrend or downtrend to uptrend.

There are several different types of charts available, and one is not inherently better than the other. The data may be the same for making a chart, but the way the data is presented and interpreted can differ.

Every chart has its own advantages and disadvantages. You can choose any form of chart or use multiple types of charts for technical analysis, depending on your personal preference.

What are Timeframe Settings ?

Timeframe settings are the main way to manipulate charts. It is a period of time that the trader wants to examine. The chart adjusts accordingly. 

For example, one candle on the day, one chart can represent an hour, while one candle on the one hour chart will reflect a minute. The specific time setting is up to each trader and is usually set out in the rules of specific trading strategies.

There are also some additional tools that can help traders read the chart. Some of them are basic drawing tools, such as pen or line that can add elements to the existing chart only visible to the current user.

What are Timeframe Settings

Obviously, the drawing will not have an impact on the actual market, it is simply a way to highlight the important part of the chart in order to better understand it. 

Next, we will discuss all the main aspects of Forex’s technical analysis indicators, including some of their examples.

Technical Analysis Indicators

Indicators are used by technical traders when they are looking for market opportunities. Although there are many indicators, traders often use volume and price-based indicators. They help to determine where the levels of support and resistance are, how often they are maintained or violated, as well as to determine the duration of the trend.

A trader may view the price or any other indicator using a multiple timeframe analysis, ranging from one second to one month, which gives the trader different angles on the price action.

The most commonly used indicators for technical analysis include:

  • Relative Strength Index (RSI)
  • Moving Averages
  • Moving Average Convergence Divergence (MACD) 

The RSI helps traders to spot potential entry and exit points, while MACDs and Moving Averages are typically used to identify market trends. Indicators help traders in market analysis, determination of entry points, and validation of trade settings.

How Do Technical (MT4) Indicators Work ?

MetaTrader or MT4 is another name for Technical Indicators, which are widely used in the market. So what are MT4 indicators, and how best can you use them when trading forex? 

MT4 Indicators serve as mathematical calculations for various aspects of the market, such as volume, volatility and historical price values. There are many indicators to choose from, and sometimes even better results can be used together. 

The best strategy for choosing the right indicators for your trading is to start by setting clear targets and setting one or two trading strategies. Once you have an action plan, you can choose the right tools to complete it.

How Do Technical (MT4) Indicators Work

The main aim of the indicators is to identify the trend and validate its reliability. It is possible to classify the technical indicators into four groups: trend, momentum, volume and volatility. Below we’ll analyse each with examples.

Trend Indicators

As we know, the trend is the quality of the market that makes it move in a certain direction over a period of time. Trends can be long-term and short-term. They can also be influenced by the amount of attention they receive. 

For example, if a large number of traders make the same decisions about a specific trend, they can both reinforce it and reverse it, depending on the nature of the trade. 

Trend indicators identify and measure the strength of current trends by calculating average values. For example, if the price continues to exceed its own average value gradually, it can be indicated as a bullish trend and signal that the trader will act accordingly. 

Some of the most popular examples of trend indicators are the following:

  • Moving Average (MA). MA is an indicator that links the average value of the currency over the specified time period. The common use of this indicator is to smooth out the short-term hiccups in the chart and to take a clear view of the ongoing trend. In addition, the moving average in the falling market can indicate support and rising-resistance.

  • Average Convergence Divergence Moving (MACD). MACD goes beyond MA and compares the long-term trend with the short-term trend. This indicator is often used to locate the entry and exit point of an upcoming trade. These points are detected by the crossover of the lines of the indicator.

  • Stop and Reverse Parabolic (SAR parabolic). For each particular trend, the parabolic SAR is determined uniquely and is used to forecast potential reversals of current trends. The indicator appears below in bullish trends, then moves towards the line, and in bearish trends, the reverse appears above and travels downwards to reach the point of reversal.

Detrended Price Oscillator (DPO). This indicator is a handy tool for short-term traders such as scalpers, as it focuses on eliminating long-term trends and working only with short-term ones. It is very useful in the determination of overbought and oversold levels.

Momentum indicators

Momentum indicators

In Forex’s technical analysis, momentum stands for an overall change in the price value of the currency. Extreme highs and lows of momentum can signal the coming overbought or oversold scenario. 

Momentum indicators are designed to identify the rate of price movement by tracking changes at different periods.  The difference between the momentum indicator and the price value shows that there might soon be a price change. Examples of  momentum indicators are:

  • Relative Strength Index (RSI) is designed to measure the magnitude of recent changes in price values. Its most common use is to assess oversold and overbought conditions. It is important to remember that the market is driven by traders and sometimes the graph continues to move even after RSI signals that the market is overbought or oversold. Therefore, the best strategy for this indicator is to use it in conjunction with others.

  • Oscillator Stochastic. This indicator works within the space between the support level and the resistance level. It operates by comparing the current price value in relation to its range over a specific period of time. The stochastic oscillator is used to predict possible turning points and, just like the RSI, it is recommended to use this indicator as a support tool.

  • True Strength Indicator (TSI). TSI can both monitor the trend and recognise situations that are overbought and oversold. Positive TSI shows the peak of momentum for buyers, while negative TSI indicates for sellers. With the help of this indicator, it is also possible to predict trends reversals. It can be done by looking at bullish or bearish differences as they anticipate the coming trend.
Volume Indicators

Volume Indicators

In forex, volume may also be referred to simply as popularity or as turnover. It defines the number of lots traded for either a specific currency or the entire market over a certain period of time. 

Volume dictates the strength of each trader’s movements. According to this logic, trades completed during high volume periods will be more significant than those processed during low volume periods. Professional traders are advised to use bar charts to calculate the volume as it can be done more easily in that setting. 

Volume indicators are programmed to measure the power of a continuous trend by smoothing out the raw volume. The higher the volume, the stronger the trend. Here are a few examples of volume indicators:

  • Ease of Movement (EMV). This indicator connects the fluctuations in the present value of the currency to the volume of the currency. EMV is used to assess the entry and exit points and to determine which position to open, whether short or long. It is generally recommended not to use this indicator signals during periods of low volumes.

     

  • On Balance Volume (OBV). The results OBV produces are similar results to EMV,  but that the calculations methods are different. This indicator also relates to the overall volume price change by deciding whether the chosen period is up or down. The idea behind  OBV’s is that it can move a few steps ahead of the price adjustment and, thus, show entries and exits.

     

Force Index (FI). FI founder Alexander Elder claimed the movement of the asset’s value had three main elements: the direction of the trend, the scale of the trend and the volume. This indicator combines all three and is used for strengthening the existing trend as well as for forecasting future reversals and proposing corrections.

Volatility indicators

Forex market volatility is an indication of the level of risk and uncertainty that goes with the selected currency pair. It is calculated by measuring the number of the changes and their scale.

As a trader’s high volatility means that the price can leap in any direction at any point in time, it is traditionally associated with high-risk trading. This does not necessarily mean, however, that high volatility is negative. 

Day traders and other short-term traders tend to benefit from highly volatile conditions, as this is the only way for them to make visible profits. Appropriate indicators are used to trade wisely during periods of high volatility. 

Volatility indicators are designed to measure the rate of change of prices, without taking into account the trend direction. They are commonly used to locate the point where the market could change the overall direction. Examples of volatility indicators are:

  • Standard Deviation (SA). This indicator is used to predict the future volatility of the currency pair chosen. It measures the number of variations in the price range. The lower SA indicates lower volatility, while the higher SA indicates that the price range is more likely to spread further, that is, higher volatility.

  • Bollinger Bands (BB). This indicator consists of three lines or bands: the MA, and two bands connecting the highest and lowest extremes, respectively. The wider the range between the additional bands, the higher the volatility. BB can also be used to identify levels of support and resistance.

  • Average True Range (ATR). ATR is an indicator which calculates volatility without factoring the current trend. When volatility is small, this is good, but the market continues to grow, and vice versa. Owing to the predictable nature of the market, we are certain that low high volatility will follow low volatility, and that is how traders make a profit from ATR.

Using Technical Analysis to Spot Trends

While fundamental analysis tends to focus on whether a currency is overvalued or undervalued relative to its equilibrium value, technical analysis is interested in whether a currency moves up, down, or sideways. 

If a currency pair breaks above or below a significant historical price level, technical-based models will make a recommendation that the currency pair be long or short, regardless of the “fair” value of the currency.

In the forex market, there are three main trends that may arise: Sideways trends, upward patterns, or downward trends.

Sideways Trends 

The sideways range indicates that the currency is range-bound and that the rate will be maintained for a period of time. In order to identify these trends, traders often draw lines linked to the highs and lows of prices, which then form support and resistance levels. Other popular tools include drawing up trends and channels to project the current trend into the future.

There is usually a lot of hidden information in this data, and a technical trader believes that it can be used to conclude future price movements that will allow him to make some profit.

Upward and Downward Trends

Upward and downward trends can be visualised as a series of primary and secondary waves, where the primary waves move the currency pair in the direction of the broader trend, and the secondary waves act as the remedial phases of the primary waves. 

As a general rule, major currency pairs (anything including USD, such as EUR/USD, GBP/USD, and USD / JPY) tend to form trends, while currency crosses (pairs involving major currencies but excluding USD) remain within range. This can be attributed to the way in which people classify these countries.

Some of the big currencies, such as USD, CHF, and JPY, have been used as safe havens for a long time, so when there are problems in the world, money generally flows into these currencies, which form trends.

The interesting part about this is that different currencies have their own personalities and patterns, creating trading opportunities as traders analyse the movements of different currencies in different ways.

How Technical Analysis Can Help Traders

Many traders depend on technical analysis to manage their risks in forex trading, thereby helping them scale one of the major hurdles in the currency market. Once a trader has understood the concepts and principles of technical analysis, it can be applied to any market, making it a flexible analytical tool. 

Where a fundamental analysis seeks to identify the inherent value of the market, a technical analysis seeks to identify trends that could easily be caused by the underlying fundamentals.

The benefits of using technical analysis include the following:

  • Can be used with any marketing using any timeframe.
  • Technical analysis can be used as a sole strategy. 
  • Lets a trader spot market trends.

Technical Analysis in Short-Term and Long-Term Trading

When performed on shorter timeframes, technical analysis usually produces better results than any other type of analysis. Short-term trading is largely influenced by technical levels, and this is especially true if the currency trades around its long-term fair value.

The reason for this is that key traders are most likely to stand beside the market and will not open up new positions if the currency is close to its level of equilibrium, which gives technical traders the opportunity to make full use of all the tools of technical analysis. However, currencies typically flow in the direction of their fundamental point of equilibrium, eventually 

According to statistics, n impressive 97% of forex traders claimed that fundamental factors did not have a major impact in short-term price movements, while 87% thought that the main driving force in the longer-term over 6 months was fundamental factors.

Rather, it is believed that technical factors are the key force behind intraday and short-term price movements. This is why technical analysis is so popular with shorter-term traders, such as day traders and swing traders. They use technical models in their day-to-day trading, which can be a combination of trend-following rules, swing trading, breakout trading, and counter-trend trading.

Before You Trade

Overall, technical analysis is a way of looking at the wisdom of the crowds and using it to your advantage. As a forex trading strategy, it is workable and has a lot of solid data to back it up. 

Technical analysis is particularly popular in short-term trading, where it yields the best results. In the longer term, fundamental analysis tends to have an edge over technical analysis.

Technical traders can use a variety of tools, such as trends, channels, support and resistance levels and technical indicators, to perform their analysis regardless of where the currency stands in relation to its “fair” value.

FAQs on Forex Technical Analysis Indicators

Metatrader is known to be both technically sophisticated and user-friendly. That’s why any MT4 process is very simple and usually doesn’t take much of your time. Here are the exact steps to take on how to install MT4 indicators for PC users.

  1. Download the indicator and remember the location of the indicator on your computer.
  2. Open the data folder inside the platform by clicking the file menu.
  3. Then follow the MQL4 Indicators path.
  4. Copy all the indicator files from your computer and paste them to the Indicator folder.
  5. Restart the trading terminal
  6. You’re ready to go!

Typically, when traders are finding ways to modify their MT4 indicator, they are trying to figure out how to adjust the indicator settings. Every indicator’s different settings offer varying results. 

By changing the different values and ranges you will obtain the most precise information that will be used in the analysis. The measures on changing the MT4 indicators are as follows:

  1. Open the MT4 and locate the Navigator menu.
  2. Under Navigator, choose Indicators or Custom Indicators
  3. Select the indicator that you want to adjust from the list.
  4. A small window pops up with every parameter available for adjustment, and you can also change the visualisation of certain indicators to fit your preference.
  5. Change the settings and press OK or press Reset to return to the default setting 

As we’ve learned above, some indicators work better in combination with others. Sometimes an additional indicator can be used to obtain additional data or to confirm the correctness of the initial indicator. 

You can either use each indicator one at a time and compare the results using screenshots or multiple screens to do that. Alternatively, some indicators will allow you to use a few of them at the same time. This quality will be described in the overview of each indicator.

Occasionally, you may want to clear your workspace and remove the indicator from the chart. You may want to do that if you plan to start using a different indicator, or simply want to minimise distractions.

Here are some simple steps on how to remove indicators from the MT4 chart:

  1. Right-click anywhere on the chart.
  2. Select the Indicators List and then select the indicator that you want to remove
  3. Click ‘Delete.’

A free demo account is the perfect way to practice all of your trading skills, including mastering the technical indicators. Demo accounts duplicate real trading accounts, thereby providing access to the same features, indicators, and charts.

The demo is the place to be if you want to know a new indicator or play with settings without losing any of your personal funds.

It is a difficult question since, as you know, different strategies and therefore different indicators are needed in every trading style and strategy. That’s why the answer to the best Forex indicator is: ‘The one that works for you.’ The trader needs to be confident using the indicator and be able to correctly read the result data. Trading is, fortunately, an ability that can be perfected by research and practice. To those who are patient, calm and focused on the larger picture, anything is possible.

There are many reasons traders may prefer to trade in currencies instead of using other opportunities. 

Accessibility: Forex trading takes place in several different exchanges around the world and, as a result, traders can do currency trading 24 hours a day on weekdays. The forex market is also the largest capital market in the world, accounting for more than US$ 5 trillion in trading volume per day. 

Liquidity: Since there is so much activity, the global forex markets provide traders with significant liquidity. Although some assets may be more difficult to buy and sell, currency-interested traders are likely to find significant opportunities. Liquidity risk may arise during significant news events if liquidity providers try to reduce their exposure to market volatility.

Leverage: Investors can theoretically have much more leverage when trading in currencies than they can when trading in other things. However, it is important to bear in mind that the risk is inherent to the trading. While using leverage to make larger trades can increase gains, the size of losses can also be amplified.

Global Exposure: Forex trading offers an incentive for investors to gain access to economies around the world. By taking a more international strategy, traders could diversify more effectively or potentially earn higher returns by putting their money to work in areas with greater potential. Once again, the risk is inherent to the trading, so no returns are guaranteed and traders must practice due diligence in the regions.

Small Trading Expenditures: Since there are so many buyers and sellers, spreads are small and trading costs are moderate.

If you want to exchange a currency that you don’t already have, there are a lot of ways to do that. There are some different types of contracts that you can use to invest in currencies that you don’t own.

For example, you might trade the euro without owning it by buying or selling currency-related options. Call and put options on EUR/USD may include methods for trading the exchange rate of the common currency with the US dollar.

In addition, the purchase of spot contracts or forward contracts involving your preferred currency will also provide publicity.

Like any kind of investment, forex trading involves risk. Just like stocks, bond or commodity markets, currency markets can sometimes be volatile. That is why smart investors always make sure to do due diligence and/or consult an independent financial advisor before trading.

In terms of specific risks, the forex market can pose less liquidity risk to investors due to the highly liquid nature of that particular market. In other words, there is less chance that an investor may find himself unable to buy or sell a currency pair because he has no other market participant to take part in the trade. Liquidity risk can increase as a result of major news events.

It’s also worth noting that there are some unscrupulous brokers out there. As a result, investors will benefit from doing extensive due diligence on any broker they might be working with.

First, they will ensure that brokers are registered with regulators such as the National Futures Association in the US, the Financial Conduct Authority in the UK and/or the Australian Securities and Investments Commission in Australia. In addition, investors will want to study the credibility of the financial institution and find out how long it has been in operation.