Forex

What is Forex

Learning Forex trading is not that difficult in that there are many systematic courses conducted by many institutes/universities all over the world. When an entrepreneur commits to learn trading, she will be mainly exposed to two types of analysis. One is technical analysis and another is fundamental analysis

Forex is the short form for “foreign exchange” and is an exciting business that is increasing in popularity.In foreign exchange, one currency of a country is traded for another. The foreign exchange market is one of the largest markets because foreign exchange transactions take place between large banks, central banks, governments, multinational corporations etc

It is the largest financial trading market in the world. Open 24 hours a day, seven days a week. Two trillion dollars on the line every day. And it's all trade accessible from your personal computer
A fast-paced industry with sudden, unexpected changes happening every day, multiple times a day, this market is forever moving. With no centralized market location, Forex markets are traded mostly over computer terminals around the world. A literal 24/7 market, trading begins in Sydney and opens around the globe as the day rolls on. First in Tokyo, then London and onto New York

Technical Analysis

Technical analysis is the market-generated data used for forecasting price movements. Tools like price charts and graphs are being used to illustrate the concept. The forecasting is based on three postulates viz., the market data contains all the fundamentals, volatility of the market and market sentiments. The possible market trends are up, down and sideways. More often than not the market moves in predictable patterns. The ultimate aim of technical analysis is to unravel this pattern basing upon the past trends

Fundamental Analysis

Fundamental analysis assumes a country to be like company with economic reports that reveal the financial health of that country's currency. The value of a country's currency depends upon the products and services it supplies to the international market. The more it supplies and is able to sell them the more of a demand is created for the currency because of its need by the purchasers of the product and services. Fundamental analysis takes into account the country's potential to generate international trade. Fundamental analysis is found to be more effective when the learner uses the same judiciously. Learning the trade in these broad categories help the traders perform well in the market

Forex trade holds high prospects for profit as well as the potential for loss depending upon the trader's skill and understanding of the market. Learning Forex trade provides that knowledge which should be analytically used for achieving better performance. The trader who has a more thorough understanding of the market has a distinct advantage and greater likelihood of creating consistent profits. As with any business, education and training are the first step toward long term success.

#1 Forex Trading Course

History

The purpose of this e-book is to introduce the forex market to you. As with many

markets, there are many derivatives of the central market such as futures, options and

forwards. For the purpose of this book we will only be discussing the main market

sometimes referred to as the Spot or Cash market.

The word FOREX is derived from Foreign Exchange and is the largest financial market

in the world. Unlike many markets, the FX market is open 24 hours per day and has an

estimated $1.5 Trillion in turnover every day. This tremendous turnover is more than the

combination of all the worlds' stock markets on any given day. This tends to lead to a

very liquid market and thus a desirable market to trade.

Unlike many other securities (any financial instrument that can be traded) the FX market

does not have a fixed exchange. It is primarily traded through banks, brokers, dealers,

financial institutions and private individuals. Trades are executed through phone and

increasingly through the Internet. It is only in the last few years that the smaller investor

has been able to gain access to this market. Previously, the large amounts of deposits

required precluded the smaller investors. With the advent of the Internet and growing

competition it is now easily in the reach of most investors.

You will often hear the term INTERBANK discussed in FX terminology. This originally,

as the name implies, was simply banks and large institutions exchanging information

about the current rate at which their clients or themselves were prepared to buy or sell a

currency. INTER meaning between and Bank meaning deposit taking institutions

normally made up of banks, large financial institutions, brokers or even the government.

The market has progressed to such a degree that the term interbank now means anybody

who is prepared to buy or sell a currency. It could be two individuals or your local travel

agent offering to exchange Euros for US Dollars. You will, however, find that most of the

brokers and banks use centralized feeds to insure reliability of quote. The quotes for Bid

(buy) and Offer (sell) will all be from reliable sources. These quotes are normally made

up of the top 300 or so large institutions. This insures that if they place an order on your

behalf that the institutions they have placed the order with is capable of fulfilling the order.

Now although we have spoken about orders being fulfilled, it is estimated that anywhere

from 70%-90% of the FX market is speculative. In other words, the person or institution

that bought or sold the currency has no intention of actually taking delivery of the

currency. Instead, they were solely speculating on the movement of that particular currency

Source: Bank For International Settlements HYPERLINK "http://www.bis.org/"http:

//www.bis.org. Extract From The Triennial Central Bank Survey of Foreign Exchange

and Derivatives Market Activity

http://www.4shared.com/photo/N56wuyHa/table_1ok.html table 1

As you can see from the above table over 90% of all currencies are traded against the US

Dollar. The four next most traded currencies are the Euro (EUR), Japanese Yen (JPY),

Pound Sterling (GBP) and Swiss Franc(CHF). As currencies are traded in pairs and

exchanged one for the other when traded, the rate at which they are exchanged is called

the exchange rate. These four currencies traded against the US Dollar make up the

majority of the market and are called major currencies or the majors.

Market Mechanics

So now we know that the FX market is the largest in the world and that your broker or

institution that you are trading with is collecting quotes from a centralized feed or

individual quotes comprising of interbank rates. So how are these quotes made up. Well,

as we previously mentioned currencies are traded in pairs and are each assigned a symbol.

For the Japanese Yen it is JPY, for the Pounds Sterling it is GBP, for Euro it is EUR and

for the Swiss Frank it is CHF. So, EUR/USD would be Euro-Dollar pair. GBP/USD

would be pounds Sterling-Dollar pair and USD/CHF would be Dollar-Swiss Franc pair

and so on. You will always see the USD quoted first with few exceptions such as Pounds

Sterling, Eurodollar, Australia Dollar and New Zealand Dollar. The first currency quoted

is called the base currency. Have a look below for some examples

http://www.4shared.com/photo/4zcvk-aE/table_2.html table 2

When you see FX quotes you will actually see two numbers. The first number is called

the bid and the second number is called the offer (sometimes called the ASK). If we use

the EUR/USD as an example you might see 0.9950/0.9955 the first number 0.9950 is the

bid price and is the price traders are prepared to buy Euros against the USD Dollar. The

second number 0.9955 is the offer price and is the price traders are prepared to sell the

Euro against the US Dollar. These quotes are sometimes abbreviated to the last two digits

of the currency such as 50/55. Each broker has its own convention and some will quote

the full number and others will show only the last two. You will also notice that there is a

difference between the bid and the offer price and that is called the spread. For the four

major currencies the spread is normally 5 give or take a pip (we will explain pips later).

To carry on from the symbol conventions and using our previous EUR quote of 0.9950

bid, that means that 1 Euro = 0.9950 US Dollars. In another example if we used the

USD/CAD 1.4500 that would mean that 1 US Dollar = 1.4500 Canadian Dollars.

The most common increment of currencies is the PIP. If the EUR/USD moves from

0.9550 to 0.9551 that is one Pip. A pip is the last decimal place of a quotation. The Pip or

POINT as it is sometimes referred to depending on context is how we will measure our profit or loss.

As each currency has its own value it is necessary to calculate the value of a pip for that particular currency. We also want a constant so we will assume that we want to convert everything to US Dollars. In currencies where the US Dollar is quoted first the calculation would be as follows.

Example JPY rate of 116.73 (notice the JPY only goes to two decimal places, most of the other currencies have four decimal places)

In the case of the JPY 1 pip would be .01 therefore

USD/JPY: (.01 divided by exchange rate = pip value) so .01/116.73=0.0000856 it looks

like a big number but later we will discuss lot (contract) size.

USD/CHF: (.0001 divided by exchange rate = pip value) so .0001/1.4840 = 0.0000673

USD/CAD: (.0001 divided by exchange rate = pip value) so .0001/1.5223 = 0.0001522

In the case where the US Dollar is not quoted first and we want to get to the US Dollar

value we have to add one more step.

EUR/USD: (0.0001 divided by exchange rate = pip value) so .0001/0.9887 = EUR

0.0001011 but we want to get back to US Dollars so we add another little calculation

which is EUR X Exchange rate so 0.0001011 X 0.9887 = 0.0000999 when rounded up it

would be 0.0001.

GBP/USD: (0.0001 divided by exchange rate = pip value) so 0.0001/1.5506 = GBP

0.0000644 but we want to get back to US Dollars so we add another little calculation

which is GBP X Exchange rate so 0.0000644 X 1.5506 = 0.0000998 when rounded up it

would be 0.0001.

By this time you might be rolling your eyes back and thinking do I really need to work all

this out and the answer is no. Nearly all the brokers you will deal with will work all this

out for you. They may have slightly different conventions but it is all done automatically.

It is good however for you to know how they work it out. In the next section we will be

discussing how these seemingly insignificant amounts can add up.

More On Market Mechanics

Spot Forex is traditionally traded in lots also referred to as contracts. The standard size

for a lot is $100,000. In the last few years a mini lot size has been introduced of $10,000

and this again may change in the years to come. As we mentioned on the previous page

currencies are measured in pips, which is the smallest increment of that currency. To take

advantage of these tiny increments it is desirable to trade large amounts of a particular

currency in order to see any significant profit or loss. We shall cover leverage later but for

the time being let's assume we will be using $100,000 lot size. We will now recalculate

some examples to see how it effects the pip value.

USD/JPY at an exchange rate of 116.73

(.01/116.73) X $100,000 = $8.56 per pip

USD/CHF at an exchange rate of 1.4840

(0.0001/1.4840) X $100,000 = $6.73 per pip

In cases where the US Dollar is not quoted first the formula is slightly different.

EUR/USD at an exchange rate of 0.9887

(0.0001/ 0.9887) X EUR 100,000 = EUR 10.11 to get back to US Dollars we add a further step

EUR 10.11 X Exchange rate which looks like EUR 10.11 X 0.9887 = $9.9957 rounded

up will be $10 per pip.

GBP/USD at an exchange rate of 1.5506

(0.0001/1.5506) X GBP 100,000 = GBP 6.44 to get back to US Dollars we add a further step

GBP 6.44 X Exchange rate which looks like GBP 6.44 X 1.5506 = $9.9858864 rounded

up will be $10 per pip.

As we said earlier your broker may have a different convention for calculating pip value

relative to lot size but however they do it they will be able to tell you what the pip value

for the currency you are trading is at that particular time. Remember that as the market

moves so will the pip value depending on what currency you trade.

So now we know how to calculate pip value lets have a look at how you work out your

profit or loss. Let's assume you want to buy US Dollars and Sell Japanese Yen. The rate

you are quoted is 116.70/116.75 because you are buying the US you will be working on

the116.75, the rate at which traders are prepared to sell. So you buy 1 lot of $100,000 at

116.75. A few hours later the price moves to 116.95 and you decide to close your trade.

You ask for a new quote and are quoted 116.95/117.00 as you are now closing your trade

and you initially bought to enter the trade you now sell in order to close the trade and you

take 116.95 the price traders are prepared to buy at. The difference between 116.75 and

116.95 is .20 or 20 pips. Using our formula from before, we now have (.01/116.95) X

$100,000 = $8.55 per pip X 20 pips =$171

In the case of the EUR/USD you decide to sell the EUR and are quoted 0.9885/0.9890

you take 0.9885. Now don't get confused here. Remember you are now selling and you

need a buyer. The buyer is biding 0.9885 and that is what you take. A few hours later the

EUR moves to 0.9805 and you ask for a quote. You are quoted 0.9805/0.9810 and you

take 0.9810. You originally sold EUR to open the trade and now to close the trade you

must buy back your position. In order to buy back your position you take the price traders

are prepared to sell at which is 0.9810. The difference between 0.9810 and 0.9885 is

0.0075 or 75 pips. Using the formula from before, we now have (.0001/0.9810) X EUR

100,000 = EUR10.19: EUR 10.19 X Exchange rate 0.9810 =$9.99($10) so 75 X $10 =$750.

To reiterate what has gone before, when you enter or exit a trade at some point your are

subject to the spread in the bid/offer quote. As a rule of thumb when you buy a currency

you will use the offer price and when you sell you will use the bid price. So when you buy

a currency you pay the spread as you enter the trade but not as you exit and when you sell

a currency you pay no spread when you enter but only when you exit

Leverage

Leverage financed with credit, such as that purchased on a margin account is very

common in Forex. A margined account is a leverageable account in which Forex can be

purchased for a combination of cash or collateral depending what your brokers will

accept. The loan (leverage) in the margined account is collateralized by your initial

margin (deposit), if the value of the trade (position) drops sufficiently, the broker will ask

you to either put in more cash, or sell a portion of your position or even close your

position. Margin rules may be regulated in some countries, but margin requirements and

interest vary among broker/dealers so always check with the company you are dealing

with to ensure you understand their policy.

Up until this point you are probably wondering how a small investor can trade such large

amounts of money (positions). The amount of leverage you use will depend on your

broker and what you feel comfortable with. There was a time when it was difficult to find

companies prepared to offer margined accounts but nowadays you can get leverage from

as high as 1% with some brokerages. This means you could control $100,000 with only

$1,000.

Typically the broker will have a minimum account size also known as account margin or

initial margin e.g. $2,500. Once you have deposited your money you will then be able to

trade. The broker will also stipulate how much they require per position (lot) traded. In

the example above for every $1,000 you have you can take a lot of $100,000 so if you

have $5,000 they may allow you to trade up to $500,00 of forex.

The minimum security (Margin) for each lot will very from broker to broker. In the

example above the broker required a one percent margin. This means that for every

$100,000 traded the broker wanted $1,000 as security on the position.

Margin call is also something that you will have to be aware of. If for any reason the

broker thinks that your position is in danger e.g. you have a position of $100,000 with a

margin of one percent ($1,000) and your losses are approaching your margin ($1,000). He

will call you and either ask you to deposit more money, or close your position to limit

your risk and his risk. If you are going to trade on a margin account it is imperative that

you talk with your broker first to find out what their polices are on this type of accounts.

Variation Margin is also very important. Variation margin is the amount of profit or loss

your account is showing on open positions. Let's say you have just deposited $10,000

with your broker. You take 5 lots of USD/JPY which is $500,000. To secure this the

broker needs $5,000 (1%). The trade goes bad and your losses equal $5001, your broker

may do a margin call. The reason he may do a margin call is that even though you still

have $4,999 in your account the broker needs that as security and allowing you to use it

could endanger yourself and him. Another way to look at it is this, if you have an account

of $10,000 and you have a 1 lot ($100,000) position. That's $1,000 assuming a (1%

margin) is no longer available for you to trade. The money still belongs to you but for the

time you are margined the broker needs that as security. Another point of note is that

some brokers may require a higher margin at the weekends. This may take the form of 1%

margin during the week and if you intend to hold the position over the weekend it may rise to 2%

or higher. Also in the example we have used a 1% margin. This is by no means standard.

I have seen as high as 0.5% and many between 3%-5% margin. It all depends on your broker.

There have been many discussions on the topic of margin and some argue that too much

margin is dangerous. This is a point for the individual concerned. The important thing to

remember as with all trading is that you thoroughly understand your brokers policies on

the subject and you are comfortable with and understand your risk.

Rollovers

Even though the mighty US dominates many markets, most of Spot Forex is still traded

through London in Great Britain. So for our next description we shall use London time.

Most deals in Forex are done as Spot deals. Spot deals are nearly always due for

settlement two business days day later. This is referred to as the value date or delivery

date. On that date the counterparties take delivery of the currency they have sold or bought.

In Spot FX the majority of the time the end of the business day is 21:59 (London time).

Any positions still open at this time are automatically rolled over to the next business day,

which again finishes at 21:59. This is necessary to avoid the actual delivery of the

currency. As Spot FX is predominantly speculative most of the time the trades never wish

to actually take delivery of the actual currency. They will instruct the brokerage to always

rollover their position. Many of the brokers nowadays do this automatically and it will be

in their polices and procedures. The act of rolling the currency pair over is known as

tom.next which, stands for tomorrow and the next day. Just to go over this again, your

broker will automatically rollover your position unless you instruct him that you actually

want delivery of the currency. Another point noting is that most leveraged accounts are

unable to actually deliver the currency as there is insufficient capital there to cover the transaction.

Remember that if you are trading on margin, you have in effect got a loan from your

broker for the amount you are trading. If you had a 1 lot position your broker has

advanced you the $100,000 considering you may have only had a fraction of that amount

on deposit. The broker will normally charge you the interest differential between the two

currencies if you rollover your position. This normally only happens if you have rolled

over the position and not if you open and close the position within the same business day.

To calculate the broker's interest he will normally close your position at the end of the

business day and again reopen a new position almost simultaneously. You open a 1 lot

($100,000) EUR/USD position on Monday 15th at 11:00 at an exchange rate of 0.9950.

During the day the rate fluctuates and at 22:00 the rate is 0.9975. The broker closes your

position and reopens a new position with a different value date. The new position was

opened at 0.9976 a 1 pip difference. The 1 pip deference reflects the difference in interest

rates between the US Dollar and the Euro.

In our example your are long Euro and short US Dollar. As the US Dollar in the example

has a higher interest rate than the Euro you pay the premium of 1 pip.

Now the good news. If you had the reverse position and you were short Euros and long

US Dollars you would gain the interest differential of 1 pip. If the first named currency

has an overnight interest rate lower than the second currency then you will pay that

interest differential if you bought that currency. If the first named currency has a higher

interest rate than the second currency then you will gain the interest differential.

To simplify the above. If you are long (bought) a particular currency and that currency has

a higher overnight interest rate you will gain. If you are short (sold) the currency with a

higher overnight interest rate then you will lose the difference.

I would like to emphasis here that although we are going a little in-depth to explain how

all this works, your broker will calculate all this for you. The purpose of this book is just

to give you an overview of how the forex market works.

Accounts

Although the movement today is towards all transactions eventually finishing in a profit

and loss in US Dollars it is important to realize that your profit or loss may not actually

be in US Dollars. From my observation the trend is more pronounced in the US as you

would expect. Most US based traders assume they will see their balance at the end of

each day in US Dollars. I have even spoken with some traders who are oblivious to the

fact the their profit might have actually been in Japanese Yen.

Let me explain a little more. You sell (go short) USD/JPY and as such are short USD and

Long (bought) JPY. You enter the trade at 116.10 and exit 116.90. You in fact made

80,000 Japanese Yen (1 lot traded) not US Dollars. If you traded all four major currencies

against the US Dollar you would in fact have gained or lost in EUR, GPY, JPY and CHF.

This might give you a ledger balance at the end of the day or month with four different

currencies. This is common in London. They will stay in that currency until you instruct

the broker to exchange the currency you have a profit or loss into your own base currency.

This actually happened to me. After dealing with mainly US based brokers it had never

occurred to me that my statement would be in anything other than US Dollars. This can

work for you or against you depending on the rate of exchange when you change back

into your home currency. Once I knew the convention I simply instructed the broker to

change my profit or loss into US Dollars when I closed my position. It is worth checking

how your broker approaches this and simply ask them how they handle it. A small point

but worth noting.

It's a sad fact that for many years the forex market largely remained unregulated. Even

today there are many countries that still don't regulate companies that trade forex. London

has been regulated for many years and the US is now getting its act together and has also

started regulating companies dealing forex.

It was only recently in the US you could with no more than an Internet site and a few

thousand dollars set up your own forex operation and give the impression that you were

larger than you are. I am all for the entrepreneurial flair and everyone need to start

somewhere, but when dealing with people's money it is imperative that the company you

choose is solid.

Preferably you want a company that is regulated in the country that it operates, insured or

bonded and has some kind of track record. As a rule of thumb, nearly all countries have

some kind of regulatory authority who will be able to advise you. Most of the regulatory

authorities will have a list of brokers that fall with their jurisdiction and will give you a

list. They probably wont tell whom to use but at least if the list came from them you can

have some confidence in those companies. Once you have a list give a few of them a call,

see who you feel comfortable with, ask for them to send you their polices and procedures.

If you live near where your broker is based, go spend the day with him. I have been to

many brokerages just to check them out. It will give you a chance to see their operation

and meet their team. If you choose to purchase the rest of this course, we suggest a firm

that we have worked with for a long time that is reputable, regulated and financially stable.

This brings up another interesting point. When you open an account with a broker you

will have to fill out some forms basically stating your acceptance of their polices. This

can range from a 1 page document to something resembling a book. Take the time to read

through these documents and make a list of things you don't understand or want

explained. Most reputable companies will be happy to spend some time with you on this.

Your involvement with your broker is largely up to you. As a forex trader you will

probably spend long hours staring at the screen without talking to anyone. You may be

the sort of person who likes this or you may be the sort of person who likes to chat with

the dealer in the trading room. You will normally get a call once a week or once a month

from someone in the brokerage asking if everything is OK.

Statements

Before we move on to account statements I just want to touch on segregation of funds. In

times past there was a danger that traders who deposited money with their broker who did

not segregate their clients money from their own companies money were at some risk.

The problem arose if the broker misused the deposited funds to either reinvest or

otherwise manipulated these deposits to enhance their own standing. There were also

instances were the broker became insolvent and many complications ensued as to what

was the clients money and what was the broker's money. With the advent of regulation

most brokers now segregate their clients funds from the brokerage funds. Deposits are

normally held with banks or other large financial institution that are also regulated and

bonded or insured. This protects your money should anything happen to your broker. The

deposit taking institution is normally aware that these deposits are client's funds.

Depending on regulation in the particular country you live, each client may have their

own segregated account or for smaller depositors they may be pooled. The point is that

segregation of funds is a safeguard. Ask your broker if your funds are segregated and who

actually has your money.

Just as with a bank you should be entitled to interest on the money you have on deposit.

Some brokers may stipulate that interest is only payable on accounts over a certain

amount, but the trend today is that you will earn interest on any amount you have that is

not being used to cover your margin. Your broker is probably not the most competitive

place to earn interest but that should not be the point of having your money with him in

the first place. Interest on the funds in your account and segregation of funds all go to

show the reputability of the company you are dealing with.

In this section, I will discuss briefly the basic account statement. I have to keep this basic

as there are as many flavors of account statements as you can imagine. Just about every

broker has their own way of presenting this. The most important thing is to know where

you stand at the end of each day or week. Just because your broker is internet based and

has all the bells and whistles does not mean they are infallible. Many of the actions taken

before information is imputed are still done by hand and if humans are involved there will

be a mistake at some point. The responsibility lies with you. It is your money so make

sure that all the transactions are correct.

FX Firm

New York

Statement for: Mr. Joe Bloggs

Statement Date: 16th January 2004

Account No: 123456

http://www.4shared.com/photo/5kL8t2AG/untitled111.html

Normally, there is a ticket or docket number to help identify the trade. You will nearly

always find the time and date of the trade. The value date if the currency were to be

delivered. You should always see the direction of the trade, buy or sell (Long or Short).

The amount and rate you bought or sold. Balance to let you know if you made a profit or

a loss. You should also see any open positions you may have and the margin requirements

for that position. A lot of the more modern systems will show your open position as

though it has been closed just to give you an up to the minute balance.

The Main Players

Central Banks And Governments

Policies that are implemented by governments and central banks can play a major role in

the FX market. Central banks can play an important part in controlling the country's

money supply to insure financial stability.

Banks

A large part of FX turnover is from banks. Large banks can literally trade billions of

dollars daily. This can take the form of a service to their customers or they themselves

speculate on the FX market.

Hedge Funds

As we know, the FX market can be extremely liquid which is why it can be desirable to

trade. Hedge Funds have increasingly allocated portions of their portfolios to speculate on

the FX market. Another advantage Hedge Funds can utilize is a much higher degree of

leverage than would typically be found in the equity markets.

Corporate Businesses

The FX market mainstay is that of international trade. Many companies have to import or

exports goods to different countries all around the world. Payment for these goods and

services may be made and received in different currencies. Many billions of dollars are

exchanged daily to facilitate trade. The timing of those transactions can dramatically

affect a company's balance sheet.

The Man In The Street

The man in the street also plays a part in toady's FX world. Every time he goes on holiday

overseas he normally need to purchase that country's currency and again change it back

into his own currency once he returns. Unwittingly, he is in fact trading currencies. He

may also purchase goods and services while overseas and his credit card company has to

convert those sales back into his base currency in order to charge him.

Speculators And Investors

We shall differentiate speculator from investors here with the definition that an investor

has a much longer time horizon in which he expects his investment to yield a profit.

Regardless of the difference both speculators and investors will approach the FX market.

What Next

Well now we have a basic understanding of how the FX market works and who the main

players are, what next? You are now going to have to decide the best way to trade the

market. The two most common approaches are that of fundamental analysis and technical

analysis.

Fundamental analysis concentrates on the forces of supply and demand for a given

security. This approach examines all the factors that determine the price of a security and

the real value of that security. This is referred to as the intrinsic value. If the intrinsic

value is below the market price then there is an opportunity to buy and if the market is

above the intrinsic price then there is an opportunity to sell.

Technical analysis is the study of market action, mainly through the use of charts and

indicators to forecast the future price of a security. There are three main points that a

technical analyst applies:

A. Market action discounts everything. Regardless of what the fundamentals are saying,

the price you see is the price you get.

B. The price of a given security moves in trends.

C. The historical trend of a security will tend to repeat.

Of all of the above things the most important of them is point A. The tools of the

technical analyst are indicators, patterns and systems. These tools are applied to charts.

Moving averages, support and resistance lines, envelopes, Bollinger bands and

momentum are all examples of indicators.

There are many ways to skin a cat as the saying goes but fundamental and technical

analysis are the two most popular ways of trading FX.

Fundamental Analysis

Our trading system is designed around technical analysis, however, there are some

fundamentals every trader should be aware of.

Fundamentals Every Trader Should Know

Currency prices reflect the balance of supply and demand for currencies. Two primary

factors affecting supply and demand are interest rates and the overall strength of the

economy. Economic indicators such as GDP, foreign investment, and the trade balance

reflect the general health of an economy and are, therefore, responsible for the underlying

shifts in supply and demand for that currency. There is a tremendous amount of data

released at regular intervals, some of which is more important than others. Data related to

interest rates and international trade is looked at the closest.

Interest Rates

If the market has uncertainty regarding interest rates, then any bit of news regarding

interest rates can directly affect the currency markets. Traditionally, if a country raises its

interest rates, the currency of that country will strengthen in relation to other countries, as

investors shift assets to that country to gain a higher return. Hikes in interest rates,

however, are generally bad news for stock markets. Some investors will transfer money

out of a country's stock market when interest rates are hiked, believing that higher

borrowing costs will affect balance sheets negatively and result in devalued stock,

causing the country's currency to weaken. Which effect dominates can be tricky, but

generally there is a consensus beforehand as to what the interest rate move will do.

Indicators that have the biggest impact on interest rates are PPI, CPI, and GDP. Generally

the timing of interest rate moves are known in advance. They take place after regularly

scheduled meetings by the BOE, FED, ECB, BOJ, and other central banks.

International Trade

The trade balance shows the net difference over a period of time between a nation’s

exports and imports. When a country imports more than it exports, the trade balance will

show a deficit, which is generally considered unfavorable. For example, if US consumers

wanted Japanese products, major automobile dealers might sell US dollars to pay for the

import of Japanese vehicles with yen. The flow of dollars outside the US would then lead

to a depreciation in the value of the US dollar. Similarly if trade figures show an increase

in exports, dollars will flow into the United States due to increased confidence in the

economy and then the value of the US dollar would increase. From the standpoint of a

national economy, a deficit in and of itself is not necessarily a bad thing. However, if the

deficit is greater than market expectations then it will trigger a negative price movement.

Psychology of Trading

Trade with a DISCIPLINED Plan:

The problem with many traders is that they take shopping more seriously than trading.

The average shopper would not spend $400 without serious research and examination of

the product he is about to purchase, yet the average trader would make a trade that could

easily cost him $400 based on little more than a “feeling” or “hunch.” Be sure that you

have a plan in place BEFORE you start to trade. The plan must include stop and limit

levels for the trade, as your analysis should encompass the expected downside as well as

the expected upside.

Cut your losses early and Let your Profits Run:

This simple concept is one of the most difficult to implement and is the cause of most

traders demise. Most traders violate their predetermined plan and take their profits before

reaching their profit target because they feel uncomfortable sitting on a profitable

position. These same people will easily sit on losing positions, allowing the market to

move against them for hundreds of points in hopes that the market will come back. In

addition, traders who have had their stops hit a few times only to see the market go back

in their favor once they are out, are quick to remove stops from their trading on the belief

that this will always be the case. Stops are there to be hit, and to stop you from losing

more then a predetermined amount! The mistaken belief is that every trade should be

profitable. If you can get 3 out of 6 trades to be profitable then you are doing well. How

then do you make money with only half of your trades being winners? You simply allow

your profits on the winners to run and make sure that your losses are minimal.

Do not marry your trades:

The reason trading with a plan is the #1 tip is because most objective analysis is done

before the trade is executed. Once a trader is in a position he/she tends to analyze the

market differently in the “hopes” that the market will move in a favorable direction rather

than objectively looking at the changing factors that may have turned against your

original analysis. This is especially true of losses. Traders with a losing position tend to

marry their position, which causes them to disregard the fact that all signs point towards

continued losses.

Do not bet the farm:

Do not over trade. One of the most common mistakes that traders make is leveraging their

account too high by trading much larger sizes than their account should prudently trade.

Leverage is a double-edged sword. Just because one lot (100,000 units) of currency only

requires $1000 as a minimum margin deposit, it does not mean that a trader with $5000 in

his account should be able to trade 5 lots. One lot is $100,000 and should be treated as a

$100,000 investment and not the $1000 put up as margin. Most traders analyze the charts

correctly and place sensible trades, yet they tend to over leverage themselves. As a

consequence of this, they are often forced to exit a position at the wrong time. A good

rule of thumb is to never use more than 10% of your account at any given time.

Forex Basics

The advantages to trading the Forex, especially for short term or day traders is the

liquidity. This means that you can trade any amount of currency and someone will

always be ready to buy or sell that currency.

Another advantage is the flexible trading hours. The Forex market is available for trading

24 hours a day.

Spot Rate-Current market price or cash rate for a currency pair.

Settlement-All currencies trade in 2 business days with the exception of the Canadian

Dollar, which settles next business day.

Bid-Price at which you can sell a certain currency

Ask (offer)-Price at which you can buy a certain currency

All currency is traded in pairs. The base currency compared to the counter currency. The

exchange rate provides the price of the base currency relative to the counter currency.

Ex: How much is one US Dollar (base currency) worth in Japanese Yen (counter

currency). So, if the quote for USD/JPY was 118.54/57, this would mean a currency

trader would pay 118.57 Yen for 1 USD and would receive 118.54 Yen for each USD

when selling.

When the exchange rate rises, it means the base currency is getting stronger against the

counter currency. When the exchange rate falls, the opposite is true.

Please note: When placing a currency order, if you are expecting a downtrend, you

would simply sell the pair and if you are expecting an uptrend, you would buy the

currency pair. The opposite order will close the position, so if you sold to open the

position, expecting the currency to drop, you would buy back the currency to close the

position. If you bought to open the position, expecting the currency to rise, you would

sell the currency to close that position.

PIPS-We briefly went over Pips in the introduction, but let's look at them in more detail.

Pip stands for “price interest point” and it represents the smallest fluctuation in price for a

given currency pair. For most currencies, the exchange rate is carried out to the fourth

decimal place. In this case, a pip is 1/10,000th of the counter currency or .0001.

Ex: If the ask price in the EUR/USD is 1.1315 and it goes up 1 Pip, the resulting rate will

be 1.1316. Some exchange rates like the USD/JPY are only carried out to two decimal

points. For these currency pairs, a pip is worth 1/100th of the counter currency.