What is traded on the Foreign Exchange?
The simple answer is money. Forex trading is the simultaneous buying of buying of one currency and the selling of another. Currencies are traded through a broker or dealer, and are traded in pairs; for example the Euro and the US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY). Because you are not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current future health of the Japanese economy.In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country`s economy, compared to the other countries economies.
Unlike other financial markets like the New York Exchange, the Forex spot market has neither a physical location nor a central exchange. The Forex market is considered an Over-the-Counter (OTC) or `Interbank` market, due to the fact that the entire market is run electronically, within a network of banks, continously over a 24-hour period. Until the late 1990`s, only the “big guys” could play this game. The initial requirement was that you could trade only if you had about ten to fifty million bucks to start with! Forex was originally
intended to be used by bankers and large institutions and not by us “little guys”. However, because of the rise of the internet, online Forex trading firms are now able to offer trading accounts to `retail` traders like us. All you need to get started is a computer, a high-speed Internet connection and an informative tutorial.
These are some sub-topics we shall take a look at when trading forex:
• Definition
• Currencies that are traded
• Best times to trade
• How money is made in the forex market
• Know your P`s and L`s
• How to calculate Profit/Loss
• Requirements for trading
• How to choose a Forex Broker
• Steps to Trading
• Types of trading
• Trading Procedures
Some Forex Terms Definitions Forex trading is the buying and selling of foreign currencies Which currencies are traded The following currencies are traded
• USD-------$
• EURO-----€
• GBP-------£
• JPY--------¥
• CAD------CAD$
• AUD------AUD$
• NZD------NZD$
• CHF-------Swiss Francs
Currencies are traded in pairs e.g GBP/USD, USD/JPY etc. The USD($) is the most traded of all currencies about-89% of all transactions.
When Is Forex Traded
The forex market is opened 24hrs a day for 5 days in a week. Opening from 9p.m on Sundays, it closes at 10p.m on Fridays(GMT).
Forex Market Participants
• Government and Central Banks of all countries
• Banks and other financial institutions of various countries
• Large corporations
• Corporate and individuals brokers
• Individuals and Corporate traders
• Consumers of Foreign currencies
• Investors and speculators
Why Trade Foreign Currencies?
There are many benefits and advantages to trading Forex.
Here are just a few reasons why so many people are choosing this market:
• No commission : No clearing fees, no government fees, no brokerage fees. Brokers are compensated for their services through something called the bid-ask spread.
• No middlemen : Spot currency trading eliminates the middlemen, and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
• No fixed lot size : In the futures market, lot or contract sizes are determined the exchanges. A standard-size contract for silver futures is 5000 ounces. In spot Forex, you determine your own lot size. This allows traders to participate with accounts as small as $250.
• Low transaction costs : The retail transaction cost (the bid/ask spread is typically less than 0.1 percent under normal market conditions. Of course this depends on your leverage.
• A 24-hour market : There is no waiting for the opening bell – from Sunday evening to Friday afternoon EST, the Forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade—morning, noon or night.
• No one can corner the market : The foreign exchange market is so huge and has so many participant that no single entity (not even a central bank) can control the market price for an extended period of time.
• Leverage : In Forex trading, a small merging deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profit, and at the same time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1 leverage, which means that a $50 margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500, one could trade with $100,000 and so on. But leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
• High liquidity : Because the Forex Market is so enormous, it is also extremely liquid. This means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will. You are never “stuck” in a trade. You can even set your online trading platform to automatically close your position at your desired profit level (a limit order), and/or close a trade if a trade is going against you (a stop loss).
Best Times to Trade Mondays, Tuesdays and Wednesday. You can trade on other days but the price movements are more on Tuesdays and Wednesdays
DAY TIME BEST CURRENCIES TO TRADE
Mon-Wed 6am-9am Asia currencies, JPY
Mon-Wed 1-5pm Other currencies EURO, USD
Thurs. All day Watch the market and trade
Friday 9-2 All Currencies
Days When Not To Trade
• Afternoon of Fridays• International Holidays, Xmas, Easter
• Specific Holiday in some western countries
Labour day in America, Thanksgiving day
Banks and financial Institutions are closed on these days
• America – Jan. 1, Jan. 21st
• National Holidays of major countries whose currencies are actively traded can be checked from: www.infoplease.com/spot/holidays.html
When Can Currencies Be Traded?
The spot FX market is unique within the world market. It`s like a Super Wal-Mart where the market is open 24-hours a day. At any time, somewhere around the world a financial center is open for business, and banks and other institutions exchange currencies every hour of the day and night with general ly only minor gaps on the weekend. The foreign exchange markets follow the sun around the world, so you can trade late at night (if you`re a vampire) or in the morning (if you`re an early bird). Keep in mind though, the early bird doesn`t necessarily get the worm in this market – you might get the worm but a bigger, nastier bird of prey can sneak up and eat you too…
Time zone New York GMT
Tokyo Open 7:00 pm 0:00
Tokyo Close 4:00 am 9:00
London Open 3:00 am 8:00
London Close 12:00 pm 17:00
New York Open 8:00 am 13:00
New York Close 5:00 pm 22:00
HOW TO READ AN FX QUOTE
Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason they are quoted in pairs is because in every foreign exchange transaction you are simultaneously buying one currency and selling another. Here is an example of a foreign exchange rate for the British pound versus the U.S dollarGBP/USD=1.7500
The first listed currency to the left of the slash (“/”) is known the base currency (in this example, the British pound), while the second one on the right is called the counter or quote When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency (in this example, the U.S dollar).
When buying, the exchange rate tells you how you have to pay in units of quote currency to buy one unit of the base currency. In the example above, you will receive 1.7500 U.S dollars to buy 1 British pound.
When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the of the base currency. In the example above, you will receive 1.7500 U.S dollars when you sell 1 British pound.
The base currency is the “for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency. You would buy the pair if you believe the base currency will appreciate (go up) relative to the quote currency. You would sell the pair if you think the base currency will depreciate (go down) relatively to the quote currency.
Long/Short
First, you should determine whether you want to buy or sell.
If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price. In trader`s talk, this is called “going long” or taking a “long position”. Just remember: long= buy.
If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price. This is called “going short” or taking a “short position”. Short= sell.
Bid/Ask Spread
All Forex quotes include a two-way price, the bid and ask. The bid is always lower than the ask price.
The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency. This means the bid is the price at which you (as the trader) will sell.
The ask is the price at which the dealer will sell the base currency in exchange for the quote currency. This means the ask is the price at which you will buy.
The difference between the bid and ask price is popularly known as the spread. Let`s take a look at an example of price taken from a trading platform:
GBP/USD
Bid Ask
1.7445 1.7449
Sell Buy
On this GBP/USD quote, the bid price is 1.7445 and for the ask price is 1.7449. Look at how this broker makes it so easy for you to trade away your money.
If you want to sell GBP, you click “Sell” and you will sell pounds at 1.7445. if you want to buy GBP, you click “Buy” and you will buy pounds at 1.7449.
In the following examples, we`re going to use fundamental analysis to help us decide whether to buy or sell a specific currency pair. If you always fell asleep during your economy class or just flat out skipped economics class, don`t worry! We will cover fundamental analysis in a later lesson. For right now, try to pretend you know what`s going on…
EUR/USD
In this example Euro is the base currency and thus the “basis” for the buy/sell.
If you believe that the US economy will continue to weaken, which is bad for the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will fall versus the US dollar.
USD/JPY
In this example the US dollar is the base currency and thus the “basis” for the buy/sell. If you think that the Japanese government is going to weaken the Yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will rise versus the Japanese Yen.
If you believe that Japanese investors are pulling money out of U.S. financial markets and converting all their U.S. dollars back to Yen, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese Yen.
YOU SHOULD DEMO TRADE FOR AT LEAST 2 MONTHS BEFORE YOU EVEN THINK ABOUT PUTTING REAL MONEY ON THE LINE
Know Your P`s and L`s
Here is where we`re going to do a little math. You`ve probably heard of the term “pips” and “lots” thrown around, and here we are going to explain what they are and show you how they are calculated. Take your time with this information, as it required knowledge for all Forex traders. Don`t even think about trading until you are comfortable with pip values and calculating profit and loss.What is a Pip?
The most common increment of currencies is the Pip. If the EUR/USD moves from 1.2250 to 1.2251, that is ONE PIP. A pip is the last decimal place of a quotation. The Pip is how you measure your profit or loss.
As each currency has its own value, it is necessary to calculate the value of a Pip for that particular currency. In currencies where the US dollar is quoted first, the calculation would be as follows.
Let`s take USD/JPY rate at 119.80 (notice this currency pair only goes to two decimal places, most of the other currencies have four decimal places)
In the case of USD/JPY, 1 pip would be .01
Therefore,
USD/JPY:
119.80 .01 divided by exchange rate = pip value .01/119.80 = 0.0000834 This looks like a very long number but later we will discuss lot size.
USD/CHF:
1.52550 0.0001 divided by exchange rate = pip value
.0001/1.5250 = 0.0000655
In the case where the US dollar is not quoted first and we want to get the US dollar value, we have to add one more step
EUR/USD
1.2200 .0001
divided by exchange rate = pip value
so .0001/1.2200 = EUR 0.00008196
But we need to get back to US dollars so we add another calculation which is
EUR x Exchange rate
So, 0.00008196 x 1.2200 = 0.00009999
When rounded up it would be 0.0001
You are probably rolling your eyes back and thinking do I really need to work all this out and the answer is NO. Nearly all Forex brokers will work this out for you automatically. It`s always good for you to know how they work it out.
What is a Lot?
Spot Forex is traded in lots. The standard size for a lot is $100,000. There is also a mini lot size and that is $10,000. As you already know, currencies are in pips, which is the smallest increment of that currency. To take advantage of these tiny increments, you need to trade large amounts of a particular currency in order to see any significant profit or loss. Let`s assume we will be using a $100,000 lot size. We will now recalculate some examples see how it affects the pip value. USD/JPY at an exchange rate of 119.90 (.01/119.80) x $100,000 = $8.34 per pip USD/CHF at an exchange rate of 1.4555 (0.0001/1.4555) x $100,000 = $6.87 per pip In cases where the US dollar is not quoted first, the formular is slightly different. EUR/USD at an exchange rate of or 1.1930 (.0001/1.1930) x EUR 100,000 = EUR 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip. Your broker may have a different convention for calculating pip value relative to lot size but whichever way they do it, they`ll be able to tell you what the pip value is for the currency you are trading is at the particular time. As the market moves, so will the pip value depending on what currency you are currently trading.
HOW DO I CALCULATE PROFIT AND LOSS?
So now that you know how to calcuate pip value, let`s look at how you calculate your profit or loss. Let`s buy US dollars and Sell Swiss Francs. The rate you are quoted is 1.4525/1.4530. Because you are buying US dollar you wll be working on the 1.4530, the rate at which traders are prepared to sell. So you buy 1 lot of $100,000 at 1.4530. A few hours later, the price moves to 1.4550 and you decide to close your trade. The new quote for USD/CHF is 1.4550/14555. Since you`re closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the 1.4550 price. The price traders are prepared to buy at. The dfference between 1.4530 and 1.4550 is .0020 or 20 pips. Using our formular from before, we now have (.0001/1.4550) x $100,000 = $6.87 per pip x 20 pips = $137.40 Remember, when you enter or exit a trade, you are subject to the spread in the bid/offer quote. So your overall profit in transaction depends on your Lot bought or sold In Forex Market, lots are categorized thus:Worth Lot Size
• Standard Lot $100,000 1
• Mini Lot $10,000 0.1
• Micro Lot $1,000 0.01
Your profit or loss in transaction is given by:
- Pip Value X Lot Size X No of Pips
Most cuurency pairs have Pip Value of $10 except USD/JPY where Pip values are $6 and $8 respectively.
Exmples
In EUR/USD pair, $100,000 (a standard Lot(1) worth of EURis bought in anticipation that EUR will rise in value. EUR was bought at 1.2055. minute later, your prediction comes through and EUR rises to 1.2060. you closed the trade at Profit = Pip Value X Lot Size X Pips No of pips = 1.2060-1.2055 = 5 Pips Lot Size = 1 Pip Value = $10 Profit = $10 X 1 X 5 = $50
STEPS TO TRADING FOREX
• Choose a Broker• Open a Demo Account
• Download the Trading sotware
• Login to your Account
• Trade
• Use indicators to decide when to buy or sell. the following indicators are commonly used:
• Moving Averages
• Bollinger Bands
• Parabolic SAR
• Stochiastics etc.
How to Choose a Forex Broker
Take the following steps:
1. Search for forex brokers through google: www.google.com
2. Check if the Broker is registered with National Future Association by checking this website. www.nfa.futures.org. if not registered here, ask the broker which regulating Agency it is affiliated to.
3. Confirm the Trading terms of the broker e.g minimum deposit, spread, trading platform, roll-over charges, trade sizes availible etc.
4. Check for ratings and comments of othe traders who have had dealings with the Broker by checking at this website- www.forexpeacearny.com.
Fundamental Analysis Trading
Trading by news. The following economic news effect the Forex Market • Employment/Unemployment • Interest Rate • Foreign Trade • Consumer Price Index • Housing Starts • Balance of Trade • Retail Sales • Inflation Rate When are news released- USD- 2-4PM JPY- 2.30AM GBP- 10.30AM EUR- 8.30AM Where to get the news: www.dailyfx.com www.forexfactory.com www.todayfx.com www.forexnews.com
Technical Analysis
Market Indicators rely on past of the currenciesto predict where the price is likely to go up OR down.
TREND LINES
Various trend lines are used to predict the price movements. These incude:
• Moving Averages (simple, Exponential etc)
• MACD – Moving Average Convergence and Divergence
• Bollinger Bands – (Bollinger Squeeze, Bollinger Bounce)
• Parabolic SAR
• Stochiastics
• Pivot Points
Some Forex Terms
Long = Buy
Short = Sell
Base Currency = The Currency on the left side of a pair (USD/JPY)
Quote Currency = The currency on the right side of a pair (USD/JPY)
Bid Price = The Price at which the Broker is willing to Buy to you
Ask = The Price which the Broker is willing to Sell to you
Pip = The smallest change in currency in currency value
Spread = The difference between Bid and Ask price.
Marging = Amount you deposit with your broker .- your capital
Leverage = This is the number of times your broker is wlling to multiply your capital e.g if you deposited $200 and your broker gives you a leverage of 1:100, then you can trade up to $20,000.
As a beginner you might want to start your DEMO TRADE by registering a neew account. The right place that I can guarantee you is InstaForex, because they have the necessary tools you might need in starting your Forex trading. It`s a perfect place for both beginners and experts. They are one of the Award winning Forex Brokers online and also N0.1 Forex Broker in Asia. So, this a well known Broker that I can guarantee of. This will save you From the Scam Brokers. GOODLUCK!!
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