FOREX

$4 Trillion Daily Turnover

The liquidity and competitive pricing available in this market are unsurpassed, and today with the irregularity in performance in other markets, the growth of Forex trading, investing and management is accelerating.

Basic-Forex-Theory

Forex-Trading-Basics

How-to-read-charts

When-to-Buy-and-Sell

Managing-risk

Trading-Psychology

Implementing-Charts

Trade Currency And Price Currency

A trade requires two currencies (a cross) in which one will be a long (bought) and the other, a short (sold) side.

This means one is speculating in the prospect of one of the currencies appreciating in value against a relative weakening of the other. The trade currency is often the one with the highest value. When closing the position, the opposite trade is performed. The profit or loss will be apparent in the difference of the amount of dollars credited and debited for the two transactions. Dollars, in this case, is the price currency.

Stop-Loss Discipline

There are significant opportunities and risks involved for investors in the Forex markets.

Aggressive traders might experience daily profit/loss swings of 20 to 30%. This calls for strict stop-loss policies in positions that are moving against you.

Fortunately, there are no daily limits on Forex trading and no restrictions on trading hours, other than the weekend. This means that there will nearly always be an opportunity to react to moves in the main currency markets. Equally, there is a lower risk of being caught without the possibility of closing out one’s positions.

Protective Stop-Loss Controls

For speculative trading, we would always recommend the placement of protective stop-losses.

Using the MT4 platform, investors can easily place and change all orders, including up to three contingent trade orders for each trade while watching developments in the market in real time. These contingent orders comprise two slave orders placed on an ‘if done’ basis, if a primary order is executed. The two slave orders are themselves related as ‘OCO’ orders allowing you to define both a profit taking and a stop-loss order around the position if the primary order is executed. If one of the orders is executed, the opposite order will be cancelled automatically.

Dealing Spread

When trading Forex, investors are quoted a dealing spread, which offers a buying and selling level for the trade. When the investor accepts the offered price and receives a confirmation, the trade is done!

The dealing spread for major currencies can range according to market liquidity, however you will find major currencies typically range between 1-3 points.

For example, USD/JPY is trading at 99.502/99.522. This means you are selling US dollars against the Japanese Yen at 99.502 and buying at 99.522. Unless you opt to trade with our Pro Account, there are no monetary commissions charged per trade, rather, the dealing spread includes the cost of trading.

Spot And Forward Trading

When trading Forex, investors are quoted a spot price. This means that if no further steps are taken, the trade will mature and be settled after two business days. If required, however, the spot trade will be automatically swapped forward with the prevailing rate for maturity the next business day, every trading day, until the position is closed. This can be undertaken on a daily basis or for a longer period.

Investors may also swap their trades forward from a few days up to several months depending on the time frame of their chosen investment strategy. Although a forward trade is for a future date, the position can be closed out at any time. The closing part of the position is then swapped forward to the same future value date.

INTRODUCTION

The Foreign Exchange market is the largest financial market globally with a daily trading volume of over $4trillion. With its high liquidity and the ability to trade 24-hours a day, the online FX market has grown significantly and technology used in the FX currency trading systems has adapted to allow retail traders access to interbank pricing, which was once the preserve of only the largest financial institutions. It is an “over-the-counter” (OTC) market, which means that there is no central exchange or clearing house where orders are matched. The Inter-bank Market is the level at which banks trade with each other. This market is not directly accessible to retail traders. Retail traders can access the FX market through online forex brokers. Typically brokers will either have a single-bank relationship, whereby they receive liquidity from one bank, or have a multi-bank relationship whereby the broker receives liquidity from a number of banks.

Market Hours

The forex market trades as long as there are banks open in one of the major financial centers of the world. This is from the beginning of Monday morning in Sydney until the afternoon of Friday in New York. In terms of GMT, the trading week occurs from Sunday night until Friday night, so 5 days a week, 24 hours per day.

Recent Trend of Online FX Market

Technological advancement in FX currency trading systems has been a huge catalyst behind the growth of forex trading at retail level. Online forex trading became available to retail clients by connecting the market makers to platforms, resulting in the ability to trade on the world’s largest financial market from your PC or laptop. Retail clients can trade directly with the biggest banks in the world, with excellent pricing and quick execution of orders. The retail trader, through platform such as the FX MetaTrader 4 platform, has the same access to charting, technical analysis and indicators that the banks do.

What is a spread?

When trading currency, there are two prices for each currency pair, a „bid” (or sell) price and an „ask” (or buy) price. The bid price is the rate at which traders sell to the FX or forex broker, and the ask price is the rate at which traders buy from the broker.

Bid/Ask

As an example, a price is quoted EUR/USD 1.2881/1.2884 as in the above picture. The bid is 1.2881 and the ask is 1.2884. Traders sell at 1.2881, and buy at 1.2884. The difference between the bid and ask price is known as the spread. If a trader buys at 1.2884 and then sells immediately, there is a 3-pip loss incurred. The trader will need to wait for the market to move 3 pips in favour of his/her position in order to break even. If the market moves 4 points in your favour, then the trade is in profit. The spread is where forex brokers generate their income. Forex Brokers receives prices from banks and then applies a small “mark-up” either side of the bid and ask prices. As we receive pricing from a wide range of banks, the spreads we receive are very tight and so even with our mark-up applied, the prices that are quoted on our platform are still tight. Some forex firms will also apply a commission on top of their spread, or even a monthly fee to maintain their account. Forex Brokers does not charge any of these.

Pips and Points

A „pip” is one ten-thousandth of a point – or the fourth decimal place.

A “point” is the fifth decimal point, and there are 10 points in a pip.

Currency pairs are shown as their 3 letter codes, and the base currency refers to the first currency quoted. So for EURUSD, Euro is the base currency and USD is known as the counter currency. The value of the base currency is always 1, and the price being quoted is for the second currency pair listed. Let’s use EUR/USD as an example. A price quote of 1.4280 means €1.00 EUR (EUR being the first currency listed in the pair) can be purchased for $1.4280 USD. If a trader purchases a standard contract at this price they would purchase €100,000 EUR in exchange for $142,800 USD. If the price appreciated to 1.4364, the €100,000 EUR is now worth more US Dollars – $143,640 – realising a profit of $840 on the trade.

Price Drivers

Changing demand and supply of a currency is the biggest reason why a currency appreciates or depreciates in value. The vast majority of currency transactions made each day are made for speculative purposes, whereby banks and financial institutions buy and sell huge quantities to generate profit. Cross-border repatriations made by corporations do have an impact on pricing, although price action is mainly driven by the banks. They base their trading decisions by taking into consideration technical and fundamental analysis, taking in a broad view of economic factors as well as charting through the use of indicators.

EURUSD is the most commonly traded currency pair, followed by USDJPY and GBPUSD respectively.

Technical Analysis

Technical analysis refers to the study of historic price action, with the aim of forecasting future price movement. Analysts chart a currency’s movement over a set period and attempt to identify a number of patters in order to extrapolate into future price movement. This allows traders to target specific price levels in order to enter or exit a trade.

Forex Brokers platform comes complete with a comprehensive range of technical analysis tools, indicators and charting so provide you with powerful technical analysis functionality.

Support and Resistance

Understanding support and resistance is key to your appreciation of technical analysis, as they are seen as barriers or target price levels. A level of support can be seen whereby a currency is seen as unlikely to immediately push lower, and conversely resistance is regarded when the price is likely to be capped for the time being, or unlikely to push immediately higher.

These support and resistance lines can form trend lines, where a trend can be defined by bouncing up off of a rising support level, or bouncing down off of a falling resistance level.

To draw a trend line showing support and resistance levels, at least 3 market points are needed to confirm the trend line. The more points a trend line has, the more confirmed and more important the trend line becomes.

Trend lines can be flat, whereby a level is drawn from previous lows or highs that have been made at the same exchange rate. In addition, support and resistance can be used to identify trends or price channels that the currency pair is trending within.

Trend

Uptrend – a market is trending up when there is a combination of higher highs and higher lows. Support and resistance can be applied to an uptrend to identify the price channel the currency is likely to trade within.

If the price fails to break previous highs, or the low falls below a previous low, the uptrend may be temporarily paused, or terminated.

Downtrend – a series of lower lows and lower highs have been made.

Range trading – if the currency pair is neither trading in an uptrend or a downtrend, it is known as range trading, or sideways trading.

Moving Averages

Forex platform comes with a number of technical analysis indicators for you to use. The most popular indicator favoured by forex traders tends to be Moving averages.

A moving average calculates an average of price ranges over a specified period. A 30 day moving average gathers the closing prices of each day within the 30 day period, then adds the 30 prices together and divides the sum by 30 to determine the average.

As this is a moving average, it is updated daily as a new 30 day timeframe is used for the calculation. Days 31 and over are excluded as the moving average moves forward.

Why are Moving Averages so popular?

Gauge overall trend. Moving averages display a smoothed out line of the overall trend. The longer the term of the moving average, the smoother the line will be. In order to gauge the strength of a trend in a market, plot the 10, 20, 50 and 200 day SMA’s. In an uptrend, the shorter term averages should be above the longer term ones, and the current price should be above the 10 day SMA. A trader’s bias in this case should be to the upside, looking for opportunities to buy when the price moves lower rather than taking a short position.

Confirmation of price action. Traders should look at candlestick patterns and other indicators to see what is really going on in the market at the time. They should use their analysis to see if the price action achieves the targets implied through their analysis.

Crossovers. When a shorter moving average crosses a longer one (i.e. if the 20 day EMA crossed below the 200 day EMA), this may be seen as an indication that the pair will move in the direction of the shorter MA (so, in the aforementioned example, it would move down). Accordingly, should the short EMA crosses back above the longer EMA (i.e. the 20 day EMA crossed above the 200 day EMA), this may be viewed as a possible change in the trend (so, in the aforementioned example, it would move up). Historically, moving average crossovers tend to ‘lag’ the current market action. The reason being is that the moving averages give us an ‘average’ price over a given period of time. Therefore the moving averages tend to reflect the market’s action, only after at least some time has past. As the short moving average crosses over and above the longer moving average, this can be interpreted as a change in trend to the upside. The opposite also holds true, as the short moving average crosses down and below the long moving average, a new downtrend may emerge in the near future. Moving average crossovers tend to generate more reliable results in a trending market that tends to accomplish either new highs or new lows. In a range bound market environment, the moving averages may cross one another many times, and may tend to give us false trading signals. It is important for this reason, that we first identify the market as either trending or range bound.

Fundamental Analysis

Fundamental analysis is the study of the reasons behind why a currency appreciated or depreciated and it’s an important basis for decision making for beginners in forex currency trading. Factors to be considered include, amongst other things, the employment rate, inflation and interest rate outlook, and these are all influential factors behind a currency move. The reasons used in fundamental analysis are explained below for the beginners who want to participate in forex currency trading.

Interest Rates

It is usual for Central Banks such as the Reserve Bank of Australia, Bank of England and the Federal Reserve to decide on the interest rate level for their country. Interest rate setting form part of monetary policy and are a key determinant of the value of a country’s currency. As an example, a country with a higher interest rate is likely to have a stronger currency than a country with a lower interest rate. A high interest rate environment is attractive for investors as the return on their investment is greater, i.e. an interest rate of 5% is more attractive than an interest rate of 0.5%.

Interest rate outlook is also important. A country with a positive interest rate outlook, or one whereby future expectation is for interest rates to rise, is likely to witness currency appreciation; whereas a country with a negative interest rate outlook compared to another higher yield environment is likely to see its weaken.

Inflation

The level of a country’s inflation can have a positive and negative effect on a currency value. From an investment perspective, inflation erodes the real rate of return on an investment. Consider an investment that has yielded 7% per annum. In one country the level of inflation is 2%, whilst in another inflation is 6%. The real rate of return is higher in the first country, 5% in this case, as inflation or the cost of living is lower than it is in the second country.

It is important to understand how the inflation outlook can affect the value of a currency. If it is expected for inflation to rise, and in turn for the country’s Central Bank to raise interest rates in response (part of monetary policy), then the value of the currency may appreciate due to the positive interest rate outlook. Low inflation can cause the Central Bank to adopt a low interest rate environment, thereby reducing the yield potential for investors.

Economic Outlook

The current state of the country’s economy, as well as future expectation, is an influencing factor. This can be a combination of a number of key indicators, including the general level of employment, interest rate and inflation outlooks, as well as the level of manufacturing activity.

The level of output, otherwise known as Gross Domestic Product (GDP) is significant here. Developed countries such as the US, UK and Australia will generally aim for around 3% GDP growth each year, whereas developing countries tend to have a higher rate of GDP relative to previous years.

Positive and negative GDP outlooks have respective positive and negative effects on a currency.

Market Sentiment

Currencies are very sensitive to overall market sentiment. In times of market nervousness, investors react in a “flight to safety” whereby they take their money out of riskier or higher yield investment for the relative safety of US Government bonds or gold – both of which are US Dollar denominated. Hence in risk events or times of nervousness, you may see the US Dollar strengthen in reaction.

A positive market outlook tends to encourage investors to invest in higher yielding assets, such as currencies with a higher interest rate (New Zealand and Australia, and the emerging economy currencies as an example), or commodities. Some countries with a natural source of commodities, such as Australia and Canada as an example, tend to appreciate in times of positive outlooks.

What is leverage

Leverage is the ability to control a large trade size in the market with a smaller initial requirement. Levels of leverage available to traders can vary from company to company, and on the currency pair. Without leverage the trader would need to pledge or transact with the entire size of the contract.

If the trader places a margin or a proportion of the overall contract size, which is dependent on the level of leverage used and number of contracts traded, then the remaining proportion of the contract value is support in credit terms by the broker.

Forex Brokers allows clients to trade with leverage levels of 1:1 up to a maximum of 500:1.

A standard contract (known as a “lot”) is generally $100,000. A client using 100:1 leverage would be required to place a $1,000 margin to place a trade size of $100,000 (100,000 / 1000). A client using 500:1 leverage would only be required to place a $200 margin for the same trade size (100,000 / 500). This looks great but you need to be aware that the higher the leverage, the higher the risk to you.

Margin

Forex Brokers clients can chose the level of leverage as a way to manage risk.

The formula to calculate the amount of margin required to place a trade is:

Margin = (Contract size / Leverage)

In addition, as well as standard lots ($100,000), Forex Brokers offers mini-lots ($10,000) and micro-lots ($1,000).

A mini-lot is 10% of the standard contract size, whereas a micro-lot is 1%. Clients trading with smaller trade sizes will benefit from smaller margin requirements if the level of leverage remains the same.

As above, a client with 100:1 leverage trading s standard lot ($100,000) requires a $1,000 margin. However if the client trades a min-lot, which is $10,000, then the margin requirement is $100 (10,000 / 100); and only a $10 margin is required for a micro-lot.

Margin Call

A Margin Call occurs when a trader’s position moves against him and the client is required to send additional funds in order to maintain the position.

The margin level is calculated by dividing the current equity in an account by the current amount of margin in use (used margin).

If your equity moves below your used margin, you will receive a margin call.

When the client’s open position reaches the 100% margin level, the client is using their entire available margin. If the position moves against the client and falls below 100%, then the client will be in margin call.

Close Out

If the market continues to move against the client’s open position (i.e the client has is long EURUSD but EURUSD is moving lower) and the margin level drops to 50%, the trade will automatically be closed out.

This is to protect the client from incurring any further losses and is a risk management tool used by Forex Brokers to protect the client.

If the client has a number of positions that are moving towards the 50% close out level, the platform will automatically start to close out the trades starting with the largest position first.