ALL ABOUT FOREX TRADING

CandleStick Charts in Forex

2009-08-24T06:43:00.000-07:00

Candlestick charts have the same characteristics of bar charts as they provide open, high, low, and close prices within one bar, but the main difference is the ease of interpretation purpose. We can easily interpret bullish and bearish pattern from the color of their bodies.

Candlesticks are used since the 17th century in Japan and have been improved in the 18th century by a well known Japanese rice trader from Sakata, Homma Munehisa, and now are widely used in forex trading due to the ability to display multiple data points instead of one.

Steve Nison's 1991 book, Japanese Candlestick Charting Techniques, called back into traders' memory this particular form of charting, which had already been picked up by Charles Dow around 1900. Today it is one of the most commonly used chart displaying methods with traders.

The candlestick bar consists of the body and the shadows.

Schematics of candlesticks

Opening and closing price makes up the body of the candlestick. When the opening price is lower from the closing price the body is left blank or white. When the opening price is higher from the closing price the body is filled with color (this color depends on the trading platform).
Upper shadows shows the high of the price and lower shadow shows the low of the price for the time span the trader selected in his chart.
Certain candlestick patterns have prediction qualities. Look at the figure below of a candlestick chart in real market environment.

Bar Charts in Forex

2009-08-24T06:38:00.000-07:00

Bar charts provide more detailed information compared to Line chart. It shows not only closing price, but consists of opening price, highest price, and lowest price during a time period (timeframe).

A bar chart is one of the most popular charts. It contains plenty of information about the price movement of the currency pair. The structure of a price bar is shown in the figure below.

The high and low prices are united by the vertical bar. The opening price is marked by a little horizontal line in the left of the vertical bar and the closing price in the right of the bar. With bar charts you have better visualization of the market movements so that’s why bar chart is the first choice for most of the traders. Below you can see a real market examples of bar chart.

Line Charts in Forex

2009-08-24T06:28:00.000-07:00

Line chart shows a series of data points which is connected together in a line. Commonly used data are closing prices as they are the most important feed to see in forex. Line chart is a basic type of chart used in forex and other financial studies.

In line charts price is displayed as a point in the map. The consequent price points connect through a line called price line. This type of chart is characteristic of the trend of the price of the currency but provides little supplemental information. This type of charts is rarely used by modern traders (after reading this book you will understand better why you shouldn’t use this type of chart). Line charts have different time periods. The time period you select is the point to point price period. The bigger time period the wider in time the chart will be. The most popular line chart is the day line chart.

Below you can watch an example of line chart.

Forex Charts

2009-08-24T06:17:00.000-07:00

In order to become a successful Forex trader and gain profit you should be aware of reading the charts that is very important and essential factor for any trader.

Chart is a graphical description of forex price movements over a specific period of time. There are two important parameters in forex chart, the X axis represents time, and the y axis represents price.

The advantage of Forex Charts before is their easiness for reading and understanding. These charts show the relations between the slow movement of a certain country's economy with daily situation concerning company reports, analysts from Wall Street and the demands of shareholders.

Forex Charts usually consist of three types ( For details on each type of chart click on name of each type of chart below ) :

Line Chart s - It chronologically represents the fluctuations of currency pair exchange rates by connecting closing prices with the straight line.

Bar Chart s - It gives the information of the currency pair performance through vertical bars located in certain intraday time distance (say, 30 min). Each of the bar's 4 "hooks" represents opening, closing, high and low (OCHL) rates accordingly for the period of time.

Candlestick Chart s - It is close to bars, but presents OCHL values as candlesticks having wicks at both sides. The candlestick remains "solid" when the opening rate exceeds the closing one and it turns "hollow" when the opening rate is lower than the closing.

Technical Analysis

2009-08-24T05:39:00.000-07:00

This article provides insight into one of the two major methods of analysis used to forecast the behavior of the Forex market. Technical analysis and fundamental analysis differ greatly, but both can be useful forecast tools for the Forex trader. They have the same goal - to predict a price or movement. The technical analyst studies the effect while the fundamentalist studies the cause of market movement. Many successful traders combine a mixture of both approaches for superior results.

Technical analysis

Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action. Technical analysis is concerned with what has actually happened in the market, rather than what should happen and takes into account the price of instruments and the volume of trading, and creates charts from that data to use as the primary tool. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments simultaneously.

Technical analysis is built on three essential principles:

Market action discounts everything! This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. However, the pure technical analyst is only concerned with price movements, not with the reasons for any changes.
Prices move in trends. Technical analysis is used to identify patterns of market behavior that have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. Also, there are recognized patterns that repeat themselves on a consistent basis.
History repeats itself. Forex chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little over time.

Forex charts are based on market action involving price. There are five categories in Forex technical analysis theory:

Indicators (oscillators, e.g.: Relative Strength Index (RSI)
Number theory (Fibonacci numbers, Gann numbers)
Waves (Elliott wave theory)
Gaps (high-low, open-closing)
Trends (following moving average).

Source - en.easy-forex.com

Fundamental Analysis

2009-08-23T06:10:00.000-07:00

FOREX traders almost always rely on analysis to make plan their trading strategies. There are two basic types of FOREX analysis – technical and fundamental. This article will look at fundamental analysis and how it used in FOREX trading. Fundamental analysis refers to political and economic conditions that may affect currency prices. FOREX traders using fundamental analysis rely on news reports to gather information about unemployment rates, economic policies, inflation, and growth rates. Fundamental analysis is often used to get an overview of currency movements and to provide a broad picture of economic conditions affecting a specific currency. Most traders rely on technical analysis for plotting entry and exit points into the market and supplement their findings with fundamental analysis. Currency prices on the FOREX are affected by the forces of supply and demand, which in turn are affected by economic conditions.

The two most important economic factors affecting supply and demand are interest rates and the strength of the economy. The strength of the economy is affected by the Gross Domestic Product (GDP), foreign investment and trade balance. Indicators Various indicators are released by government and academic sources. They are reliable measures of economic health and are followed by all sectors of the investment market. Indicators are usually released on a monthly basis but some are released weekly. Two of the most important fundamental indicators are interest rates and international trade. Other indicators include the Consumer Price Index (CPI), Durable Goods Orders, Producer Price Index (PPI), Purchasing Manager's Index (PMI), and retail sales. Interest Rates - can have either a strengthening or weakening effect on a particular currency.

On the one hand, high interest rates attract foreign investment which will strengthen the local currency. On the other hand, stock market investors often react to interest rate increases by selling off their holdings in the belief that higher borrowing costs will adversely affect many companies. Stock investors may sell off their holdings causing a downturn in the stock market and the national economy. Determining which of these two effects will predominate depends on many complex factors, but there is usually a consensus amongst economic observers of how particular interest rate changes will affect the economy and the price of a currency. International Trade – Trade balance which shows a deficit (more imports than exports) is usually an unfavourable indicator. Deficit trade balances means that money is flowing out of the country to purchase foreign-made goods and this may have a devaluing effect on the currency. Usually, however, market expectations dictate whether a deficit trade balance is unfavourable or not.

If a county habitually operates with a deficit trade balance this has already been factored into the price of its currency. Trade deficits will only affect currency prices when they are more than market expectations. Other indicators include the CPI – a measurement of the cost of living, and the PPI – a measurement of the cost of producing goods. The GDP measures the value of all goods and services within a country, while the M2 Money Supply measures the total amount of all currency. There are 28 major indicators used in the United States. Indicators have strong effects on financial markets so FOREX traders should be aware of them when preparing strategies. Up-to-date information is available on many websites and many FOREX brokers supply this information as part of their trading service..

Author - John Sanderson

What "Mini Forex Trading" is All About

2009-08-20T00:14:00.000-07:00

There are times when trading demo money failed to create the same sentiments as trading your hard earned money. You may trade $200,000 without blinking an eye in a demo account but when real money is at stake, your mind is going to make you react in a different way than in paper trading.

Ready to ditch your demo account for live trading but not sure if you can tolerate the risks? Get a mini forex account! The amount of money needed to open a regular forex account is already small, but a mini account minimum amount is even smaller. With a minimum investment of $200, a mini forex account is perfect for newbie and those with little capital. A regular forex account will require 10 times more money. This may just be the bridge you need to learn about funds management and get a taste of live trading without getting your fingers burned.

For a small stake, you still get the enjoy the full range of facilities and resources used by full forex traders such as advanced software, free trading platform, charts and the likes. The worst scenario is that you lose all your $200, if no margin was used. This has a direct impact on investors' psychology and pressure when trading.

Needless to say, a mini forex account is a great channel to hone your skills and build your confidence. With a mini forex trading account, you can trade up to 5 mini lot with each lot equivalent to 1/10th the size of a normal forex account. By default, the standard contract size in forex platform trading is 100,000 units. According to Paolo Freguglia, "for mini lot you need to adjust it to 0.1 lot in order to place 10,000 units."

This is also to say that the profit and loss will be a fraction of that of a usual account. Once you are ready to earn full profit from your trade, (not to mention handle a full-blown loss), it is time to move on to a regular forex trading account. Even when a loss is suffered, a mini forex trading account holder get over his loss relatively easy and learn not to make the same trading mistake again.

Like any expert will tell you, controlling one's emotion when trading is the most important underlying aspect, surpassing those of analysis and skills. Once the mind is conditioned to resist financial influence, it can then decode the market and decide the course of action objectively. Therefore, a mini forex trading account is useful for investors to test the water without getting their feet wet.

Source - Forexrealm.com

Forex Hedging Strategy

2009-08-07T05:17:00.000-07:00

When a currency trader enters into a trade with the intent of protecting an existing or anticipated position from an unwanted move in the foreign currency exchange rates, they can be said to have entered into a forex hedge. By utilizing a forex hedge properly, a trader that is long a foreign currency pair, can protect themselves from downside risk; while the trader that is short a foreign currency pair, can protect against upside risk.

The primary methods of hedging currency trades for the retail forex trader is through:

* Spot contracts, and
* Foreign currency options.

Spot contracts are essentially the regular type of trade that is made by a retail forex trader. Because spot contracts have a very short-term delivery date (two days), they are not the most effective currency hedging vehicle. Regular spot contracts are usually the reason that a hedge is needed, rather than used as the hedge itself.

Foreign currency options, however are one of the most popular methods of currency hedging. As with options on other types of securities, the foreign currency option gives the purchaser the right, but not the obligation, to buy or sell the currency pair at a particular exchange rate at some time in the future. Regular options strategies can be employed, such as long straddles, long strangles and bull or bear spreads, to limit the loss potential of a given trade.

Forex hedging strategy

A forex hedging strategy is developed in four parts, including an analysis of the forex trader’s risk exposure, risk tolerance and preference of strategy. These components make up the forex hedge:

1. Analyze risk: The trader must identify what types of risk (s)he is taking in the current or proposed position. From there, the trader must identify what the implications could be of taking on this risk un-hedged, and determine whether the risk is high or low in the current forex currency market.
2. Determine risk tolerance: In this step, the trader uses their own risk tolerance levels, to determine how much of the position’s risk needs to be hedged. No trade will ever have zero risk; it is up to the trader to determine the level of risk they are willing to take, and how much they are willing to pay to remove the excess risks.
3. Determine forex hedging strategy: If using foreign currency options to hedge the risk of the currency trade, the trader must determine which strategy is the most cost effective.
4. Implement and monitor the strategy: By making sure that the strategy works the way it should, risk will stay minimized.

The forex currency trading market is a risky one, and hedging is just one way that a trader can help to minimize the amount of risk they take on. So much of being a trader is money and risk management, that having another tool like hedging in the arsenal is incredibly useful.

Not all retail forex brokers allow for hedging within their platforms. Be sure to research fully the broker you use before beginning to trade.

Source - Forextutorial.com

How to choose best Forex Software

2009-07-28T05:07:00.000-07:00

When it comes to forex trading the forex software you choose is essential. There are so many forex trading companies all competing for your business that choosing the right forex software can be quite a difficult task. Most of the forex software products available offers live online forex trading platforms but what other components are vital when it comes to your forex software.

Key Elements For Your Forex Software

Before purchasing any forex software there are a few essential items that should be included. The most important is security and your online forex trading software should include a 128 bit SSL encryption which will prevent hackers from accessing any of your personal details and information such as your account balance, transaction history, etc.

Providing the best security for your forex trading will include a company that provides 24 hour technical server support for your forex software, 24 hour maintenance should anything go wrong, daily backups of all information, and a security system that has been designed to prevent any unauthorized access. Along with these security protocols there are also some forex trading companies that use smart cards and fingerprint scanners to ensure that only their employees can have access to their servers.

Another important factor when it comes to choosing your forex software is to check what the company's downtime is like. When it comes to trading forex and particularly your online forex trading you need to ensure that the forex software you choose is reliable and available 24 hours a day. The forex software you choose for your forex trading should also have technical support available at all times should your session be cut short.

Ensuring that all the above features are listed in the forex software you choose will help to ensure your forex trading success.Anyway, a forex software is a must have if you want to earn money.

Author - Oliver Turner

Essential Elements of a Successful Forex Trader

2009-07-22T22:03:00.000-07:00

Courage Under Stressful Conditions When the Outcome is Uncertain

All the foreign exchange trading knowledge in the world is not going to help, unless you have the nerve to buy and sell currencies and put your money at risk. As with the lottery “You gotta be in it to win it”. Trust me when I say that the simple task of hitting the buy or sell key is extremely difficult to do when your own real money is put at risk.

You will feel anxiety, even fear. Here lies the moment of truth. Do you have the courage to be afraid and act anyway? When a fireman runs into a burning building I assume he is afraid but he does it anyway and achieves the desired result. Unless you can overcome or accept your fear and do it anyway, you will not be a successful trader.

However, once you learn to control your fear, it gets easier and easier and in time there is no fear. The opposite reaction can become an issue – you’re overconfident and not focused enough on the risk you're taking.

Both the inability to initiate a trade, or close a losing trade can create serious psychological issues for a trader going forward. By calling attention to these potential stumbling blocks beforehand, you can properly prepare prior to your first real trade and develop good trading habits from day one.

Start by analyzing yourself. Are you the type of person that can control their emotions and flawlessly execute trades, oftentimes under extremely stressful conditions? Are you the type of person who’s overconfident and prone to take more risk than they should? Before your first real trade you need to look inside yourself and get the answers. We can correct any deficiencies before they result in paralysis (not pulling the trigger) or a huge loss (overconfidence). A huge loss can prematurely end your trading career, or prolong your success until you can raise additional capital.

The difficulty doesn’t end with “pulling the trigger”. In fact what comes next is equally or perhaps more difficult. Once you are in the trade the next hurdle is staying in the trade. When trading foreign exchange you exit the trade as soon as possible after entry when it is not working. Most people who have been successful in non-trading ventures find this concept difficult to implement.

For example, real estate tycoons make their fortune riding out the bad times and selling during the boom periods. The problem with trying to adapt a 'hold on until it comes back' strategy in foreign exchange is that most of the time the currencies are in long-term persistent, directional trends and your equity will be wiped out before the currency comes back.

The other side of the coin is staying in a trade that is working. The most common pitfall is closing out a winning position without a valid reason. Once again, fear is the culprit. Your subconscious demons will be scaring you non-stop with questions like “what if news comes out and you wind up with a loss”. The reality is if news comes out in a currency that is going up, the news has a higher probability of being positive than negative (more on why that is so in a later article).

So your fear is just a baseless annoyance. Don’t try and fight the fear. Accept it. Have a laugh about it and then move on to the task at hand, which is determining an exit strategy based on actual price movement. As Garth says in Waynesworld “Live in the now man”. Worrying about what could be is irrational. Studying your chart and determining an objective exit point is reality based and rational.

Another common pitfall is closing a winning position because you are bored with it; its not moving. In Football, after a star running back breaks free for a 50-yard gain, he comes out of the game temporarily for a breather. When he reenters the game he is a serious threat to gain more yards – this is indisputable. So when your position takes a breather after a winning move, the next likely event is further gains – so why close it?

If you can be courageous under fire and strategically patient, foreign exchange trading may be for you. If you’re a natural gunslinger and reckless you will need to tone your act down a notch or two and we can help you make the necessary adjustments. If putting your money at risk makes you a nervous wreck its because you lack the knowledge base to be confident in your decision making.

Patience to Gain Knowledge through Study and Focus

Many new traders believe all you need to profitably trade foreign currencies are charts, technical indicators and a small bankroll. Most of them blow up (lose all their money) within a few weeks or months; some are initially successful and it takes as long as a year before they blow up. A tiny minority with good money management skills, patience, and a market niche go on to be successful traders. Armed with charts, technical indicators, and a small bankroll, the chance of succeeding is probably 500 to 1.

To increase your chances of success to near certainty requires knowledge; acquiring knowledge takes hard work, study, dedication and focus. Compile your knowledge base without taking any shortcuts, thereby assuring a solid foundation to build upon.

Author - Jimmy Young .

Forex Regulatory Agencies

2009-07-19T11:44:00.000-07:00

Below is a list of all the Forex regulatory agencies . These guardians work hard to protect us traders against the bad boys of this Forex market.

Here they are listed based on their country of origin:

Australia:

Australian Securities and Investment Commission

Canada:

Denmark:

Danish FSA

Germany:

Bundeszentrale fúr Finanzdienstleistungsaufsicht

Hong Kong SAR:

Securities and Futures Commission

Japan:

Financial Services Agency

Spain:

Comisión Nacional del Mercado de Valores

Sweden:

Swedish Financial Supervisory Authority (Finansinspektionen)

Switzerland:

United Kingdom:

Financial Services Authority

United States:

How to choose a Forex Broker ?

2009-07-19T11:14:00.000-07:00

Once you have made the positive decision to start currency trading, you need to choose the right forex broker. The right choice will greatly influence the success of the whole enterprise.
So what exactly is a broker? In simplest terms, a broker is an individual or a company that buys and sells orders according to the trader's decisions. Brokers earn money by charging a commission or a fee for their services.
Forex trading is hot right now. It is being called the Recession Proof Business of 21st Century. The market is overcrowded with companies and banks offering online forex brokerage services. Internet has opened the forex markets to individual retail traders and small investors. It will not be easy for you to make the right choice of a forex broker. You need a certain set of criteria.Prepare answer to following questions before coming to a final decision .

Is the Forex broker regulated?

When selecting a prospective Forex broker, find out with which regulatory agencies it is registered with.
Among the registered firms, look for those with clean regulatory records and solid financials. Stay away from non-regulated firms !

How efficient is the customer service provided by the broker ?

Forex is a 24-hour market, so 24-hour support is a must! Can you contact the firm by phone, email, chat, etc.? Do the reps seem knowledgeable? The quality of support can vary drastically from broker to broker, so be sure to check them out before opening an account. You can check by personally contacting the help desk of various brokers and jotting down their time and type of response .

What kind of automated trading system they provide ?

A professional and easy to use trading platform is a must. You would not want to be struggling with the features of the trading platform while trying to make a trade. Any reputable forex broker will offer the ability to trade on a demo account. The demo software operates the same way as the live trading platform. This will give you a chance to fully test out the trading platform without the pressure of using real money.

What are available currency pairs ?

You should confirm that the prospective broker offers, at minimum, the seven major currencies (AUD, CAD, CHF, EUR, GBP, JPY, and USD).

What is the amount of the interday and overnight margin required by the forex broker? What is the corresponding leverage offered ?

Many online forex brokers offer margin between 1 to 5%. They provide leverage ranging from 20:1 to 200:1. Margin is the amount the broker sets aside as guarantee against your trading losses. Higher margin requirement means lower investment efficiency for you.

However, beware of lower margin. It means that most of the time the forex broker will be against you as a trader and will do everything possible to prevent you from winning. You will face many trading problems with such a broker. It will become difficult for you to work under such conditions.

What are their policies ?

Be sure to scrutinize a prospective broker’s “fine print” section to be fully aware of all the nuances that a specific broker may impose on a new trader.

Finding the right broker is a critical part of the process. It’s not easy and requires some real work on your part. Don’t pick the first one that looks good to you. Keep looking and trying different demo accounts.

Glossary - Fundamentals of Forex trading

2009-07-16T12:39:00.000-07:00

This post contains the list of all the basic terms used in Forex trading . Wherever necessary i have provided the brief description . Links to detailed explanations are also given . The List is not alphabetical (sorry for the inconvenience ) but you can always search for a specific word with FIND option of web browsers . For example if you are using firefox pressing F3 from your keyboard will bring in a search box where you can type and search or else EDIT tab at top left of the most of the browsers have a FIND option .

Foreign Exchange

The simultaneous transaction of one currency for another.

Foreign Exchange Market

Spot Market

The market for buying and selling currencies at the current market rate.

Rollover

Exchange Rate

The value of one currency expressed in terms of another. For example, if EUR/USD is 1.3200, 1 Euro is worth US$1.3200.

Currency Pair

The two currencies that make up an exchange rate. When one is bought, the other is sold, and vice versa.

Base Currency

The first currency in the pair. Also the currency your account is denominated in.

Counter Currency

The second currency in the pair. Also known as the terms currency.

ISO Currency Codes

USD = US Dollar
EUR = Euro
JPY = Japanese Yen
GBP = British Pound
CHF = Swiss Franc
CAD = Canadian Dollar
AUD = Australian Dollar
NZD = New Zealand Dollar

For a full list, see ISO Currency Codes

Currency Pair Terminology

EUR/USD = "Euro"
USD/JPY = "Dollar Yen"
GBP/USD = "Cable" or "Sterling"
USD/CHF = "Swissy"
USD/CAD = "Dollar Canada" (CAD referred to as the "Loonie")
AUD/USD = "Aussie Dollar"
NZD/USD = "Kiwi"

FCM

Futures Commission Merchant. An individual or organisation licensed by the U.S. Commodities Futures Trading Commission (CFTC) to deal in futures products and accept money from clients to trade them.

Dealing Desk

A dealing desk provides pricing, liquidity and execution of trades.

Market Maker

NDD ( No Dealing Desk )

Forex ECN Broker

Sell Quote / Bid Price

The sell quote is displayed on the left and is the price at which you can sell the base currency. It is also referred to as the market maker's bid price. For example, if the EUR/USD quotes 1.3200/03, you can sell 1 Euro at the bid price of US$1.3200.

Buy Quote / Offer Price

The buy quote is displayed on the right and is the price at which you can buy the base currency. It is also referred to as the market maker's ask or offer price. For example, if the EUR/USD quotes 1.3200/03, you can buy 1 Euro at the offer price of US$1.3203.

Spread

The difference between the sell quote and the buy quote or the bid and offer price. For example, if EUR/USD quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread.

Pip Value

Standard Account

Trading with standard lot sizes, generally 100,000 units of the base currency. e.g. The pip value is $10 for EUR/USD.

Mini Account

Trading with mini lot sizes, generally 10,000 units of the base currency. e.g. The pip value is $1 for EUR/USD.

Micro Account

Trading with micro lot sizes, generally 1,000 units of the base currency. e.g. The pip value is $0.10 for EUR/USD.

Margin

Leverage

Manual Execution

An order which is executed by dealer intervention.

Automatic Execution

The order is executed automatically without dealer intervention or involvement.

Slippage

The difference between the order price and the executed price, measured in pips. Slippage often occurs in fast moving and volatile markets, or where there is manual execution of trades.

Drawdown

The decline in account balance from peak to valley, until the account surpasses the previous high, usually measured in percentage terms.

Support

Support is a technical price level where buyers outweigh sellers, causing prices to bounce off a temporary price floor.

Resistance

Resistance is a technical price level where sellers outweigh buyers, causing prices to bounce off a temporary price ceiling .

Common Order Types

Common Trade Types

Common Trading Styles

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Common Trading Styles

2009-07-16T12:34:00.000-07:00

Technical Analysis

A style of trading that involves analysing price charts for technical patterns of behaviour.

Fundamental Analysis

A style of trading that involves analysing the macroeconomic factors of an economy underpinning the value of a currency and placing trades that support the trader's long or short-term outlook.

Trend Trading

A style of trading that attempts to profit from riding short, medium or long term trends in price.

Range Trading

A style of trading that attempts to profit from buying and selling currencies between a lower level of support and an upper level of resistance. The upper level of resistance and the lower level of support defines the range. The range forms a price channel where the price can be seen to oscillate between the two levels of support and resistance.

News Trading

A style of trading whereby a trader attempts to profit from fundamental news announcements on a country's economy that may affect the value of a currency, usually seeking short term profit immediately after the announcement is released.

Scalping

A style of trading that involves frequent trading seeking small gains over a very short period of time. Trades can last from seconds to minutes.

Day Trading

A style of trading that involves multiple trades on an intra-day basis. Trades can last from minutes to hours.

Swing Trading

A style of trading that involves seeking to profit from short to medium term swings in trend. Trades can last from hours to days.

Carry Trading

A style of trading whereby the trader attempts to profit from holding a currency with a higher rate of interest and selling a currency with a lower rate of interest, profiting from the daily interest rate differential of the position.

Position Trading

A style of trading that involves taking a longer term position that reflects a longer term outlook. Trades can last from weeks to months.

Discretionary Trading

A style of trading that uses human judgement and decision making in every trade.

Automated Trading

A style of trading that involves neither human decision making nor involvement, but uses a pre-programmed strategy based on technical or fundamental analysis to automatically execute trades via an automated software programme.

Common Trade Types

2009-07-16T12:32:00.001-07:00

Long Position

A position in which the trader attempts to profit from an increase in price. i.e. Buy low, sell high.

Short Position

A position in which the trader attempts to profit from a decrease in price. i.e. Sell high, buy low

Common Order Types

2009-07-16T12:27:00.000-07:00

Market Order

An order to buy or sell at the current market price.

Limit Order

An order to buy or sell at a pre-specified price level.

Stop-Loss Order

An order to restrict losses at a pre-specified price level.

Limit Entry Order

An order to buy below the market or sell above the market at a pre-specified level, believing that the price will reverse direction from that point.

Stop-Entry Order

An order to buy above the market or sell below the market at a pre-specified level, believing that the price will continue in the same direction.

OCO Order

One Cancels Other. An order whereby if one is executed, the other is cancelled.

GTC Order

Good Till Cancelled. An order stays in the market until it is either filled or cancelled.

Leverage

2009-07-16T12:25:00.001-07:00

Leverage is the ability to gear your account into a position greater than your total account margin. For instance, if a trader has $1,000 of margin in his account and he opens a $100,000 position, he leverages his account by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of margin in his account, his leverage is 200 times, or 200:1. Increasing your leverage magnifies both gains and losses.

To calculate the leverage used, divide the total value of your open positions by the total margin balance in your account. For example, if you have $10,000 of margin in your account and you open one standard lot of USD/JPY (100,000 units of the base currency) for $100,000, your leverage ratio is 10:1 ($100,000 / $10,000). If you open one standard lot of EUR/USD for $150,000 (100,000 x EURUSD 1.5000) your leverage ratio is 15:1 ($150,000 / $10,000).

Margin

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The deposit required to open or maintain a position. Margin can be either "free" or "used". Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1. If a trader's account falls below the minimum amount required to maintain an open position, he will receive a "margin call" requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade.

How to Calculate Pip Values

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First of all you must understand currency quoting conventions and the differrence between the base currency and the terms currency.

In the spot forex market (but not localized futures markets) the quoting
conventions are:

Base / terms:
EUR/USD
GBP/USD
USD/CHF
USD/JPY
AUD/USD

The following rules:

EUR always base
GBP always base except EURGBP
Old colonial like AUD / NZD Always base except EUR / GBP
USD always base except UER / GBP / Old colonials
CHFJPY

Pip values:

To express the value in the terms currency multiply 1 pip with the lot value:

EURUSD pip = 0.0001 X 100,000 = $10.00
EURUSD pip = 0.0001 X 10,000 = $1.00

USDCHF pip = 0.0001 X 100,000 = SFr 10.00
USDCHF pip = 0.0001 X 10,000 = SFr 1.00

To convert to the base currency divide by exchange rate:

Say EURUSD exchange rate = 1.4750 = $10.00 / 1.4750 = EUR 6.78

Say USDCHF exchange rate = 1.1015 = $10.00 / 1.1015 = $9.08

JPY works same principle 2nd decimal.

Pip Value

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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 .

More details on how to calculate pip values are at DETAILS .

Forex ECN (Electronic Communications Network) Broker

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ECN is an acronym for Electronic Communications Network. A Forex ECN broker does not have a dealing desk but instead provides a marketplace where multiple market makers, banks and traders can enter in competing bids and offers into the platform and have their trades filled by multiple liquidity providers in an anonymous trading environment. The trades are done in the name of your ECN broker, thereby providing you with complete anonymity. A trader might have their buy order filled by liquidity provider "A", and close the same order against liquidity provider "B", or have their trade matched internally by the bid or offer of another trader. The best bid and offer is displayed to the trader along with the market depth which is the combined volume available at each price. A greater number of marketplace participants providing pricing to the ECN broker leads to tighter spreads. ECN's typically charge a small fee for matching trades between their clients and liquidity providers.

NDD (No Dealing Desk)

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An acronym for 'No Dealing Desk'. A no-dealing desk broker does not have a dealing desk but instead uses external liquidity providers to provide pricing and liquidity for its clients. The liquidity providers send in competing bids and offers into the platform, resulting in the best bid and offer being displayed to the client. Some no-dealing desk brokers may display the market depth which is the amount of liquidity available at each price. A greater number of liquidity providers providing pricing to the no-dealing desk broker leads to tighter spreads. A no-dealing desk broker may increase the spread to earn its commission.

Market Maker

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A market maker provides pricing and liquidity for a particular currency pair and stands ready to buy or sell that currency at the quoted price. A market maker takes the opposite side of your trade and has the option of either holding that position or partially or fully offsetting it with other market participants, managing their aggregate exposure to their clients. If a market maker chooses to keep the trader's position without offsetting it in the market, the trader's profit is the market maker's loss and vice versa, leading to a possible conflict of interest between the trader and his market maker. A market maker earns their commission from the spread between the bid and offer price.

Rollover in FX market

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In the forex(FX) market, rollover is the process of extending the settlement date of an open position. In most currency trades, a trader is required to take delivery of the currency two days after the transaction date. However, by rolling over the position - simultaneously closing the existing position at the daily close rate and re-entering at the new opening rate the next trading day - the trader artificially extends the settlement period by one day.

Often referred to as tomorrow next, rollover is useful in FX because many traders have no intention of taking delivery of the currency they buy - rather, they want to profit from changes in the exchange rates. Since every forex trade is transacted by borrowing one country's currency to buy another, receiving and paying interest is a regular occurrence. At the close of every trading day, a trader who took a long position in a high yielding currency relative to the currency that he or she borrowed will receive an amount of interest in his or her account. Conversely, a trader will need to pay interest if the currency he or she borrowed has a higher interest rate relative to the currency that he or she purchased.

What is Margin Trading System ?

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I don't have enough money to buy 10,000 euros. Can I still trade?

You can with margin trading! Margin trading is simply the term used for trading with borrowed capital. This is how you're able to open $10,000 or $100,000 positions with as little as $50 or $1,000. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital.

A typical transaction amounts to $10 million in inter-bank trade. However, it is quite clear that such transaction values are not affordable for a private investor – well, at least to the overwhelming majority of them.

Involvement of small and medium investors in the Forex market was facilitated by intermediacy of dealing or brokerage companies. Medium and small investors have access to the global forex market in many nations, using the sums of money starting from $2,000 in their transactions. A dealing company provides its customers with a credit line – a so-called dealing leverage, or a credit leverage, that is several times as big as the deposit. Brokers providing margin trading services require that a pledge deposit should be contributed, and provide a customer with an opportunity of entering into forex sales and purchase transactions for amounts that are 50, 100 and sometimes even 200 times as large as the deposit made. The risk of losses is borne by the customer; the deposit serves as security hedging a broker. The system of operations through a dealing (brokerage) house, with a credit leverage, was called margin trading.

To put it simply, the essence of margin trading can be reduced to the following: by placing pledged capital, an investor becomes able to manage target loans provided against this pledge and to guarantee indemnification against any potential losses on open forex positions with the deposit.

As mentioned above, unlike with forex transactions with actual delivery or actual currency exchange, FOREX participants, especially those with little funds, make use of trading with an insurance deposit - margin trade, or leverage trade. In case of marginal trade, each transaction must consist of the two stages – purchase/sales of foreign exchange at one price, and then its compulsory sales/purchase at another (or at the same) price. The first action is called the opening of a position; the second is the closing of a position. Opening of a position is not accompanied with actual delivery of foreign exchange, and a participant that opened the position contributes an insurance deposit that serves as guarantee of indemnification against any possible losses. Upon closing of a position, the insurance deposit is returned, and profit or losses are calculated.

Any margin trading transaction must comprise two parts: opening of a position and closing of a position. For instance, when forecasting the euro goes up (looks up) vs the dollar, we want to buy a cheaper euro with dollars now and to sell it back when it rises in price. In this case, the transaction will look as follows: opening of a position – euro purchase; closing of a position – its sale. All the time until the position has been closed we have an “open euro position.” Just the same, when we believe that the euro will cheapen (look down) vs the dollar, our transaction will consist of the following steps: opening a position – sales of a more expensive euro; closing a position – purchase of a cheapened euro. Therefore, we are able to generate profit whether the exchange rate goes up or down.

What is Demo trading ?

2009-07-16T10:57:00.000-07:00

You can open a demo account for free with most Forex brokers. This account has the full capabilities of a "real" account. Why is it free? It's because the broker wants you to learn the ins and outs of their trading platform, and have a good time trading without risk, so you'll fall in love with them and deposit real money. The demo account allows you to learn about the Forex markets and test your trading skills with ZERO risk.

One should always do demo trading for atleat 6 months before trading for real because learning by losing money is much worse than learning for free with virtual money .

Building up your Forex Trading Strategy

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Internet is packed with numerous paid strategy offers which promise to “reveal forex secrets” for hundred bucks. Designing a strategy to fit your individual trading style is complicated and time-consuming process. The truth is that there are no secrets about forex trading. What really matters are experience, dedication and, when it comes to forex strategies, an old fashioned trial and error testing. The question is, how is testing a strategy done? Are there any special tricks you need to know?

While figuring out a forex strategy, it is important to decide what kind of trader you are. Even if you take a strategy from another trader, it is your up most responsibility to analyze it and fit it according to your needs. Every forex trader is different when it comes to executing trades. Two traders using the same system may have different; therefore it is crucial to take it slow. The more you understand your trading system and forex market, the better your chance for consistent profits.

For most traders backtesting a strategy is a painful and long process. Becoming comfortable with your strategy requires a lot of time testing it via free demo account. It can take up days, weeks or even longer. Despite the massive amount of time needed to perfect the strategy, it is the only way to make things work.

So, what are the steps for testing a strategy?

First of all, history tends to repeat itself. Therefore, historical data is a necessity for backtesting. You can purchase historical data from data providers for a reasonable price. Yes, you have to pay for it, because the good quality data is just too vital for professional forex trading. Once you have an access to historical data, you can backtest it, one bar at a time and look for entries/exits to see the results.

The key to backtesting, just as to the whole forex trading concept, is patience. Make sure to DEMO TRADE your strategy in progress for at least 100 trades. You never know when a nasty surprise can hit you, but the more you test, the more chances that there will be less pitfalls on your way.

Once you go live with your forex strategy, increase the account funds used in trading gradually. You can trade live with, let’s say, 0.1% of the account in the beginning. Then increase by an extra 0.1% after every successful trading week. Speaking of presents, try not to risk over 1% - it is just not worth it as this point.

While backtesting the system, keep a journal of the trading data stats from the forex market and try to develop mental and physical image of how the market behaves. This way you will be able to pull your strategy to the right direction to fit the specific conditions of the market, without ditching the whole fundamental set up of the strategy.

Traders often argue about the need of backtesting, what really works and what does not. There are traders who claim to win with mechanical system, saying that backtesting is a waste of time. The strong believers in mechanical strategy trust the system to fit the past data and consider those who backtest – inexperienced believers in repetitive pattern in market behavior.

On the other hand, there are traders who are convinced that there is no way to profit in forex without analyzing the full picture fundamentally. There are a lot of different ways to make money in forex and the beauty of this game is that nobody is wrong, and nobody is right. The holy grail of the whole concept of forex is to find the way that fits the trader in you. Don’t listen to what others say – find what is right for your trading personality.

I personally found out that backtesting is the right way for my personality. Development of trading skills from the basics of lower lows, higher highs, s/r, entries, exits, trade management, spotting different market conditions, money management, greed control etc. makes me a better trader – a forex trader well prepared for live forex market .

How to read FX quotes ?

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Reading forex quotes correctly is essential to forex trading but it can be quite confusing for the new comer. Actually, they are quite simple to read and understand. Here is a guideline to reading forex quotes correctly.

Let us look at an example of how a forex rate quote looks like:

EUR/USD = 1.2526

The above looks simple enough, right? This is an example of a foreign exchange rate between the Euro and the US Dollar.

Do not forget that in all forex quotes, there are always two currencies quoted. The forex quote is displayed such because when you make a trade in forex trading, you are always buying one currency and selling another at the same time.

In all forex quotes, the first currency listed is known as the base currency while the second is known as the quote currency. Forex quotes are meant to show us the price relationship between the two currencies.

The foreign exchange rate gives us an indication of how many units of the quote currency we have to pay to get one unit of the base currency.

The above example shows us that the base currency is the Euro and the quote currency is the US dollar. The forex quote tells us how each currency is trading relative to the other. In order to purchase one unit of Euros you will have to sell 1.2526 units of US Dollars.

It should be easy to understand so far. Now let’s add an additional thing to our example and that is the bid ask spread.

Forex brokers are paid not on the trades placed in the forex market but on the bid/ask spread instead.

We shall add the bid/ask spread to our example above:

EUR/USD = 1.2526/1.2528

This can be simplified to:

EUR/USD = 1.2526/8

Forex brokers make their commissions by selling currencies at a slightly higher rate than they buy them. This is perfectly legal and all forex brokers do it, though the amount of the spread may vary.

As a forex trader, you will be buying at the bid price, which is the first price quoted. You will then sell at the ask price which is the second price listed. This difference between the two prices is called the spread which is retained by the forex broker as their profit on the trade.

In our above example, you will buy at 1.2526 and sell at 1.2528. The 0.0002 (2 pips) will go to the forex broker as a payment for executing the trade for you.

The bid/ask spread is an easy to understand and clear-cut way for calculating trading fees and expenses.

With a good understanding of how to read forex quotes correctly, it can go a long way in helping you achieve success in forex trading .

The original author of this article is Duncan Lee , a fulltime forex trader with over 4 years of experience .

How currency trading takes place ?

2009-07-16T09:06:00.000-07:00

Currencies are traded against one another through a broker or dealer . Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD = 1.2045 is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar. For detailed information about quotes read at FX QUOTES

A simple example will show you the basic structure of investing

Trader's Action	EUR	USD
You purchase 10,000 euros at the EUR/USD exchange rate of 1.30	+10,000	-13,000
Two weeks later, you exchange your 10,000 euros back into US dollars at the exchange rate of 1.45.	-10,000	+14,500
You earn a profit of $1500.	0	+1500

Here the investor earns by exhanging EUROS for US dollars at exchange rate 1.30 and then doing just the opposite at some later time when exchange rate of USD/EUR is 1.45 .

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 the information contained within this site.

This blog is made with an intention to make beginners understand forex in an easy way . I would appreciate your feedback .

Advantages of FX trading ( FX vs Stock market )

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You are probably wondering why should you consider investing your time and energy in FOREX?
Top 10 reasons why so many people go for it , these also show how forex market is different from stock market .

1. No hidden fees or commissions

Aren't you exhausted of all these "pay upfront" deals? Almost everywhere you have to pay to join, pay to be trained, pay to make a transaction. There is no commission fee, exchange fee or trading fee. What about the broker? Your broker makes their money by taking the difference in price between the ask price and bid price for the currency being traded. In short, you won't be asked a penny for any FOREX services.

2. No middlemen

Forex doesn't have and doesn't need middlemen, unlike for example equity exchanges. This gives you opportunity to access market maker directly. In simple words, you buy or sell directly from the entity that has put a price on a certain currency pair and, therefore, gain a quick access to trades.

3. A 24-hour market

You won't have to set an alarm to wake up early in the morning or drink 10 cups of black coffee to stay awake at night. Forex market is as flexible as it gets and welcomes traders from all over the world at any time of the day! You choose the trading hours – morning, noon or night!

4. Much less complicated then stocks

There are tones of stocks available for trading and it is difficult to keep up with the updates, read up the news and perform the analysis before each new trade. Unlike stocks, Forex market is much less demanding. You have access to many different currencies, but generally FX focuses on the four major currency pairs. That means less time wasting on research and much faster entrance to the market itself.

5. Leverage

Not long ago only the owners of million dollars account could participate in currency exchange. Today due to expended international growth FOREX became available to anyone from the comfort of your own home. Every individual including you have the same leverage guarantees that were available only to international banks back then. Leverage has been explained in details at LEVERAGE

6. High Liquidity

The daily turnover in Forex Market reaches 2 trillion dollars. Let me picture this for you: 2,000,000,000,000!! Forex is an enormous market and it never stays still. Almost every country in the world has institutional and individual traders who are active and have a personal interest in this largest of commodities. That's where the liquidity comes from. Buying and selling is done by a simple click of a mouse.

7. Practice makes perfect

Almost all online Forex brokers offer demo account, easily to download and install, to practice your skills. You won't have to deposit anything. The demo account works exactly like the real account with all capabilities and information. For example, with your free demo account you have an access to breaking forex news and charting services, buy and sell capabilities and realistic "play" money account with active profit and loss. This is a perfect way to master your trading skills and tactics with virtual money before becoming a real thing and opening a live trading account.

8. Free software

Forex software offered by the brokers is specifically designed for the average home computer. The software provides the trader with real-time charting, lots of indicators, live price feed and ability to sell and buy currency pairs immediately online. There is also an option to upgrade the software program for an additional cost to get an access to advanced features, but it is more then unnecessary for a beginner. Start small, think big!

9. Small deposits are allowed

Don't blame yourself for not marrying a milliner's daughter or a Saudi Arabian prince yet. You don't need tons of money to start as a currency trader. Unlike trading stocks, online forex brokers have "mini" and "micro" account options with a minimum account deposit of 250$ and lower, which makes Forex accessible to almost anyone! You might wonder what can possibly come out of $250. With proper training and patience within several months a minimal investment can turn into a $25,000 account.

10. Limit your risk with Forex

FOREX platforms are designed to automatically assign a margin call if the margin amount required by your account exceeds the actual capital available in your account. In simple words, the most you can possibly lose is the money you have got in your account and no penny more. You cannot get into minus and trade amount not available in your account.

Over all, Foreign Currency Exchange markets have become a profitable hobby and satisfying lifestyle for many individual investors. Forex is fun, user-friendly and lucrative market available to anyone of us.

Misconceptions about Forex trading

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Forex trading is often misunderstood, threaded as a joke career or quickly dismissed as gambling; therefore many traders don’t even bother telling others that they trade. Besides ignorance, there is of course the jealously towards achievement, therefore in most cases it is better not to admit your forex trading success to others, unless you want to be proclaimed as a lazy idiot that cannot hold a normal job.

Some traders explain forex with combination of unobjectionable careers such as computers and accountancy. Forex trading is a proper profession – it is demands time, instincts, business mind, management, planning and strategy building. However, since online forex trading is relatively new concept of making a living, the major portion of society is still quite unaware of forex as a career.

Pretending to have another profession in this case has little to do with being ashamed of it. Some people compare trading to brain surgery in terms of skill and focus – definitely not a career to be ashamed of! When you make a living with forex trading and the market brings you constant profits, the true self-confidence should be enough to dodge disapproving glances of the judgmental by passers.

The part played by a partner is extremely important, and their cooperation is crucial. I guess, I am very lucky to have a very understanding partner who supports and appreciates the difficulty of forex trading. After all, there are sacrifices made from both sides of the relationship. It is important for trader’s success to be around people who don’t poison the air with envious and sarcastic remark regarding what you consider an essential part of who you are.

Unless they are forex traders, nobody truly understands what you are going through. Even people who are dealing with stock market one way or another believe that the market is random. In my experience, it is better off not discussing forex with the outside world! Instead, mention something about taxes and accounting – boring professions are respected but rarely talked about!

If you choose, however, to uncover your true identity as a forex trader, at least make a rule to others that you will not give any market predictions or tips. Also, once you are successful, it is important not to show off. It makes people extremely envious. Keep it as simple as possible – others don’t need to know about the millions in your bank account!

Sometimes when people hear that you are a forex trader they might accuse you of being lazy, unsociable and arrogant. Responses such as “you should be doing something more positive”, or “don’t you feel the need to contribute to the society”, "How much did you earn a month", “That sounds so boring, I could never do that” or “aren’t you lonely? Don’t you need people around you?” are not uncommon. I personally put all the rude responses down to jealousy, ignorance and intimidation by the technical definition of forex trading. Sorry, but I don’t do “normal”! I am different and proud of it (my earnings speak for themselves).

Others might have an impression that you are a gambler – not too uncommon, but it does invoke unpleasant reactions from those who think you should share the secret of easy-money making! The truth is that 95% of traders (and I am talking about the unsuccessful forex luck-seekers, who do not deserve the title “trader” in the first place) are gambling! Therefore it is not unreasonable to expect from others to think that you belong to the unfortunate group! I have to admit that quite a number of people have dismissed me as a gambler, but I don’t really care. I pity the slaves of the employment system. Better to be a gambler than a slave. I hope you agree .

What is a Forex Market ?

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The Foreign Exchange market, also referred to as the "FOREX" or "Forex" or "Retail forex" or "FX" or "Spot FX" or just "Spot" is the largest financial market in the world . In this market one currency is traded for another .

The purpose of the foreign exchange market is to help international trade and investment. A foreign exchange market helps businesses convert one currency to another. For example, it permits a U.S. business to import European goods and pay Euros, even though the business's income is in U.S. dollars.

However, apart from people or organizations seeking exchange of foreign currency a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.

Privacy Policy

2009-05-17T05:19:00.000-07:00

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