Forex trading basics

Forex Market Basics

The Foreign Exchange market (also referred to as the Forex, FX market, "Cash" Forex or Spot Forex market ) is the largest financial market in the world, with more than $1.5 trillion changing hands every day — 30 times larger than the combined volume of all U.S. equity markets. Another major feature of the Forex market is that it operates 24 hours a day, corresponding to the opening and closing of financial centers in countries all across the world, starting each day in Sydney, then Tokyo, London and New York. At any time, in any location, there are buyers and sellers, making the Forex market the most liquid market in the world.

What to trade in Forex Market?

In the forex market, currency trading is always done in currency pairs, such as EUR/USD or GBP/USD. Accordingly, all trades result in the simultaneous buying of one currency and the selling of another. The base currency is the "basis" for the buy or the sell. It is useful to consider the currency pair as an instrument, which can be bought or sold.

Understanding Forex quote

• Base currency: The first currency in the pair.
• Counter Currency: The second currency in the pair. Also known as the terms currency.

The US dollar is the centerpiece of the Forex market and is normally considered the ’base’ currency for quotes. This includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/CAD 1.1302 means that one U.S. dollar is equal to 1.1302 Canadian dollar.

BID and ASK Prices

When trading forex you will often see a two-sided quote, consisting of a ’bid’ and ’ask’. The ’bid’ is the price at which you can sell the base currency (at the same time buying the counter currency). The ’ask’ is the price at which you can buy the base currency (at the same time selling the counter currency).

Commission-free, but with spreads

Most Forex brokers offer commission-free Forex trading. Spread - The difference between the bid and ask price of a currency. Normally 3-5 pips on the Majors.

Rollover - What happens to my open positions at the end of the trading day?

Process whereby the settlement of a deal is rolled forward to another value date. The cost of this process is based on the interest rate differential of the two currencies. Most brokers will automatically roll over your open positions, allowing you to hold a position for an indefinite period of time.

Leverage & Margin

The leverage available in forex trading is one of main attractions for many traders. Leveraged trading, or trading on margin, simply means that you are not required to put up the full value of the position. Forex brokers provide more leverage than stocks or futures. In forex trading, the amount of leverage available can be up to 400 times the value of your account.

Forex Fundamental Analysis

The two primary approaches of analyzing Forex markets are technical analysis and fundamental analysis. Fundamental analysis comprises the examination of economic indicators, asset markets and political considerations when evaluating a nation’s currency in terms of another. The focus of fundamental analysis lies on the economic, social and political forces that drive supply and demand. There is no single set of beliefs that guide forex fundamental analysis, yet most fundamental analysts look at various macroeconomic indicators such as economic growth rates, interest rates, inflation, and unemployment.

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Here we look at some of the major Forex fundamental factors that play a role in the movement of a currency:

Economic Indicators

Economic indicators are reports released by the government or a private organization that detail a country’s economic performance. These economic indicators can be released on a weekly basis, but the more common report is monthly. Indicators are based around a number of economical situations, of which the two primary factors are that of International trade and Interest. Subsidiary factors also include Consumer Price Index (CPI), Purchasing Managers Index (PMI), Durable goods orders, retail sales and Producer Price Index (PPI).

Currency’s Interest Rates

One of the major indicator factors, Interest rates, are a key economic function of any nation. Generally, when a country raises its interest rates, the country’s currency will strengthen in relation to other currencies as assets are shifted to gain a higher return. Interest rates hikes, however, are usually not good news for stock markets. This is due to the fact that many investors will withdraw money from a country’s stock market when there is a hike of interest rates.

International Trade

The trade balance portrays the net difference (over a period of time) between the imports and exports of a nation. A trade deficit can be an economic disaster for a government and a currency. A deficit may appear when a country is importing more than it is exporting, meaning that more money is leaving and less is coming in. In some ways, however, a trade deficit in and of itself is not necessarily a bad thing. A deficit is only negative if the deficit is greater than market expectations and therefore will trigger a negative price movemen

FX Trading Systems Which Work

Summary

1. Trading systems
2. Managing your funds
3. Trader Psychology
4. Summary

There are many different methods, systems and strategies which traders, “newbies” and old “pro’s”, apply to the market to make a profit from the movements in the prices. Each trader will assert that his or her methods are the best and the most profitable, but the truth is that each trading system has its strengths and weaknesses. The real keys to making money from the Forex market are the following:

1. Having and clear and simple trading system, and applying it consistently
2. Managing the funds you are trading with tight disciplines
3. Taking control of your psychology

This article will examine each of these three keys separately and propose some simple guidelines for traders to follow to avoid being trapped by the market during the inevitable periods of volatility which occur daily.

1. Trading systems
There are essentially two types of systems which traders employ. These are:

a. Price following systems
b. Price prediction systems

Let’s examine each one briefly.

Price following systems

These are systems which rely on momentum indicators, oscillators and averaging methods to simply follow the market in the direction in which it is moving. The simplest of these is to find a suitable moving average (MA) and trade in the direction the MA is pointing, with the price on the correct side of that average.

One can add to that a whole variety of other indicators such as MACD, Stochastics, RSI and Bollinger Bands etc. One charting package I use has 29 different indicators, leading to an overload of endless possible combinations to use. Furthermore, there are about 20 different possible time frames to study. Its not hard to see why traders end up with the commonly know “paralysis of analysis” which is recognized by the comatose mouse hand and glazed eyes of someone sitting in front of the screen for 12 hours without taking a trade.

They key is to keep it simple. Decide on the time from you choose to trade from (scalpers may prefer 5 minute or 15 minute charts, whereas session/day traders may prefer 1 hour, 4 hour of day charts) and look for a very simple system which combines no more than 2 or 3 indicators. Such systems may also incorporate simple trend line studies, with the trade direction following the prevailing straight line trend.

When the signals are given by your system, take your trades confidently and consistently. Do not abandon your method and start searching for another after the first loss.

Price Prediction systems

These are systems which are generally longer term systems, applied to session, day or longer periods. They involve deciding the overall direction of the currency pair over a longer time frame and then trading a simple “buy on dips” or “sell on rallies” approach, depending on the direction you have decided on. There are various tools to help the strategy trader, such as horizontal lines, trend lines, Fibonacci retracement levels, moving averages and so on. These will help to a) identify the direction of trade, b) identify a logical entry point and c) identify a logical exit point. These trades can then be programmed into the dealing software and left to take care of themselves, allowing the trader spend his time doing other things. This form of trading requires more skill and experience, but this can be learned with time and practice.

Essentially, price following systems generally tend to be shorter term “scalping” type systems, which involve screen watching for a large part of each day. Price prediction systems tend to involve strategies lasting 8 hours up to several days and allow the trader to get away from the screen and enjoy more free time.

Everyone has their preference but I have found from my own experience and observations that intense screen watching cannot be sustained for very long by most traders, before burning out after several weeks or months. You can recognize these traders immediately by their bagged eyes, short tempers and lack of social skills.

2. Managing your funds
Whilst most traders can invent or learn a reasonable trading system to suit their styles of trading, many cannot manage their account safely enough to prevent large losses and the dreaded margin call. Even the some best traders in the World suffer from temporary lack of sanity in this area (including “yours truly”). Interesting case histories are described, for example, in Jack Schwager’s book “Market Wizards: Interviews with Top Traders”

There are three simple rules which can be applied here:

a) Never leverage over 10:1 and as your account grows larger, reduce this to below 5:1
b) Never risk more than 5% of your equity on a given day, and as your account grows, reduce this to less than 2%
c) Never take a trade where you are risking more than 50% of the projected gains from the trade with your stop loss. In other words, the Win/Lose ratio (profit target in pips/stop loss in pips) should be 2:1 or higher.

Following these simple rules, even with a half baked trading system, will ensure that you can lose 2 out of every 3 trades and still break even on your account.

3. Trader Psychology
All humans are subject to two (often opposing) forces – the mind and the emotions. The key to successful trading psychology is to prevent your emotions from dominating your mind.

The emotions you will experience will fluctuate wildly from fear to greed, to self-doubt and elation. These are all the enemy of the trader and need to be tempered by clear, objective and logical thinking.

Work out your trading strategy based on your previously defined system. Apply the system with safe account management rules, and shut out the emotional noise which will attempt to convince you to close early, over leverage, risk too much, risk too little etc.

4. Summary
It is clear that the best traders aim for small and consistent gains without seeking “the latest” system to produce enormous profits. There simply are no such systems which work reliably day in and day out. Keep your money management tight and keep your emotions in check and you should succeed.

Finally – it is well worth the money spent on good education. Attend a seminar by a truly active trader and teacher, and buy lots of books on the subject. Do not think you can go from “zero to hero” in the FX market without investing time, effort and money in learning from experienced players. The money you might save initially will probably

Learn Forex

How do I begin? Please give it to me SIMPLY.

1. The best advice on how to learn to trade profitably is to learn from experts with proven track records. Many learning styles are available to beginners at all levels: books, CDs, online courses, group seminars, even one-on-one mentors who will come right your home for a few days. We outline our Forex-Trader picks in Learning Forex Trading. Learning to trade from experts is worth every penny and has saved us untold thousands in mistakes.We would not recommend starting forex trading without any training. It is not hard to learn, nor difficult to trade successfully, but you must first provide yourself with a basic functioning knowledge of ’the game you’re in’.

2. While you are learning you will need charting software to practice reading the Market. Charting is an indispensable tool that shows you in real-time data what the market is doing moment by moment and also what the market has done in the past. As you learn to analyze these charts you can determine what trades to enter and exit, where to set your stop losses, limits etc. There are several good charting software services that you can subscribe to online monthly. See our Forex-Trader tested Charting Software picks in Tools of The Trade.

3. Then, to perform your actual trades online you need a real-time ’trading platform’ to execute your ’buys’ and ’sells’ directly in the Foreign Currency Market. You obtain a trading platform from a Forex Clearinghouse that is connected real-time to the interbank market. There are many good Clearinghouses (also confusingly called Brokerage Firms, Market Makers, etc.) that provide you with the trading platform to trade the funds in the account you have opened with them. Before you begin trading your ’real’ money, while you are learning, you will practice on your own ’demo account’ with play-money in it, which will be provided to you by the clearinghouse you plan to trade through. The contractual relationship you enter into with your Clearinghouse is a very important one because the Clearinghouse you choose determines many trading features and financial advantages to you both as a trader and as an investor. Forex-Trader tested Clearinghouses are reviewed in Tools of The Trade.

We have outlined a Getting Started path with uncomplicated steps. This is the path that we would take if we were beginning trading over again today with ’what we know now’. The products and services we mention in these steps are all ones that we have personally used for some time with consistent success. As always you are free to forge your own path, and if you do, happy hiking. There is a mountain of products and services try out, and if you find ones you like better we would love to compare notes with you.

Explain More About Charting Services

To trade successfully you also must have good charting software and instantaneous data feeds critical to helping you analysis and interpret the movement of currencies moment to moment so you know when/why to buy or sell — this you subscribe to monthly. You can get a 2 week or more demo to familiarize yourself with one that has the features you like. The costs also vary, and some companies require a year commitment. There are some free charting services offered through the clearinghouses, but they tend to lack the tools to be truly useful. There are also some costly proprietary Specialty Software charting ’hybrids’ which are market forecasters tools that look more like video games than charts.

Explain More About How Clearinghouses Work

A good clearinghouse (i.e.. your computer access/link to the live Forex Exchange Market) is the partner with which you trade the money you have deposited with them in your trading account. After trying and demo-ing many we have found a small handful that are truly excellent for the beginner (and continue to be excellent as you grow) — meaning user friendly, legally accountable to regulatory bodies, and offering fair costs (spreads) for their services/trading software platforms. There still are many worrisome ones practicing in this closing era of unregulated forex trading (new Commodities laws are imminent).

The topic of matching the right clearinghouse for your needs is discussed more in Tools of the Trade, because it depends on a number of factors — how much you can open an account with, how much the clearinghouse profit spread, what your liquidity needs are, your minimum/maximum stop loss and margin requirements, even where you live and how much time you have to give to trading in a 24 hr. day.

How Much Does it Cost to Begin to Trade?

Learning to trade will entail the cost of books and whatever traiining method you choose. It will also include a reliable computer with a minimum 128 Mb of memory to run the charting software and trading platform. Ongoing ’costs of operation’ include the monthly costs of high-speed internet, charting software, the email forecasting subscriptions — plan on spending $150./mo. up for ongoing costs.

What about Pooled Clearinghouse Accounts to Trade with More Leverage?

We strongly do not recommend pooled accounts in any circumstance. Perhaps you are considering self-trading a pooled- together family account because it would give you a perceived advantage of more leveraged funds to trade (50:1 up to 100:1 leverage) — any risks of loss represent a potential risk to family relationships, and for this reason alone we do not recommend aggregating with family or friends.

However much worse are the too-numerous negative experiences of people allowing their investment funds to leave their control to become part of a ’managed’ pooled account. Not only is it a very risky investment idea, it is illegal for anyone to ’pool’ accounts without compliance with SEC (a USA Securities Exchange Commission) or international equivalent license. Never relinquish direct control over your money/trading account to anyone (i.e.. the ability to make withdrawals, deposits etc. directly by your own authority into your own account).

A good fund manager, if you do choose to go the (legitimate) Managed Account route rather than the Self-Trader route, will make certain you have your own ’segregated account’ in your own name in a bank or brokerage firm. These individual segregated accounts can still be traded together as though they were in a single account by a designated trader as long as the clearing house uses a trading platform that allows it. You, as the investor/account holder, have direct access online to your account activity at all times, and direct control over your own account in your own name (just like a bank account). The importance of this, for the safety of your funds, cannot be over emphasized.

About technical analysis

The aim of technical analysis is to forecast price trends in future basing on the historical data along with the one of the volume. Technical analysts are sure that any fundamentals and even expectations have affection to exchange rates changing being the factors of the market. Any private investor can have an access to the technical analysis tools in order to compute his or her trading decisions. Though, we can not state that these tools figure out unreliable estimations. Technical analysis has been in use for centuries, that's why its premises are based on the experience, prolonged observation and can be considered quite reliable. Japan traders started using the technique of candlestick which is still popular in the 18th century, so, it is thought as the oldest one.

The end of the 19th century gave birth to the Dow Theory that used the writings of Charles Dow, who was an editor and co-founder of Dow Jones. Recent decades gave a number of new tools along with the amelioration of the old ones that was caused by the development of computer-based technologies.

There are three suppositions laying at the basis of technical analysis:

Everything should be considered at the market movement;

Price movement has a purpose;

History is to repeat its occasions;

Relying on these statements, technical analysis can be described as the mathematical analyzing of historical data and carrying out price forecasts.

The technical analysis is aimed at the fact that there is a certain direction or a chart pattern for the price movement, but not at finding out the reasons of such movements, like complicated business environment, low earnings and level of management and other fundamental factors. Anyone can gain the profit by posing himself in the trend direction, from the point of view of technical analyst. In the uptrend situation you should consider a buy decision, whether if the downtrend occurs you should try to sell. Technical analysts use different patterns in order to create the a price chart that will suit the future market and the price would follow the pattern.

Forex Trader should consider technical analysis as a key factor for success. Technical analysis basic overview is historical market prices analysis for the purpose of predicting price trends or having an adequate picture of prices movement in future. The concept of Forex Technical Analysis is made up of mathematical equations along with other technical applied towards Forex prices. Deep knowledge of the Forex Technical Analysis techniques is required for profitable dealing with Online Forex Market. The traders using technical analysis invest their money thoughtfully and monitor the daily prices movement precisely that lets them reach the profit. You can choose some basic technical indicators offered at our Forex Technical indicators page among lots of other ones. You should keep in mind that theoretical knowledge added to the thoughtful strategy gives the key to good results and positive trading. You shouldn't ever use the methods you understand not clearly. There is always a choice from a number of methods offered, so you can use the one you are good at and invest adequately for successful Forex trading.

Forex options

Forex options have a lot in common with the stock market business. They are more reliable in limiting risks and raising profit during market trading. An investor can choose between two main options, the first of which is traditional. It lets the buyer the right purchase currency at preconcerted price and time but doesn't make him do that. If a trader seizes the opportunity of Forex options and during the agreed time the currency being bought appreciates, the trader can sell this currency with advantage. Forex options give investors another tool which helps to minimize losses and to raise profits, they are extremely popular at periods of economic reporting. But if the currency underrates the loses of a trader they pay the premium for this option.

The second type of Forex options is called SPOT (Single Payment Options Trading). This type depends on the Forex trader; it is a forecast from the trader on what they predict is going to happen in the Forex market. If the trader is successful possible profit can be unlimited and if the SPOT is unsuccessful the trader loses only the premium.

Transactions in options on FOREX are extremely risky. The options' sellers and purchasers should get acquainted with the type of option which they intend to trade and the connected risks with it. It's worth figuring out the extent to which the value of the options must go up for the position to stay beneficial, taking into consideration all transaction costs and, of course, the premium.

The options' buyer may either offset or exercise the options or let the options expire. The exercise of an option results in a cash settlement or in the purchaser getting or giving the basic interest. If the options you bought expire worthless, you lose the investment which consists of the option premium. If the option is on a leveraged position, the buyer receives a FOREX open position with associated margin responsibilities. You should remember that transaction costs on FOREX are usually zero with no commission. If you intend to buy deep-out-of-the-money options, you should realize that the chance of getting profit from such options is usually rather far-off.

As a rule, selling, "granting" or "writing" an option is more risky than buying options. The seller may uphold a loss in excess of that amount even though there's a fixed premium level acquainted by the seller. The seller is responsible for an extra-margin to keep the position at the same level if the market moves unsuccessfully. The seller also meets a risk of the buyer using the option and the seller will have to either settle the option in cash, to get or deliver the basic interest. If the option is "covered" by the seller of a corresponding position in the basic interest or a future or another option the risk may be less. If the option is on a leveraged position the seller receives an open FOREX position with associated margin responsibilities. If the option isn't covered the risk of loss is unlimited.

In some authorities brokers let postponed payment of the option premium, bringing the purchaser to responsibility for margin payments isn't more then the premium amount. It's still possible that the buyer loses the premium and transaction costs. The buyer is liable for any unpaid premium which is already overdue when the option is exercised or expires. The stock market is often associated with options; still the foreign exchange (FOREX) market also lets trade these sole derivatives. Retail traders many opportunities to minimize risk and increase profit thanks to options.

Forex Trading - Foreign Exchange

FOREIGN EXCHANGE TRADING

Forex (FOReign EXchange market) becomes one of the most attractive instruments for investment. Forex boundless opportunities, such as absolute liquidity, round-the-clock operation, global scale, up-to-date technologies have created a unique profession -Foreign Exchange Trader. However, the art of making money using Forex trading, despite its simplicity, is not an easy matter. Our resource gives You a chance to become not only forex professional, but achieve real SUCCESS. Every day we offer You particular recommendations in real trade and analytical articles on FOREX basic currency pairs. Includes live forex signals through SMS. Besides, a full version of our forecasts is at your disposal.