Forex Training Center
Your Source for Quality Forex Trading Education
The Forex Training Center provides prospective currency traders with information and links to
quality Forex trading education sites, free ebooks, Forex articles, Forex books and hints on
selecting a reputable broker. Adequate Forex training is essential to a currency trader's
success.
Learn Forex Trading
If you're looking for a career change that gives you independence and unlimited earning potential, or just
wish to supplement your current income, then becoming a currency trader on the Foreign Exchange
(Forex or FX) might be what you're looking for.
With the proper Forex trading education, you can work from home as a currency trader, and
because the Forex market is open 24 hours a day from Sunday afternoon through Friday afternoon
(EST), you also have the option of choosing your own trading hours and not be tied down to a specific
schedule. You can trade short-term for income, or long-term for investment, or do both if you wish. If
your funds are limited, you can open a Forex trading account and deposit as little as $300 to start on a
part-time basis. Online Forex trading has exploded in popularity in the last few years, so now is the time
to explore the possibilities. Quality Forex training is the key to your success, so learn currency
trading now.
Quality Forex Training is the Key to Success
Currency trading has a tremendous amount of income potential, but along with that goes an equal
amount of risk (see Disclosure/Disclaimer). The bottom line is you can lose everything in a short amount
of time if you are not properly prepared. Being properly prepared means getting quality Forex training
in the following areas:
How the Forex market works (currency pairs, trading rules)
Technical Analysis (indicators, overbought, oversold, etc.)
Fundamental Analysis (economic and political news)
Risk Management (preserving your account)
Controlling Your Emotions (emotions and trading don't mix)
It's a fact that without the proper Forex trading education, you will fail, probably within the first
few months. Statistics indicate that well over 90% of all traders go out of business in the first year. In all
probability, most of these people are not properly trained, do not have a good trading plan, and don't
manage their money properly ... the perfect recipe for failure!! Conversely, successful currency traders
are well-trained, use a systematic, emotion-free trading plan, and consider the protection of their trading
capital their highest priority. Keep in mind that there are no guarantees of success, but preparing
yourself properly with the right Forex training gives you the highest probability of success as a currency
trader.
Forex Training Resources
There are numerous sources of Forex training on the Internet, many of which are not worth your time
and money. In the last few years, I've investigated many of them and discounted nearly all of them. One
of the best all-round Forex sites I've seen is ForexInterBank. Not only does ForexInterBank have
excellent, professionally prepared Forex trading education courses, they also have many other useful
products and services, including a live trading room, currency trading simulator, pivot point calculator and
a live Forex charting package. If you're serious about learning Forex trading, and possibly making a
career change or supplementing your current income, then go to our ForexInterBank page, and take a
look at what they have to offer in more detail. I definitely recommend their suite of Forex trading
education packages as some of the best you'll find on the Internet.
Once you learn the theory of currency trading by taking ForexInterBank's Complete Forex Training
Course (the basic course) followed by ForexInterBank's Advanced Strategies Course, my advice is to
enhance your knowledge by investigating Peter Bain's ForexMentor web site for a technically sound
trading system based on Pivot Points and various technical indicators such as MACD (Moving Average
Convergence/Divergence) and standalone Moving Averages. I've been on Peter's email list for some
time, and I've also viewed all of his sample videos. I can definitely see merit in what he teaches about
currency trading, plus he provides ongoing support, and there is an extensive network of ForexMentor
students as well. For more details on the ForexMentor system, visit ForexMentor's Forex Course and
Mentorship Program web site. You'll find that this is an excellent Forex training program.
Introduction to Forex
by Mark McRae
www.wizardoftrading.com
A Little History
The purpose of this ebook is to introduce the forex market to you. As with many markets there are many
derivative of the central market such as futures, options and forwards. For the purpose of this book we will only
be discussing the main market sometime referred to as the Spot or Cash market.
The word FOREX is derived from Foreign Exchange and is the largest financial market in the world. Unlike many
markets the FX market is open 24 hours per day and has an estimated $1.2 Trillion in turnover every day. This
tremendous turnover is more than the combined turnover of all the world's' stock markets on any given day. This
tends to lead to a very liquid market and thus a desirable market to trade.
Unlike many other securities (any financial instrument that can be traded) the FX market does not have a fixed
exchange. It is primarily traded through banks, brokers, dealers, financial institutions and private individuals.
Trades are executed through phone and increasingly through the Internet. It is only in the last few years that the
smaller investor has been able to gain access to this market. Previously the large amounts of deposits required
precluded the smaller investors. With the advent of the Internet and growing competition it is now easily in the
reach of most investors.
You will often hear the term INTERBANK discussed in FX terminology. This originally, as the name implies was
simply banks and large institutions exchanging information about the current rate at which their clients or
themselves were prepared to buy or sell a currency. INTER meaning between and Bank meaning deposit taking
institutions normally made up of banks, large institution, brokers or even the government. The market has
moved on to such a degree now that the term interbank now means anybody who is prepared to buy or sell a
currency. It could be two individuals or your local travel agent offering to exchange Euros for US Dollars. You will
however find that most of the brokers and banks use centralized feeds to insure reliability of quote. The quotes
for Bid (buy) and Offer (sell) will all be from reliable sources. These quotes are normally made up of the top 300
or so large institutions. This insures that if they place an order on your behalf that the institutions they have
placed the order with is capable of fulfilling the order.
Now although we have spoken about orders being fulfilled, it is estimated that anywhere from 70%-90% of the
FX market is speculative. In other words the person or institution that bought or sold the currency has no
intention of actually taking delivery of the currency. Instead they were solely speculating on the movement of
that particular currency.
Source: Bank For International Settlements http://www.bis.org
Extract From The Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity.
Currency 1989 1992 1995 1998 2001
US Dollar 90 82.0 83.3 87.3 90.4
Euro . . . . 37.6
Japanese Yen 27 23.4 24.1 20.2 22.7
Pound Sterling 15 13.6 9.4 11.0 13.2
Swiss Franc 10 8.4 7.3 7.1 6.1
As you can see from the above table over 90% of all currencies are traded against the US Dollar. The four next
most traded currencies are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc(CHF).
As currencies are traded in pairs and exchanged one for the other when traded, the rate at which they are
exchanged is called the exchange rate. These four currencies traded against the US Dollar make up the majority
of the market and are called major currencies or the majors.
Market Mechanics
So now we know that the FX market is the largest in the world and that your broker or institution that you are
trading with is collecting quotes from a centralized feed or individual quotes comprising of interbank rates. So
how are these quotes made up. Well, as we previously mentioned currencies are traded in pairs and are each
assigned a symbol. For the Japanese Yen it is JPY, for the Pounds Sterling it is GBP, for Euro it is EUR and for
the Swiss Frank it is CHF. So, EUR/USD would be Euro-Dollar pair. GBP/USD would be pounds Sterling-Dollar
pair and USD/CHF would be Dollar-Swiss Franc pair and so on. You will always see the USD quoted first with few
exceptions such as Pounds Sterling, EuroDollar, Australia Dollar and New Zealand Dollar. The first currency
quoted is called the base currency. Have a look below for some example.
Currency Symbol Currency Pair
EUR/USD Euro / US Dollar
GBP/USD Pounds Sterling/ US Dollar
USD/JPY US Dollar / Japanese Yen
USD/CHF US Dollar / Swiss Franc
USD/CAD US Dollar / Canadian Dollar
AUD/USD Australian Dollar / US Dollar
NZD/USD New Zealand Dollar / US Dollar
When you see FX quotes you will actually see two numbers. The first number is called the bid and the second
number is called the offer (sometimes called the ASK). If we use the EUR/USD as an example you might see
0.9950/0.9955 the first number 0.9950 is the bid price and is the price traders are prepared to buy Euros
against the USD Dollar. The second number 0.9955 is the offer price and is the price traders are prepared to
sell the Euro against the US Dollar. These quotes are sometimes abbreviated to the last two digits of the
currency such as 50/55. Each broker has its own convention and some will quote the full number and others will
show only the last two. You will also notice that there is a difference between the bid and the offer price and that
is called the spread. For the four major currencies the spread is normally 5 give or take a pip (will explain pips
later)
To carry on from the symbol conventions and using our previous EUR quote of 0.9950 bid, that means that 1
Euro = 0.9950 US Dollars. In another example if we used the USD/CAD 1.4500 that would mean that 1 US Dollar
= 1.4500 Canadian Dollars.
The most common increment of currencies is the PIP. If the EUR/USD moves from 0.9550 to 0.9551 that is one
Pip. A pip is the last decimal place of a quotation. The Pip or POINT as it is sometimes referred to depending on
context is how we will measure our profit or loss.
As each currency has its own value it is necessary to calculate the value of a pip for that particular currency. We
also want a constant so we will assume that we want to convert everything to US Dollars. In currencies where the
US Dollar is quoted first the calculation would be as follows.
Example JPY rate of 116.73 (notice the JPY only goes to two decimal places, most of the other currencies have
four decimal places)
In the case of the JPY 1 pip would be .01 therefore
USD/JPY: (.01 divided by exchange rate = pip value) so .01/116.73=0.0000856 it looks like a big number but
later we will discuss lot (contract) size.
USD/CHF: (.0001 divided by exchange rate = pip value) so .0001/1.4840 = 0.0000673
USD/CAD: (.0001 divided by exchange rate = pip value) so .0001/1.5223 = 0.0001522
In the case where the US Dollar is not quoted first and we want to get to the US Dollar value we have to add one
more step.
EUR/USD: (0.0001 divided by exchange rate = pip value) so .0001/0.9887 = EUR 0.0001011 but we want to get
back to US Dollars so we add another little calculation which is EUR X Exchange rate so 0.0001011 X 0.9887 =
0.0000999 when rounded up it would be 0.0001.
GBP/USD: (0.0001 divided by exchange rate = pip value) so 0.0001/1.5506 = GBP 0.0000644 but we want to
get back to US Dollars so we add another little calculation which is GBP X Exchange rate so 0.0000644 X 1.5506
= 0.0000998 when rounded up it would be 0.0001.
By this time you might be rolling your eyes back and thinking do I really need to work all this out and the answer
is no. Nearly all the brokers you will deal with will work all this out for you. They may have slightly different
conventions but it is all done automatically. It is good however for you to know how they work it out. In the next
section we will be discussing how these seemingly insignificant amounts can add up.
More On Market Mechanics
Spot Forex is traditionally traded in lots also referred to as contracts. The standard size for a lot is $100,000. In
the last few years a mini lot size has been introduced of $10,000 and this again may change in the years to
come. As we mentioned on the previous page currencies are measured in pips, which is the smallest increment
of that currency. To take advantage of these tiny increments it is desirable to trade large amounts of a particular
currency in order to see any significant profit or loss. We shall cover leverage later but for the time being let's
assume we will be using $100,000 lot size. We will now recalculate some examples to see how it effects the pip
value.
USD/JPY at an exchange rate of 116.73
(.01/116.73) X $100,000 = $8.56 per pip
USD/CHF at an exchange rate of 1.4840
(0.0001/1.4840) X $100,000 = $6.73 per pip
In cases where the US Dollar is not quoted first the formula is slightly different.
EUR/USD at an exchange rate of 0.9887
(0.0001/ 0.9887) X EUR 100,000 = EUR 10.11 to get back to US Dollars we add a further step
EUR 10.11 X Exchange rate which looks like EUR 10.11 X 0.9887 = $9.9957 rounded up will be $10 per pip.
GBP/USD at an exchange rate of 1.5506
(0.0001/1.5506) X GBP 100,000 = GBP 6.44 to get back to US Dollars we add a further step
GBP 6.44 X Exchange rate which looks like GBP 6.44 X 1.5506 = $9.9858864 rounded up will be $10 per pip.
As we said earlier your broker may have a different convention for calculating pip value relative to lot size but
however they do it they will be able to tell you what the pip value for the currency you are trading is at that
particular time. Remember that as the market moves so will the pip value depending on what currency you trade.
So now we know how to calculate pip value lets have a look at how you work out your profit or loss. Let's assume
you want to buy US Dollars and Sell Japanese Yen. The rate you are quoted is 116.70/116.75 because you are
buying the US you will be working on the 116.75, the rate at which traders are prepared to sell. So you buy 1 lot
of $100,000 at 116.75. A few hours later the price moves to 116.95 and you decide to close your trade. You ask
for a new quote and are quoted 116.95/117.00 as you are now closing your trade and you initially bought to
enter the trade you now sell in order to close the trade and you take 116.95 the price traders are prepared to
buy at. The difference between 116.75 and 116.95 is .20 or 20 pips. Using our formula from before, we now
have (.01/116.95) X $100,000 = $8.55 per pip X 20 pips =$171
In the case of the EUR/USD you decide to sell the EUR and are quoted 0.9885/0.9890 you take 0.9885. Now
don't get confused here. Remember you are now selling and you need a buyer. The buyer is biding 0.9885 and
that is what you take. A few hours later the EUR moves to 0.9805 and you ask for a quote. You are quoted
0.9805/0.9810 and you take 0.9810. You originally sold EUR to open the trade and now to close the trade you
must buy back your position. In order to buy back your position you take the price traders are prepared to sell at
which is 0.9810. The difference between 0.9810 and 0.9885 is 0.0075 or 75 pips. Using the formula from before,
we now have (.0001/0.9810) X EUR 100,000 = EUR10.19: EUR 10.19 X Exchange rate 0.9810 =$9.99($10) so
75 X $10 = $750.
To reiterate what has gone before, when you enter or exit a trade at some point your are subject to the spread in
the bid/offer quote. As a rule of thumb when you buy a currency you will use the offer price and when you sell
you will use the bid price. So when you buy a currency you pay the spread as you enter the trade but not as you
exit and when you sell a currency you pay no spread when you enter but only when you exit.
Leverage
Leverage financed with credit, such as that purchased on a margin account is very common in Forex. A
margined account is a leverageable account in which Forex can be purchased for a combination of cash or
collateral depending what your brokers will accept. The loan(leverage) in the margined account is collateralized
by your initial margin (deposit), if the value of the trade (position) drops sufficiently, the broker will ask you to
either put in more cash, or sell a portion of your position or even close your position. Margin rules may be
regulated in some countries, but margin requirements and interest vary among broker/dealers so always check
with the company you are dealing with to ensure you understand their policy.
Up until this point you are probably wondering how a small investor can trade such large amounts of money
(positions). The amount of leverage you use will depend on your broker and what you feel comfortable with.
There was a time when it was difficult to find companies prepared to offer margined accounts but nowadays you
can get leverage from a high as 1% with some brokerages. This means you could control $100,000 with only
$1,000.
Typically the broker will have a minimum account size also known as account margin or initial margin e.g.
$10,000. Once you have deposited your money you will then be able to trade. The broker will also stipulate how
much they require per position (lot) traded. In the example above for every $1,000 you have you can take a lot
of $100,000 so if you have $5,000 they may allow you to trade up to $500,00 of forex.
The minimum security (Margin) for each lot will very from broker to broker. In the example above the broker
required a one percent margin. This means that for every $100,000 traded the broker wanted $1,000 as security
on the position. Margin call is also something that you will have to be aware of. If for any reason the broker thinks
that your position is in danger e.g. you have a position of $100,000 with a margin of one percent ($1,000) and
your losses are approaching your margin ($1,000). He will call you and either ask you to deposit more money, or
close your position to limit your risk and his risk. If you are going to trade on a margin account it is imperative
that you talk with your broker first to find out what their polices are on this type of accounts.
Variation Margin is also very important. Variation margin is the amount of profit or loss your account is showing
on open positions. Let's say you have just deposited $10,000 with your broker. You take 5 lots of USD/JPY which
is $500,000. To secure this the broker needs $5,000 (1%). The trade goes bad and your losses equal $5001,
your broker may do a margin call. The reason he may do a margin call is that even though you still have $4,999
in your account the broker needs that as security and allowing you to use it could endanger yourself and him.
Another way to look at it is this, if you have an account of $10,000 and you have a 1 lot ($100,000) position.
That's $1,000 assuming a (1% margin) is no longer available for you to trade. The money still belongs to you but
for the time you are margined the broker needs that as security. Another point of note is that some brokers may
require a higher margin at the weekends. This may take the form of 1% margin during the week and if you intend
to hold the position over the weekend it may rise to 2% or higher. Also in the example we have used a 1%
margin. This is by no means standard. I have seen as high as 0.5% and many between 3%-5% margin. It all
depends on your broker.
There have been many discussions on the topic of margin and some argue that too much margin is dangerous.
This is a point for the individual concerned. The important thing to remember as with all trading is that you
thoroughly understand your brokers policies on the subject and you are comfortable with and understand your
risk.
Rollovers
Even though the mighty US dominates many markets most of Spot Forex is still traded through London in Great
Britain. So for our next description we shall use London time. Most deals in Forex are done as Spot deals. Spot
deals are nearly always due for settlement two business days day later. This is referred to as the value date or
delivery date. On that date the counterparties take delivery of the currency they have sold or bought.
In Spot FX the majority of the time the end of the business day is 21:59 (London time). Any positions still open at
this time are automatically rolled over to the next business day, which again finishes at 21:59. This is necessary
to avoid the actual delivery of the currency. As Spot FX is predominantly speculative most of the time the trades
never wish to actually take delivery of the actual currency. They will instruct the brokerage to always rollover
their position. Many of the brokers nowadays do this automatically and it will be in their polices and procedures.
The act of rolling the currency pair over is known as tom.next which, stands for tomorrow and the next day. Just
to go over this again, your broker will automatically rollover your position unless you instruct him that you actually
want delivery of the currency. Another point noting is that most leveraged accounts are unable to actual deliver
of the currency as there is insufficient capital there to cover the transaction.
Remember that if you are trading on margin, you have in effect got a loan from your broker for the amount you
are trading. If you had a 1 lot position you broker has advanced you the $100,000 even though you did not
actually have $100,000. The broker will normally charge you the interest differential between the two currencies
if you rollover your position. This normally only happens if you have rolled over the position and not if you open
and close the position within the same business day.
To calculate the broker's interest he will normally close your position at the end of the business day and again
reopen a new position almost simultaneously. You open a 1 lot ($100,000) EUR/USD position on Monday 15th at
11:00 at an exchange rate of 0.9950. During the day the rate fluctuates and at 22:00 the rate is 0.9975. The
broker closes your position and reopens a new position with a different value date. The new position was opened
at 0.9976 a 1 pip difference. The 1 pip deference reflects the difference in interest rates between the US Dollar
and the Euro. In our example your are long Euro and short US Dollar. As the US Dollar in the example has a
higher interest rate than the Euro you pay the premium of 1 pip.
Now the good news. If you had the reverse position and you were short Euros and long US Dollars you would
gain the interest differential of 1 pip. If the first named currency has an overnight interest rate lower than the
second currency then you will pay that interest differential if you bought that currency. If the first named currency
has a higher interest rate than the second currency then you will gain the interest differential.
To simplify the above. If you are long (bought) a particular currency and that currency has a higher overnight
interest rate you will gain. If you are short (sold) the currency with a higher overnight interest rate then you will
lose the difference.
I would like to emphasis here that although we are going a little in-depth to explain how all this works, your broker
will calculate all this for you. The purpose of this book is just to give you an overview of how the forex market
works.
Accounts
Although the movement today is towards all transaction eventually finishing in a profit and loss in US Dollars it is
important to realize that your profit or loss may not actually be in US Dollars. From my observation the trend is
more pronounced in the US as you would expect. Most US based traders assume they will see their balance at
the end of each day in US Dollars. I have even spoken with some traders who are oblivious to the fact the their
profit might have actually been in Japanese Yen.
Let me explain a little more. You sell (go short) USD/JPY and as such are short USD and Long (bought) JPY. You
enter the trade at 116.10 and exit 116.90. You in fact made 80,000 Japanese Yen (1 lot traded) not US Dollars.
If you traded all four major currencies against the US Dollar you would in fact have made or lose in EUR, GBP,
JPY and CHF. This might give you a ledger balance at the end of the day or month with four different currencies.
This is common in London. They will stay in that currency until you instruct the broker to exchange the currency
you have a profit or loss into your own base currency. This actually happened to me. After dealing with mainly
US based brokers it had never occurred to me that my statement would be in anything other than US Dollars.
This can work for you or against you depending on the rate of exchange when you change back into your home
currency. Once I knew the convention I simply instructed the broker to change my profit or loss into US Dollars
when I closed my position. It is worth checking how your broker approaches this and simply ask them how they
handle it. A small point but worth noting.
It's a sad fact that for many years the forex market largely remained unregulated. Even today there are many
countries that still don't regulate companies that trade forex. London has been regulated for many years and the
US is now getting its act together and has also started regulating companies dealing forex. It was only recently in
the US you could with no more than an Internet site and a few thousand dollars set up your own forex operation
and give the impression that you were larger than you are. I am all for the entrepreneurial flair and everyone
need to start somewhere but when dealing with people's money it is imperative that the company you choose is
solid.
Preferably you want a company that is regulated in the country that it operates, insured or bonded and has
some kind of track recorded. I cannot advise you on which broker you should use as there are just to many
variables to each person, but as a rule of thumb, nearly all countries have some kind of regulatory authority who
will be able to advise you. Most of the regulatory authorities will have a list of brokers that fall with their
jurisdiction and will give you a list. They probably wont tell whom to use but at least if the list came from them you
can have some confidence in those companies. Once you have a list give a few of them a call, see who you feel
comfortable with, ask for them to send you their polices and procedures. If you live near where your broker is
based, go spend the day with him. I have been to many brokerages just to check them out. It will give you a
chance to see their operation and meet their team.
This brings up another interesting point. When you open an account with a broker you will have to fill in some
forms basically stating your acceptance of their polices. This can range from a 1 page document to something
resembling a book. Take the time to read through these documents and make a list of things you don't
understand or want explained. Most reputable companies will be happy to spend some time with you on this.
Your involvement with your broker is largely up to you. As a forex trader you will probably spend long hours
staring at the screen without talking to anyone. You may be the sort of person who likes this or you may be the
sort of person who likes to chat with the dealer in the trading room. You will normally get a call once a week or
once a month from someone in the brokerage asking if everything is OK.
Statements
Before we move on to account statements I just want to touch on segregation of funds. In times past there was a
danger that traders who deposited money with their broker who did not segregate their clients money from their
own companies money were at some risk. The problem arose if the broker misused the deposited funds to either
reinvest or otherwise manipulated these deposits to enhance their own standing. There were also instances
were the broker became insolvent and many complications ensued as to what was the clients money and what
was the broker's money. With the advent of regulation most broker now segregate their clients funds from the
brokerage funds. Deposits are normally held with banks or other large financial institution that are also regulated
and bonded or insured. This protects you money should anything happen to your broker. The deposit taking
institution is normally aware that these deposits are client's funds. Depending on regulation in the particular
country you live, each client may have their own segregated account or for smaller depositors they may be
pooled. The point is that segregation of funds is a safeguard. Ask your broker if your funds are segregated and
who actually has your money.
Just as with a bank you should are entitled to interest on the money you have on deposit. Some broker may
stipulate that interest is only payable on accounts over a certain amount but the trend today is that you will earn
interest on any amount you have that is not being used to cover your margin. Your broker is probably not the
most competitive place to earn interest but that should not be the point of having your money with him in the first
place. Payment on your account that is not being used and segregation of funds all go to show the reputability
of the company you are dealing with.
In this section I will discuss briefly the basic account statement. I have to keep this basic as there are as many
flavours of account statements as you can imagine. Just about every broker has their own way of presenting
this. The most important thing is to know where you stand at the end of each day or week. Just because your
broker is Internet based and has all the bells and whistles does not mean they are infallible. Many of the actions
taken before information is imputed are still done by hand and if humans are involved there will be a mistake at
some point. The responsibility lies with you. It is your money so make sure that all the transactions are correct.
FX Some Company New York Statement for: Mr. Joe Bloggs Statement Date: 16th July 2002 Account No:
123456 Summary Of All Trades From: 15/07/02-17/07/02
Ticket No Time Trade Date Value Date B/S Symbol Quantity Rate Debit Credit Balance
123458 09:05 15/07/2002 17/07/02 B EUR/USD 100,000 0.9850 $10,000
123459 13:01 15/07/2002 17/07/02 S EUR/USD 100,000 0.9870 $200.00 $10,200
123460 14:05 16/07/2002 18/07/02 S USD/JPY 100,000 116.85 $10,200
Total Equity $10,200
Margin Available $9,200
Margin Requirements $1,000
Current Position Short USD/JPY
Normally there is a ticket or docket number to help identify the trade. You will nearly always find the time and
date of the trade. The value date if the currency were to be delivered. You should always see the direction of
the trade, buy or sell (Long or Short). The amount and rate you bought or sold. Balance to let you know if you
made a profit or a loss. You should also see any open positions you may have and the margin requirements for
that position. A lot of the more modern systems will show your open position as though it has been closed just to
give you an up to the minute balance.
The Main Players
Central Banks And Governments
Policies that are implemented by governments and central banks can play a major roll in the FX market. Central
banks can play an important part in controlling the country's money supply to insure financial stability.
Banks
A large part of FX turnover is from banks. Large banks can literally trade billions of dollars daily. This can take
the form of a service to their customers or they themselves speculate on the FX market.
Hedge Funds
As we know the FX market can be extremely liquid which is why it can be desirable to trade. Hedge Funds have
increasingly allocated portions of their portfolios to speculate on the FX market. Another advantage Hedge
Funds can utilize is a much higher degree of leverage than would typically be found in the equity markets.
Corporate Businesses
The FX market mainstay is that of international trade. Many companies have to import or exports goods to
different countries all around the world. Payment for these goods and services may be made and received in
different currencies. Many billions of dollars are exchanges daily to facilitate trade. The timing of those
transactions can dramatically affect a company's balance sheet.
The Man In The Street
Although you may not think it the man in the street also plays a part in toady's FX world. Every time he goes on
holiday overseas he normally need to purchase that country's currency and again change it back into his own
currency once he returns. Unwittingly he is in fact trading currencies. He may also purchase goods and services
whilst overseas and his credit card company has to convert those sales back into his base currency in order to
charge him.
Speculators And Investors
We shall differentiate speculator from investors here with the definition that an investor has a much longer time
horizon in which he expects his investment to yield a profit. Regardless of the difference both speculators and
investors will approach the FX market to exploit the movement in currency pairs. They both will have their reason
for believing a particular currency will perform better or worse as the case may be and will buy or sell
accordingly. They may decide that the Euro will appreciate against the US Dollar and take what is called a long
position in Euro. If the Euro does in fact gain ground against the US Dollar they will have made a profit.
What Next
Well now we have a basic understanding of how the FX market works and who the main players are, what next?
You are now going to have to decide the best way to trade the market. The two most common approaches are
that of fundamental analysis and technical analysis.
Fundamental analysis concentrates on the forces of supply and demand for a given security. This approach
examines all the factors that determine the price of a security and the real value of that security. This is referred
to as the intrinsic value. If the intrinsic value is below the market price then there is an opportunity to buy and if
the market is above the intrinsic price then there is an opportunity to sell.
Technical analysis is the study of market action, mainly through the use of charts and indicators to forecast the
future price of a security. There are three main points that a technical analyst applies. A. Market action
discounts everything. Regardless of what the fundamentals are saying, the price you see is the price you get. B.
The price of a given security moves in trends. C. The historical trend of a security will tend to repeat.
Of all of the above things the most important of them is point A. The tools of the technical analyst are indicators,
patterns and systems. These tools are applied to charts. Moving averages, support and resistance lines,
envelopes, Bollinger bands and momentum are all examples of indicators.
There are many ways to skin a cat as the saying goes but fundamental and technical analysis are the two most
popular ways of trading FX.
My own preferred approach is that of technical analysis. It is beyond the scope if this little book to cover all the
finer points of trading and if you would like to learn more then I would suggest your first book should be ''Trading
For Beginners'' which you can find at www.tradingforbeginners.com. It is specifically designed for the novice
trader wishing to learn more about trading and technical analysis.
Major Currencies
The U.S. Dollar
The United States dollar is the world's main currency. All currencies are generally quoted in U.S. dollar terms.
Under conditions of international economic and political unrest, the U.S. dollar is the main safe-haven currency
which was proven particularly well during the Southeast Asian crisis of 1997-1998. The U.S. dollar became the
leading currency toward the end of the Second World War and was at the center of the Bretton Woods Accord,
as the other currencies were virtually pegged against it. The introduction of the euro in 1999 reduced the dollar's
importance only marginally. The major currencies traded against the U.S. dollar are the euro, Japanese yen,
British pound, and Swiss franc.
The Euro
The euro was designed to become the premier currency in trading by simply being quoted in American terms.
Like the U.S. dollar, the euro has a strong international presence stemming from members of the European
Monetary Union. The currency remains plagued by unequal growth, high unemployment, and government
resistance to structural changes. The pair was also weighed in 1999 and 2000 by outflows from foreign
investors, particularly Japanese, who were forced to liquidate their losing investments in euro-denominated
assets. Moreover, European money managers rebalanced their portfolios and reduced their euro exposure as
their needs for hedging currency risk in Europe declined.
The Japanese Yen
The Japanese yen is the third most traded currency in the world; it has a much smaller international presence
than the U.S. dollar or the euro. The yen is very liquid around the world, practically around the clock. The natural
demand to trade the yen concentrated mostly among the Japanese keiretsu, the economic and financial
conglomerates. The yen is much more sensitive to the fortunes of the Nikkei index, the Japanese stock market,
and the real estate market. The attempt of the Bank of Japan to deflate the double bubble in these two markets
had a negative effect on the Japanese yen, although the impact was short-lived.
The British Pound
Until the end of World War II, the pound was the currency of reference. Its nickname, cable, is derived from the
telex machine, which was used to trade it in its heyday. The currency is heavily traded against the euro and the
U.S. dollar, but has a spotty presence against other currencies. The two-year bout with the Exchange Rate
Mechanism, between 1990 and 1992, had a soothing effect on the British pound, as it generally had to follow the
deutsche mark's fluctuations, but the crisis conditions that precipitated the pound's withdrawal from the ERM had
a psychological effect on the currency. Prior to the introduction of the euro, both the pound benefited from any
doubts about the currency convergence. After the introduction of the euro, Bank of England is attempting to
bring the high U.K. rates closer to the lower rates in the euro zone. The pound could join the euro in the early
2000s, provided that the U.K. referendum is positive.
The Swiss Franc
The Swiss franc is the only currency of a major European country that belongs neither to the European
Monetary Union nor to the G-7 countries. Although the Swiss economy is relatively small, the Swiss franc is one
of the four major currencies, closely resembling the strength and quality of the Swiss economy and finance.
Switzerland has a very close economic relationship with Germany, and thus to the euro zone. Therefore, in terms
of political uncertainty in the East, the Swiss franc is favored generally over the euro. Typically, it is believed that
the Swiss franc is a stable currency. Actually, from a foreign exchange point of view, the Swiss franc closely
resembles the patterns of the euro, but lacks its liquidity. As the demand for it exceeds supply, the Swiss franc
can be more volatile than the euro.
Kinds of Foreign Exchange Systems
Trading with Brokers
Foreign exchange brokers, unlike equity brokers, do not take positions for themselves; they only service banks.
Their roles are:
• bringing together buyers and sellers in the market;
• optimizing the price they show to their customers;
• quickly, accurately, and faithfully executing the traders' orders.
The majority of the foreign exchange brokers execute business via phone. The phone lines between brokers
and banks are dedicated, or direct, and are usually in-stalled free of charge by the broker. A foreign exchange
brokerage firm has direct lines to banks around the world. Most foreign exchange is executed through an open
box system—a microphone in front of the broker that continuously transmits everything he or she says on the
direct phone lines to the speaker boxes in the banks. This way, all banks can hear all the deals being executed.
Because of the open box system used by brokers, a trader is able to hear all prices quoted; whether the bid was
hit or the offer taken; and the following price. What the trader will not be able to hear is the amounts of
particular bids and offers and the names of the banks showing the prices. Prices are anonymous the anonymity
of the banks that are trading in the market ensures the market's efficiency, as all banks have a fair chance to
trade. Brokers charge a commission that is paid equally by the buyer and the seller. The fees are negotiated on
an individual basis by the bank and the brokerage firm. Brokers show their customers the prices made by other
customers either two-way (bid and offer) prices or one way (bid or offer) prices from his or her customers.
Traders show different prices because they "read" the market differently; they have different expectations and
different interests. A broker who has more than one price on one or both sides will automatically optimize the
price. In other words, the broker will always show the highest bid and the lowest offer. Therefore, the market has
access to the narrowest spread possible. Fundamental and technical analyses are used for forecasting the
future direction of the currency. A trader might test the market by hitting a bid for a small amount to see if there
is any reaction. Brokers cannot be forced into taking a principal's role if the name switch takes longer than
anticipated. Another advantage of the brokers' market is that brokers might provide a broader selection of
banks to their customers. Some European and Asian banks have overnight desks so their orders are usually
placed with brokers who can deal with the American banks, adding to the liquidity of the market.
Direct Dealing
Direct dealing is based on trading reciprocity. A market maker—the bank making or quoting a price—expects the
bank that is calling to reciprocate with respect to making a price when called upon. Direct dealing provides more
trading discretion, as compared to dealing in the brokers' market. Sometimes traders take advantage of this
characteristic. Direct dealing used to be conducted mostly on the phone. Dealing errors were difficult to prove
and even more difficult to settle. In order to increase dealing safety, most banks tapped the phone lines on
which trading was conducted. This measure was helpful in recording all the transaction details and enabling the
dealers to allocate the responsibility for errors fairly. But tape recorders were unable to prevent trading errors.
Direct dealing was forever changed in the mid - 1980s, by the introduction of dealing systems. Dealing Systems
Dealing systems are on-line computers that link the contributing banks around the world on a one-on-one basis.
The performance of dealing systems is characterized by speed, reliability, and safety. Accessing a bank through
a dealing system is much faster than making a phone call. Dealing systems are continuously being improved in
order to offer maximum support to the dealer's main function: trading. The software is very reliable in picking up
the big figure of the exchange rates and the standard value dates. In addition, it is extremely precise and fast in
contacting other parties, switching among conversations, and accessing the database. The trader is in
continuous visual contact with the information exchanged on the monitor. It is easier to see than hear this
information, especially when switching among conversations. Most banks use a combination of brokers and
direct dealing systems. Both approaches reach the same banks, but not the same parties, because
corporations, for instance, cannot deal in the brokers' market. Traders develop personal relationships with both
brokers and traders in the markets, but select their trading medium based on price quality, not on personal
feelings. The market share between dealing systems and brokers fluctuates based on market conditions. Fast
market conditions are beneficial to dealing systems, whereas regular market conditions are more beneficial to
brokers.
Matching Systems
Unlike dealing systems, on which trading is not anonymous and is conducted on a one-on-one basis, matching
systems are anonymous and individual traders deal against the rest of the market, similar to dealing in the
brokers' market. However, unlike the brokers' market, there are no individuals to bring the prices to the market,
and liquidity may be limited at times. Matching systems are well-suited for trading smaller amounts as well.
The dealing systems characteristics of speed, reliability, and safety are replicated in the matching systems. In
addition, credit lines are automatically managed by the systems. Traders input the total credit line for each
counter party. When the credit line has been reached, the system automatically disallows dealing with the
particular party by displaying credit restrictions, or shows the trader only the price made by banks that have
open lines of credit. As soon as the credit line is restored, the system allows the bank to deal again. In the
interbank market, traders deal directly with dealing systems, matching systems, and brokers in a complementary
fashion.
The Fundamentals Of Technical Analysis
Technical analysis is appointed to analyze market movement (the movement of prices, volumes and open
interests) using the information obtained for a past time. Mainly, it is the chart study of past behavior of
currencies prices in order to forecast their future performance. It is one of the most significant tools available for
the forecasting of financial markets. Such analysis has been an increasingly utilized forecasting tool over the
last two centuries.
The main strength of technical analysis is the flexibility with regard to the underlying instrument, regarding the
markets and regarding the time frame. A trader who deals several currencies but specializes in one may easily
apply the same technical expertise to trading another currency. A trader who specializes in spot trading can
make a smooth transition to dealing currency futures by using chart studies, because the same technical
principles apply over and over again, regardless of the market. Finally, different players have different trading
styles, objectives, and time frames.
Technical analysis is easy to compute what is important while the technical services are becoming increasingly
sophisticated and reasonably priced.
Prior to this historic open market intervention, technical analysis provided ample selling signals.
Price
The Fundamental Principles of Technical Analysis are based on the Dow Theory with the following main thesis:
1. The price is a comprehensive reflection of all the market forces. At any given time, all market information and
forces are reflected in the currency prices.
2. Price movements are historically repetitive.
3. Price movements are trend followers.
4. The market has three trends: primary, secondary, and minor. The primary trend has three phases:
accumulation, run-up/run-down, and distribution. In the accumulation phase the shrewdest traders enter new
positions. In the run-up/run-down phase, the majority of the market finally "sees" the move and jumps on the
bandwagon. Finally, in the distribution phase, the keenest traders take their profits and close their positions
while the general trading interest slows down in an overshooting market. The secondary trend is a correction to
the primary trend and may retrace one-third, one-half or two-thirds from the primary trend.
5. Volume must confirm the trend.
6. Trends exist until their reversals are confirmed. Figure 1 shows an example of reversals in a bearish
currency market. The buying signals occur at points A and B when the currency exceeds the previous highs.
Cycles of currency price change are the propensity for events to repeat themselves at roughly the same time
and are an important ground to justify Dow Theory.
Cycle identification is a powerful tool that can be used in both the long the short term. The longer the term, the
more significance a cycle has. Figure 2 shows a series of three cycles. The top of the cycle (C) is called
crest and the bottom (T) is known as trough. Analysts measure cycles from trough to trough.
Cycles are gauged in terms of amplitude, period, and phase. The amplitude shows the height of the cycle, the
period shows the length of cycle, the phase shows the location of a wave trough.
Volume and Open Interest
Volume consists of the total amount of currency traded within a period of time, usually one day. For example, by
year 2000, the total foreign currency daily trading volume was $1.4 trillion. But traders are naturally more
interested in the volume of specific instruments for specific trading periods, because large trading volume
suggests that there is interest and liquidity in a certain market, and low volume warns the trader to veer away
from that market.
The risks of a low-volume market are usually very difficult to quantify or hedge. In addition, certain chart
formations require heavy trading volume for successful development. An example is the head-and-shoulder
formation. Therefore, despite its obvious importance, volume is not easy to quantify in all foreign exchange
markets.
One method to estimate volume is to extrapolate the figures from the futures market. Another is "feeling" the
size of volume based on the number of calls on the dealing systems or phones, and the "noise" from the
brokers' market.
Open interest is the total exposure, or outstanding position, in a certain instrument. The same problems that
affect volume are also present here. As it was already mentioned, figures for volume and open interest are
available for currency futures. If you have access to printed or electronic charts on futures, you will be able to
see these numbers plotted at the bottom of the futures charts.
Volume and open interest figures are available from different sources, although one day late such as the
newswires (Bridge Information Systems, Reuters, Bloomberg), newspapers (the Wall Street Journal, the Journal
of Commerce), Weekly printed charts (Commodity Perspective, Commodity Trend Service).
The Forex Market And Its Three Distinctive Elements
By: David Mclauchlan
Although there are many distinctive elements of the Forex market, there are three that can be highlighted as
helping new traders learn exactly what the foreign exchange market is all about. These distinctive elements are
those that every new trader should know long before they make their first trade. The Forex system is one that is
made to encompass the entire globe. It can be difficult to interpret and even more difficult to successfully trade
within. The first step to being a successful trader is knowing how the system works. Before you even think about
opening a Forex account, be sure
Forex Training - Which One Of These Should You Choose?
Forex training, well there's much to choose from - how do you know what's good and where do you start Do you surf the net for hours - if so, who do you trust
The Importance of Even the Most Basic Forex Trading Education For Budding Traders
The title of this article points to a very disturbing trend that has been going on in the world today More and more people are turning towards the Forex market as a means to make either a secondary income or to open up a revenue stream that would soon be the main source of income for them
Forex Artificial Intelligence, Free Forex Training and 100% Accurate Currency Trading Signals
I recall very visibly when I first launched my inquiries for free Forex training on the internet and I got so excited when I went concluded the online learning modules because I was actually learning information that was justifiably going to generate me some money on the internet without having to call people and hustle some meaningless products and services