Introduction to the Forex.
The purpose of trading on any market is to buy low and sell high. The foreign currency market FOREX is no exception. The goods traded on this market are rates of currencies of different countries. As any other goods the currencies have their prices.
To settle transactions between businesses located in different countries, governments, speculative transactions and so forth, banks around the world execute currency trades on FOREX market. Depending on various trade, economical and other parameters, interest rates, central bank policies, time of the day, preferences and anticipations of the market players, and many other causes, the rates, that is prices, of currencies stay in ceaseless motion.
Your task as a trader is to determine the trend of the rate and buy an appreciating currency or sell a depreciating one, and then take your profits through execution of a reverse transaction.
Our dealing center gives you the opportunity to use software to obtain real time currency quotations from different banks and largest world exchanges participating in FOREX market. At the same time, the rate charts for every currency are displayed for you, and hottest economical News that may affect currency rates now or in the future directly or indirectly are fed to your screen.
And, at last, you will have a special trading account allowing you to buy and sell desired currencies. Despite of having US dollars in your account, you may start your trading from selling japanese yens not concerning yourself with not having bought them in advance.
Some codes, numbers and definitions.
Each currency is assigned a three-letter code. For example, US dollar is coded - USD (United States Dollar), euro is coded EUR (EURo), Swiss frank is coded CHF (Confederation Helvetica Franc), Japanese yen is coded JPY (JaPanese Yen), British pound is coded GBP (Great British Pound). Currency rates are equal to ratios of currency units of different countries relative to each other. The rates are represented by 6-letter words composed of two three-letter currency codes. The first position is occupied, as a rule, by the code of a more expensive currency. The rates are expressed in units of the second currency per unit of the first one. For example, rates USDCHF (USD-CHF) show the number of Swiss franks in one US dollar, but rates GBPUSD (GBP-USD) show the number of US dollars having to be paid for one British pound.
The rates are usually expressed as five-digit numbers. For example, USDJPY = 121.44 means that 1 US dollar is valued at 121.44 Japanese yens (i.e. they are willing to pay you that many yens for one US dollar while you are buying or selling). At the same time, GBPUSD = 1.6262 means that 1 British pound is valued at 1.6262 US dollars. Generally, if the rate XXXYYY = Z, it means that one unit of XXX is worth Z units of YYY.
When the rate has changed, for example USDJPY = 121.44 to USDJPY = 121.45 or GBPUSD = 1.6262 to 1.6263, they say that the rate has moved 1 point. As it follows from the information above, yen in this example has DEPRECIATED by 1 point, but the pound has APPRECIATED, also by 1 point.
While watching the charts, you should keep in mind that only euro (EURUSD) and British pound (GBPUSD) charts reflect real movements of the rates of these currencies (that is, chart going up, means increasing price), as growth (that is, charts moving up) mean decreasing rates (prices) for the other currencies.
Your trading account is kept in US dollars, this is why it would help to know the worth of this 1 point expressed in other currencies. The point's worth is determined by the following algorithm: you should divide the size of a lot by the rate disregarding the position of the decimal point. For example, in the example above the worth of one point USDJPY expressed in US dollars = 100000 / 12144 = $8.24. Or, for GBPUSD one point's worth = 100000 / 16262 =$6.15. Consequently, the worth of one point is different not only for different currencies, but also for the same currency in different quotations.
It is known, that every transaction is executed at a rather well defined and concrete price, while the table Quote Spread Sheet lists three prices for each currency, for example:
Each of the participants of FOREX market enters each trade as either a SELLER or a BYUER of a particular currency. In so doing, the seller offers the currency at a higher price, for example GBPUSD at 1.6325, while the buyer bids for it at a lower price, for example, GBPUSD at 1.6322. The seller's price is called ASK and the buyers price is called BID accordingly. This is why, if you anticipate GBPUSD to appreciate (your GBPUSD chart to go up), then you should decide to buy the pound when it is low to sell it high later. You can BUY only from a seller offering it at the price equal to ASK. Should you be selling the pound (this operation is called SELL), the buyer will bid at a price equal to BID for it (this holds true for all currencies). The obvious conclusion is that if you have OPENED a !! position (the operation is called OPEN), that is you have executed BUY GBPUSD, and want to CLOSE it immediately (the operation is called CLOSE), that is to sell the pounds you have just bought, then you could do it only at a loss, similar to what would happen at any currency exchange booth. Consequently, to make a profit you should let the rate move in the anticipated direction more than the difference between BID and ASK. The third number is called LAST, which is an average of last BID and ASK on Forex.
To sum up, for USDCHF and USDJPY OPENING of a SHORT position (that is BUY) is executed at the BID price, and the CLOSING at the ASK price respectively; correspondingly OPENING of a LONG position (that is SELL) is executed at the ASK price, and CLOSING at the BID price.
For GBPUSD and EURUSD OPEN BUY (up) occurs at the ASK, ànd CLOSE at the BID, while OPEN SELL (down) happens at the BID, ànd CLOSE at the ASK.
Trading Tools.
Let us get acquainted with some useful trading tools allowing us to protect ourselves from unforeseen losses to certain degree and take the expected profits.
These are STOP and LIMIT. For a previously opened position an instruction may be entered at any moment (during the working days) to close it, if the rate reaches a preset level. For example, you have opened a position expecting the rate to go up (on the chart). To protect yourself from significant losses if the rate moves down, especially in such a situation when you don't have or are about to lose control of the market, you should enter a STOP, that is set a price at below its current value at which your position should be closed with no further instructions. Similarly, if you have opened a down position, then you should specify a price above its current value. In this case you should bear in mind that if the STOP is set too closely to the current rate value, then a random rate fluctuation may close a correctly open position at a loss, but if it is set too far, then the losses could become unreasonably high. LIMIT is a rate value that you set at which the position should be closed with a profit, that is the value of the LIMIT should always be above the current level, if you play long, and below it, if you play short. It should be noted that STOP and LIMIT should differ by more than 20 points from the current values of BID or ASK (in accordance with what side of the market you play and which of these tools you use).
A few more words about the differences between operations and service in a training and a real trading accounts.
In the quoting mode of a training account real quoting does not occur, and the offered price corresponds to slightly modified BID/ASK ratio (depending on whether you play long or short). Naturally, with a real account the offered price does not usually coincide with the value of BID/ASK (the difference is 1-2-3 points in a calm market, more often than not it's not in your favor).
The time lag between a rate inquiry and the receipt of a quotation (about 10 s) in a training account simulates the real-life lag rather well (usually 40-50 s, sometimes longer). It should be kept in mind, though, that the quoted rate is equal to the rate at the moment of quoting, rather than the moment of inquiry.
The rest of dealing with real and training accounts is essentially the same (disregarding the financial side).
Forextips.com
WHEN NOT TO TRADE
There’s no point in learning all the techniques required to win a battle if you then take on the wrong opponent. It’s a bit like trading GBP/USD instead of GBP/JPY. Although they move very similarly, they can be very different and they have mastered different forms of fighting back...
There are a number of scenarios where it’s inadvisable to trade. These can be separated into personal/environmental reasons and market reasons.
Personal reasons not to trade:
1. Do not trade while drunk. You need a clear head while you are trading. You would not fight an opponent while drunk. In fact, you might think you were fighting 2 opponents if you did!! Drinking can affect your state of mind in so many ways and can make you make simple mistakes while trading. Many of these mistakes would not be made if you were sober.
2. Get rid of all distractions. You need to be able to concentrate on the charts and not get caught up with other things going on. For instance you might be waiting for a trade and then you get distracted and when you come back to your chart you have missed the trade or you buy instead of selling etc. Distractions can be costly. However, life is full of distractions so put the cat in the hall and shut the door. Put the baby in the playpen where you can see/hear her but at least you won’t have to worry that she has wandered off again... Whatever your potential distractions are, deal with them before you start to trade. Even a Ninja can lose a fight if distracted...
3. Emotional times. If something emotional has happened, and you can’t be subjective, then do not trade! This could be any number of things that had a negative impact on your day. It could be that you broke up with your partner to a death in the family etc... You need to be able to assess what’s happening in a very short period of time, and if you are mentally elsewhere then this can have a negative impact on your trading account...
The personal times that you shouldn’t trade can really be summed up as times when you are out of synch with your normal body rhythm. These are times where your emotions or environment can negatively affect the way you trade, and can seriously hamper the likelihood of a successful trade. The good news is these tend to be things that you can control or have some degree of control over. The market reasons for not taking a trade are a bit different. These tend to be external where you have very little or no control over them. These can really kick you in the butt and leave you limping for a while. Ignore these at your Peril!!
Market Reasons not to trade:
1.
Bank Holidays. These are scheduled and there is nothing you can do about it. If there is an USA or UK Bank Holiday I don’t bother trading. This is because the Banks are the biggest participants in the Forex market. If they are on holiday then the volume of transactions being carried out is greatly reduced. This can lead to either really static markets or on occasion erratic markets. Either way it does not follow the normal pattern, so I stay clear.
If however, it’s a Bank Holiday in another country such as Japan or Australia then I wouldn’t trade currencies that belong to those countries, e.g. jpy or aud pairs, but would still trade the gbp/usd/chf etc pairs...
2.
News. There are scheduled news releases, and economic news, that is due to be released throughout the day. These can be found, in advance, in a number of places but the most popular one seems to be the Forex Calendar, provided by Forex Factory.
There are 3 types of news; yellow, orange and red. Each has a different impact and is all explained in the calendar. There tend to be folders that generally are not a good idea for a new trader to try and trade. High impact, red folders, can really move the market, sometimes spiking in both directions, before settling done. These are high risk times where a lot of people get stopped out.
The one’s I specifically avoid would be the ISM Manufacturing data, interest rate announcements and NFP related news announcements. However, it’s not just the announcements themselves that can affect the market. The rumours surrounding what the potential numbers will be can cause the markets to move in anticipation. Therefore, it’s not a good idea to trade, for the hour before or after the news. With NFP, it’s a good idea not to trade that day at all.
Now that may seem extreme, but these can be the biggest account killers and can wipe out a new account in a few seconds.
3.
Speeches. These tend to generally be on the calendar as well. If specific people are talking then please do not trade. These people include the ECB President Jean-Claude Trichet, Fed Chairman Ben Bernanke and BOE Governor Mervyn King. It’s important that when the BOJ Governor Masaaki Shirakawa speaks to pay attention. These tend to happen when people are asleep so less of a worry. But if you are trading the Japanese session then be wary!!
These people are notorious for dropping hints about economic policy changes that are likely to happen with the currency they are responsible for. These hints cause a lot of speculation in the market and therefore a lot of price movement. These can be big currency movers as they are generally responsible for setting Interest rates in those countries, and as mentioned above interest rate announcements can cause large movements.
4. Erratic Periods. There will be times where a currency is moving differently from normal. Perhaps it’s spiking and you don’t know why. This is a good time to stay out of the market. If you don’t understand why it’s moving like this then it’s generally because there is unscheduled news that has been released or leaked. This is generally bad news and the market is still unsure as to how to react to it. For instance, this was happening during the recent credit crunch and the various Banks reporting that they were having major difficulties.
5.
Weekends. It’s unadvisable to hold trades over the weekend, unless your method is a long term strategy which specifically involves holding trades for longer time frames, such as weeks or months.
A lot can happen over the weekend. All it would take is for 1 Bank to go bust over the weekend for your position to go completely different from how you expected... A terrorist attack could happen over the weekend, which would also move the markets crazily. Now these might seem out of the norm but if you look these have happened recently on more than 1 occasion.
These types of events will generally lead to the market opening again will a large gap and generally with a large change in your position. A lot of times this can cause serious harm to your trading account balance.
6. Market close/open. Good idea to avoid these or be wary around these times. At market close a number of trading positions are being closed. This will lead to volatility in the currency markets and can cause the price to move erratically. The same applies at market open. A lot of people are opening positions as they do not want to hold them over the weekend for the reasons stated above.
7.
December and Summer Holidays. Banks tend to trade the Forex markets at least once a day for balance sheet reasons and can also trade a number of times throughout the day for speculation reasons.
When I say balance sheet reasons, I mean to balance out their currency book. They need a certain amount of each currency to meet the demand of their customers, both personal and business, that will need to buy foreign currency from the bank or exchange their foreign currency for their local currency. Banks have to balance this out each day otherwise they leave themselves open to Foreign exchange risk. This means Banks are the major players in the Forex market.
So during December and the summer months a lot of Bank staff take their holidays. Therefore, Forex markets generally slow down as there are fewer participants in the marketplace. This is generally a good time for private traders such as us to take a holiday. If the markets are flat there’s no point in trading so go off and enjoy yourself.
You gotta keep your body in prime fighting condition but holidays are also part of giving your mind some relaxing time to recharge those batteries, ready to go when you return.
forex4noobs.com
TYPES OF FOREX TRADING
Fundamental Analysis
Fundamental Analysis is a way of looking at what’s happening with the currency from an economic point of view, mainly. As mentioned before, economic news is normally scheduled to be released at pre arranged times, as shown on the Forex Calendar. These announcements often move price.
Fundamentalists mainly use this economic data to try and predict which currency will appreciate and which currency will depreciate in value. In simple terms, which currency is going to get stronger and which is likely to get weaker. For example, currencies tend to get stronger when interest rates increase. This is because this currency now attracts savers. These savers can be from anywhere in the world, generally. However, they need to change their money into the currency they wish to save in, where the highest interest rate is. This creates demand for that currency and pushes the value of that currency up. Basic principles of supply and demand.
Fundamental traders do tend to hold their trades for longer as they are looking at a currency gaining or losing strength due to economic conditions. They can hold trades for days/weeks or even months. They can also take short term position of just a few minutes. These tend to be News traders and this can be a highly risky strategy and not recommended for a new trader.
However, most traders visiting this site are Technical traders.
Technical Traders
Technical Analysis is a way of seeing what’s happening with the currency purely by looking at past price. Technical traders believe that all information is priced into the currency. Therefore, the chart has all the information for you. For this reason, Technical Analysts are also known as Chartists.
By looking at how the chart moved in the past they use this to determine how it is likely to move in the future. These past movements can give indications of where the currency will get stuck; at areas of support/resistance. It can also show patterns which will give an indication of market sentiment. Chart patterns will be covered later.
Chartists tend to be in a trade for a shorter period of time than the average Fundamentalist trader. They tend to prefer to jump in and out at significant price levels as dictated by the past price performance of the chart. Technical traders are all about the timing of the entry of the trade.
TECHNICAL TRADERS
Technical Analysis is a way of seeing what’s happening with the currency purely by looking at past price. Technical traders believe that all information is priced into the currency. Therefore, the chart has all the information for you. For this reason, Technical Analysts are also known as Chartists.
By looking at how the chart moved in the past they use this to determine how it is likely to move in the future. These past movements can give indications of where the currency will get stuck; at areas of support/resistance. It can also show patterns which will give an indication of market sentiment. Chart patterns will be covered later.
Chartists tend to be in a trade for a shorter period of time than the average Fundamentalist trader. They tend to prefer to jump in and out at significant price levels as dictated by the past price performance of the chart. Technical traders are all about the timing of the entry of the trade.
FUNDAMENTAL VS TECHNICAL ANALYSIS
It is not possible to say which is better as it is probably best you have an understanding of both. An understanding of both is necessary because even if you are a Technical trader the news can still have a major impact on your position. Ever looked back on a chart and wondered why there was a gap or a huge spike in price. Well that could have been news based.
And if you are a trader that trades based on economic data then technical traders can affect your position. They can affect your position because although the economic data suggests that this currency will weaken, for some reason if continues to climb. This could be because it just passed a significant price level and Technical traders have just piled into the market taking long positions. They have just changed the supply and demand dynamics in the market. The currency will probably weaken but it may not be straightaway.
So if you want to be a successful FX Ninja you need to learn to balance both aspects. A Ninja learns to attack and defend and you have to do the same with your trading.
If you are a Technical trader (as the majority of people on the site are) then you need to learn to attack by looking at the chart and timing your entry into the market. But you also need to defend against other threats, by being aware of new events being released which can affect your trade. For this reason, most Technical traders will trade with the Forex Calendar open, and, if a major announcement is due then they wait for a set period, after the news, to take the trade, or they may not take the trade at all. This is because the news can cause unpredictable results, especially when it is initially announced. To protect against losses, you need to know both methods of trading.
INDICATORS
Now some of this will be really basic and will probably remind you of when you were in your maths class a long time ago. However, it is important that you understand the different types of chart as this is what most people trade from.
An indicator is a programme that reads charts and uses historical info to ‘indicate’ what might happen. They give signals for when to enter and exit the market. They can also tell you when NOT to trade.
Sounds like the Holy Grail right? Woah there Ninja Newbie... if indicators alone were the answer there’d be a lot more successful traders out there!
In an ideal world we’d find an indicator we liked and trade by its signals. Problem is it’s not an ideal world and all indicators have their limitations. So, traders often use more than one (more the merrier right?) searching for the perfect combination to give them the edge. You need to be careful though as different indicators can give conflicting results. This is an even bigger problem if you don’t really understand what the indicators are telling you about the market.
Indicators, being computer programmes, don’t apply judgement or discretion which are crucial to successful trading. Just remember the BEST tool you have for mastering forex trading is between your ears! Unfortunately many newbies (and some experienced traders) don’t take time to learn what indicators really show, blindly following signals without understanding what they really mean in the market.
So why do traders use indicators?
Used correctly, indicators can be used as a secondary form of analysis to back up what you’re reading from the charts. As you try different indicator software you’ll learn which one or combination, work with your trading style and help confirm your decisions.
If you’re going to use an indicator then find out what it does, how it reflects and predicts price in the market. Then at least you can apply your own judgement to its signals. If it seems like a daunting task learning about the thousands of indicators out there, remember most traders choose from a small group of about 20 of the most common such as; moving average, Stochastic, MACD etc.
Forex4noobs.com
TRADING THE NEWS
Trading the news is becoming a popular technique to trade the forex markets … and why shouldn’t it be? Time and time again you see currency pairs move 50 to 100 pips within minutes or even seconds after a major news release. When you see that, I bet you’re thinking, “50 to 100 pips!? That’s easy money!” Maybe it is, and maybe it isn’t. It all depends on how prepared you are to trade a news release.
The goal of this lesson isn’t to give you a specific “Trading the News” strategy. The goal is to point you in the right direction and show some of the risks involved with trading these events, because here at BabyPips.com, we want to help you help yourself in developing your own methods that fit YOU best.
Why Trade the News?
Trading news releases can be a significant tool in your trading arsenal. If you want, it can be your only weapon altogether. Economic news reports often spur strong short-term moves in the market, which are great trading opportunities for breakout traders. And with the forex being open 24 hours a day and a true worldwide market, there are plenty of opportunities almost every trading day to catch market volatility (aka a lot of pips!) kicked off by an economic news report.
TRADING PLAN
Uh oh! You’ve learned so much and have come so far in your education, and yet you're still haven't graduated high school. No, you’re not dumb, BUT you didn’t have a trading plan.
Our point is that you can fill your mind with plenty of information, but without a good trading plan and the discipline to stick to it, you will NEVER be profitable.
Think of your trading plan as your map to success. It will be a constant reminder of how you will make money in this market. Of course it’s not required, and if you can make your living by trading without a plan, we will bow down and hail you as the Market Zeus of the Forex.
So you CAN trade without a plan if you want, but before you make that decision, let us give you a few reasons WHY you should have one.
Why Have a Trading Plan?
Reason 1: It keeps you in the right direction
Consistency is very important to have in your trading routine because it allows you to truly measure how successful you are as a trader. If you have a sound trading system but always break your rules, how can you ever really know how good your system really is? Your trading plan will keep you on target. Read it every day and stick to it.
Reason 2: Trading is a business and successful businesses ALWAYS have plans
I have never seen a successful business not start out with a plan. Do you honestly think Walmart was just created on a whim and then magically became successful? Or what about McDonalds? I’m sure almost anyone can make a better hamburger than McDonalds, but the difference between them and the individual is that they have a successful business plan that guides them to success.
In the same way, you can relate the McDonald’s story to your trading career. Whether it’s by luck or experience, everyone can make money in the forex. However, the difference between a losing trader and a successful trader is the PLAN. If you have a good trading plan and you are disciplined enough to stick to it, you will be successful!
Now you know why you should have a trading plan. Let's find out what makes up a trading plan...
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