Traders have developed lots of rules over the years in an attempt to refine the way they make trading decisions. So it’s not hard to come up with a list of 10 trading rules that can be part of a trading plan. Some are generic and general and not exclusive to any particular trader or trading approach. Others can be very precise as traders tweak rules into their trading system. The rules below have been selected for their broad appeal to many types of traders. They are presented in no particular order of importance.
1. Don’t trade markets about which you know very little.
This is not to imply that you have to be a fundamental expert on every market you wish to trade. However, you should know about what fundamentals are impacting, or could impact, a market you are contemplating trading. For example, a person who has only traded grains would not want to jump right into a Treasury Bond futures trade without first doing a bit of homework on how the bond market trades - price increments (dollar amount per tick), trading hours, on what exchange the market trades, etc.
A trader could pick up a Wall Street Journal and read the “Credit Markets” section for a week or so to become familiar with fundamental factors that influence the bond market. Also, consider this: Most traders enjoy the process of trading. If they did not, they would likely just hand their money over to a “fund manager” and give the manager discretionary control over their money. Learning and knowing what fundamental factors are impacting or could impact a market that a trader plans to trade is part of the process (enjoyment) of trading.
2. Don’t trade hot “tips.”You may trade for 20 years and never hear a good trading tip. Reason: There aren’t any . . . at least not any that are any good for regular individual traders. Markets are way too big and too tightly regulated to be impacted by any tips or inside information. Any legitimate “early information” has almost certainly already been factored into the market price structure by the time most individual traders could ever benefit from it.
Don’t confuse tips with rumors. Markets do move on rumors more than just occasionally. Rumors are a part of trading but still fall into the category of “not much use” to off-floor traders. Besides, many rumors are never confirmed as fact and are often self-serving to those who try to start them.
3. Don’t get too fancy with your market orders.
Entering a trade “at the market” with a market order may be the best way to enter a trading position, especially in markets that are liquid (have high open interest). It’s certainly the easiest way to enter. Fiddling around with limit or stop-limit or other multi-step orders to save a tick or two or three can cost a trader a good entry point or even a missed trade altogether.
It’s certainly easy to be guilty of this offense because every trader is always trying to get just a little better price. This doesn’t mean that limit or stop-limit or other types of orders are not useful in certain circumstances because they are. However, most trade entries are best made “at the market.” Look at pitchers in major league baseball who “nibble” with their pitches around home plate. Most wind up with a walk instead of an out.
4. Don’t form a new market opinion during trading hours.
This rule goes hand in hand with the rule that says you need to stick to your trading plan of action. Day-to-day market “noise,” or the minor up-and-down price fluctuations of a market, can be at least distracting to a trader and at most prompt the trader to make a hasty and poorly founded trading decision.
5. Don’t force trades; if you don’t see a trade, stand aside.
Don’t chase a market just to put on a trade. Try to exhibit patience and discipline in trading - easily said but hard to follow. Patience and discipline are not easy virtues for any trader to learn because a typical futures trader has a “Type A” personality with a competitive nature who hates to wait in lines. However, to have even a chance at success in trading, you have to control your impatience. If you happen to miss a trading opportunity because you waited too long, other trading opportunities will come along.
A good trade is usually profitable right from the beginning. If the market price moves “your way” in the first couple days after you’ve executed the trade, then odds are significantly higher that your trade will be a winner if you have waited patiently for the right position. This rule reinforces the notion that tight protective stops are an important part of trading success. But there is a time to be impatient: If a straight futures trade is under water after two or three days, more times than not it’s prudent to take a small loss and move on. Do not be patient with losers.
6. Use intermarket analysis to spot trading opportunities.
No market trades in isolation but is influenced by what is happening in a number of related markets. Don’t focus on just one market as much of today’s single-market technical analysis does. Instead, take into account developments in other markets that are likely to affect prices in your target market. If you trade stock indexes, you have to be aware of what is taking place in interest rate, currency and commodity markets such as gold. The price of a market you want to trade may be the sum of what is happening in ten or more interrelated markets.
7. Watch open interest statistics, especially in options.
When you are contemplating trading any contract, make sure to first check the open interest for that specific contract or strike price. If a futures contract or options strike price has a low open interest total, it is probably best to seek out a more liquid contract. Fills on both entry and exit can be tough and may produce more slippage than is desired. When you get into a position, be sure it is liquid enough so you can get out on favorable terms.
8. Know what you can and cannot control.
You can control the market you want to trade. You can control the type of market order you want to give your broker. You can control when you want to enter the market. You can control the amount of contracts you wish to trade. You can control when you want to exit the market.
But you can’t control the market, which often has a habit of doing unusual and unexpected things. Knowing and prudently managing the market factors you can control and knowing that you cannot control the market gives you a trading edge.
9. Make the market’s action confirm your opinions.
If you have a particular market on your “radar screen” for a trade, don’t just jump in based on a hunch or a “gut feeling” or because you want to get a fill right away. That’s when a market order advised above may not be in your best interest. Make the market first confirm your opinion. Make the market show you some strength if you want to be long, or make it show you some weakness if you want to be short.
10. Do not overtrade.
Trying to trade too many markets or too many contracts in one market can create problems for an undercapitalized trader. There is no set rule for how many markets a trader should trade at one time. Some traders can trade many markets at the same time and not have a problem. However, if you are feeling stress about a position you are carrying or can’t keep up with what’s going on in all the markets you are trading, then you are likely over-trading.
For those traders who are really not sure how many markets to trade at one time or how many contracts to trade for each position, it’s always better to take a conservative approach. Step in slowly until you become comfortable trading in a larger size or in multiple markets.
Glossary and Definition of Terms
Ask: Price at which broker/dealer is willing to sell. Same as "Offer".
Bid: Price at which broker/dealer is willing to buy.
Bid/Ask Spread(or "Spread"): The distance, usually in pips, between the Bid and Ask price. A tighter spread is better for the trader.
Cost of Carry (also "Interest" or "Premium"): The cost, often quoted in terms of dollars or pips per day, of holding an open position.
Currency Futures: Futures contracts traded on an exchange, most typically the Chicago Mercantile Exchange ("CME"). Always quoted in terms of the currency value with respect to the US Dollar. Parameters of the futures contract are standardized by the exchange.
Drawdown: The magnitude of a decline in account value, either in percentage or dollar terms, as measured from peak to subsequent trough. For example, if a trader's account increased in value from $10,000 to $20,000, then dropped to $15,000, then increased again to $25,000, that trader would have had a maximum drawdown of $5,000 (incurred when the account declined from $20,000 to $15,000) even though that trader's account was never in a loss position from inception.
EBS: "Electronic Brokerage System", the electronic system on which major banks trade with each other. This is considered to be the most definitive indicator of prices at which currencies are "really" trading, at least for EUR/USD and USD/JPY.
Forex: Short for "Foreign Exchange". Refers generally to the Foreign Exchange trading industry and/or to the currencies themselves.
Fundamental Analysis: Macro or strategic assessments of where a currency should be trading based on any criteria but the price action itself. These criteria often include the economic condition of the country that the currency represents, monetary policy, and other "fundamental" elements.
Leverage: The amount, expressed as a multiple, by which the notional amount traded exceeds the margin required to trade. For example, if the notional amount traded (also referred to as "lot size" or "contract value") is $100,000 dollars and the required margin is $2,000, the trader can trade with 50 times leverage ($100,000/$2,000).
Limit: An order to buy at a specified price when the market moves down to that price, or to sell at a specified price when the market moves up to that price.
Liquidity: A function of volume and activity in a market. It is the efficiency and cost effectiveness with which positions can be traded and orders executed. A more liquid market will provide more frequent price quotes at a smaller bid/ask spread.
Margin: The amount of funds required in a clients account in order to open a position or to maintain an open position. For example, 1% margin means that $1,000 of funds on deposit are required for a $100,000 position.
Margin Call: A requirement by the broker to deposit more funds in order to maintain an open position. Sometimes a "margin call" means that the position which does not have sufficient funds on deposit will simply be closed out by the broker. This procedure allows the client to avoid further losses or a debit account balance.
Market Order: An order to buy at the current Ask price.
Offer: Price at which broker/dealer is willing to sell. Same as "Ask".
Pip: The smallest price increment in a currency. Often referred to as "ticks" in the futures markets. For example, in EURUSD, a move from .9015 to .9016 is one pip. In USDJPY, a move from 128.51 to 128.52 is one pip.
Premium (also "Interest" or "Cost of Carry"): The cost, often quoted in terms of dollars or pips per day, of holding an open position.
Spot Foreign Exchange: Often referred to as the "interbank" market. Refers to currencies traded between two counterparties, often major banks. Spot Foreign Exchange is generally traded on margin and is the primary market that this website is focused on. Generally more liquid and widely traded than currency futures, particularly by institutions and professional money managers.
Stop: An order to buy at the market only when the market moves up to a specific price, or to sell at the market only when the market moves down to a specific price.
Technical Analysis: Analysis applied to the price action of the market to develop trading decisions, irrespective of fundamental factors.
Tick: The smallest price increment in a futures or CFD price. Often referred to as a "pip" in the currency markets. For example, in Down Jones Industrials, a move from 8845 to 8846 is one tick. In S&P 500, a move from 902.50 to 902.51 is one tick.
Bid: Price at which broker/dealer is willing to buy.
Bid/Ask Spread(or "Spread"): The distance, usually in pips, between the Bid and Ask price. A tighter spread is better for the trader.
Cost of Carry (also "Interest" or "Premium"): The cost, often quoted in terms of dollars or pips per day, of holding an open position.
Currency Futures: Futures contracts traded on an exchange, most typically the Chicago Mercantile Exchange ("CME"). Always quoted in terms of the currency value with respect to the US Dollar. Parameters of the futures contract are standardized by the exchange.
Drawdown: The magnitude of a decline in account value, either in percentage or dollar terms, as measured from peak to subsequent trough. For example, if a trader's account increased in value from $10,000 to $20,000, then dropped to $15,000, then increased again to $25,000, that trader would have had a maximum drawdown of $5,000 (incurred when the account declined from $20,000 to $15,000) even though that trader's account was never in a loss position from inception.
EBS: "Electronic Brokerage System", the electronic system on which major banks trade with each other. This is considered to be the most definitive indicator of prices at which currencies are "really" trading, at least for EUR/USD and USD/JPY.
Forex: Short for "Foreign Exchange". Refers generally to the Foreign Exchange trading industry and/or to the currencies themselves.
Fundamental Analysis: Macro or strategic assessments of where a currency should be trading based on any criteria but the price action itself. These criteria often include the economic condition of the country that the currency represents, monetary policy, and other "fundamental" elements.
Leverage: The amount, expressed as a multiple, by which the notional amount traded exceeds the margin required to trade. For example, if the notional amount traded (also referred to as "lot size" or "contract value") is $100,000 dollars and the required margin is $2,000, the trader can trade with 50 times leverage ($100,000/$2,000).
Limit: An order to buy at a specified price when the market moves down to that price, or to sell at a specified price when the market moves up to that price.
Liquidity: A function of volume and activity in a market. It is the efficiency and cost effectiveness with which positions can be traded and orders executed. A more liquid market will provide more frequent price quotes at a smaller bid/ask spread.
Margin: The amount of funds required in a clients account in order to open a position or to maintain an open position. For example, 1% margin means that $1,000 of funds on deposit are required for a $100,000 position.
Margin Call: A requirement by the broker to deposit more funds in order to maintain an open position. Sometimes a "margin call" means that the position which does not have sufficient funds on deposit will simply be closed out by the broker. This procedure allows the client to avoid further losses or a debit account balance.
Market Order: An order to buy at the current Ask price.
Offer: Price at which broker/dealer is willing to sell. Same as "Ask".
Pip: The smallest price increment in a currency. Often referred to as "ticks" in the futures markets. For example, in EURUSD, a move from .9015 to .9016 is one pip. In USDJPY, a move from 128.51 to 128.52 is one pip.
Premium (also "Interest" or "Cost of Carry"): The cost, often quoted in terms of dollars or pips per day, of holding an open position.
Spot Foreign Exchange: Often referred to as the "interbank" market. Refers to currencies traded between two counterparties, often major banks. Spot Foreign Exchange is generally traded on margin and is the primary market that this website is focused on. Generally more liquid and widely traded than currency futures, particularly by institutions and professional money managers.
Stop: An order to buy at the market only when the market moves up to a specific price, or to sell at the market only when the market moves down to a specific price.
Technical Analysis: Analysis applied to the price action of the market to develop trading decisions, irrespective of fundamental factors.
Tick: The smallest price increment in a futures or CFD price. Often referred to as a "pip" in the currency markets. For example, in Down Jones Industrials, a move from 8845 to 8846 is one tick. In S&P 500, a move from 902.50 to 902.51 is one tick.
Calculating Profit and Loss
For ease of use, most online trading platforms automatically calculate the P&L of a traders' open positions. However, it is useful to understand how this calculation is derived.
To illustrate a typical FX trade, consider the following example.
The current bid/ask price for EUR/USD is 1.2320/23, meaning you can buy 1 euro with 1.2323 US dollars or sell 1 euro for 1.2320 US dollars.
Suppose you decide that the Euro is undervalued against the US dollar. To execute this strategy, you would buy Euros (simultaneously selling dollars), and then wait for the exchange rate to rise.
So you make the trade: to buy 100,000 euros you pay 123,230 dollars (100,000 x 1.2323). Remember, at 1% margin, your initial margin deposit would be $1,232 for this trade.
As you expected, Euro strengthens to 1.2395/98. Now, to realize your profits, you sell 100,000 euros at the current rate of 1.2395, and receive $123,950.
You bought 100k Euros at 1.2323, paying $123,230. You sold 100k Euros at 1.2395, receiving $123,950. That's a difference of 72 pips, or in dollar terms ($123,950 - $123,230 = $720).
Total profit = US $720
(TIP: When trading any USD counter currency pair, each pip is worth $10, per 100,000 trades).
This information was provided by Forex,44 Wall Street, 7th Floor, New York 10005.
To illustrate a typical FX trade, consider the following example.
The current bid/ask price for EUR/USD is 1.2320/23, meaning you can buy 1 euro with 1.2323 US dollars or sell 1 euro for 1.2320 US dollars.
Suppose you decide that the Euro is undervalued against the US dollar. To execute this strategy, you would buy Euros (simultaneously selling dollars), and then wait for the exchange rate to rise.
So you make the trade: to buy 100,000 euros you pay 123,230 dollars (100,000 x 1.2323). Remember, at 1% margin, your initial margin deposit would be $1,232 for this trade.
As you expected, Euro strengthens to 1.2395/98. Now, to realize your profits, you sell 100,000 euros at the current rate of 1.2395, and receive $123,950.
You bought 100k Euros at 1.2323, paying $123,230. You sold 100k Euros at 1.2395, receiving $123,950. That's a difference of 72 pips, or in dollar terms ($123,950 - $123,230 = $720).
Total profit = US $720
(TIP: When trading any USD counter currency pair, each pip is worth $10, per 100,000 trades).
This information was provided by Forex,44 Wall Street, 7th Floor, New York 10005.
Leverage and Margin
The leverage available in forex trading is one of main attractions of this market 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 provides more leverage than stocks or futures. In forex trading, the amount of leverage available can be up to 200 times the value of your account.
There are several reasons for the higher leverage that is offered in the forex market. On a daily basis, the volatility of the major currencies is less than 1%. This is much lower than an active stock, which can easily have a 5-10% move in a single day. With leverage, you can capture higher returns on a smaller market movement. More importantly, leverage allows traders to increase their buying power and utilize less capital to trade. Of course, increasing leverage increases risk.
Margin Trading: Stocks vs Forex
The word "margin" means something very different in forex than it does in stocks.
With stocks, trading on margin means that a trader can borrow up to 50% of a stock's value to buy that stock. This can be a costly move because the investor must pay interest to the brokerage firm on the amount borrowed. This is not the case in forex trading.
* For example, at $400/share, 100 shares of Google are valued at $40,000 ($400 x 100 shares). To trade this stock on margin, the money required for the trade is 50%, or $20,000. The remaining $20,000 is borrowed and interest must be paid on that amount. Margin interest is different from broker to broker, but a good rule of thumb is typically Prime plus 1-3% or more.
In forex, margin is the minimum required balance to place a trade. When you open a forex trading account, the money you deposit acts as collateral for your trades. This deposit, called margin, is typically 1% of the value of the position.
* For example, if you want to purchase $100,000 of USD/JPY at 100:1 leverage, the money required is 1%, or $1000. The other $99,000 is collateralized with your remaining account balance. You pay no interest.
It is very important to remember that increasing leverage increases risk. You should monitor your account balance on a regular basis and utilize stop-loss orders on every open position in an attempt to limit downside risk.
Here's a hypothetical example that demonstrates the upside of leverage:
With a US$5,000 balance in your account, you decide that the US Dollar (USD) is undervalued against the Swiss Franc (CHF).
To execute this strategy, you must buy Dollars (simultaneously selling Francs), and then wait for the exchange rate to rise.
The current bid/ask price for USD/CHF is 1.2322/1.2327 (meaning you can buy $1 US for 1.2327 Swiss Francs or sell $1 US for 1.2322 francs)
Your available leverage is 100:1 or 1%. You execute the trade, buying a one lot: buying 100,000 US dollars and selling 123,270 Swiss Francs. At 100:1 leverage, your initial margin deposit for this trade is $1,000.
As you expected, USD/CHF rises 50 pips to 1.2372/77. Since you're long dollars (and are short francs), you must now sell dollars and buy back the francs to realize any profit.
You close out the position, selling one lot (selling 100,000 US dollars and receiving 123,720 CHF) Since you originally sold (paid) 123,270 CHF, your profit is 450 CHF.
To calculate your P&L in terms of US dollars, simply divide 450 by the current USD/CHF rate of 1.2372. Your profit on this trade is $364.3
SUMMARY
Initial Investment: $1000
Profit: $364.31
Return on investment: 36%
If you had executed this trade without using leverage, your return on investment would be less than 1%.
This information was provided by Forex,44 Wall Street, 7th Floor, New York 10005.
Forex provides more leverage than stocks or futures. In forex trading, the amount of leverage available can be up to 200 times the value of your account.
There are several reasons for the higher leverage that is offered in the forex market. On a daily basis, the volatility of the major currencies is less than 1%. This is much lower than an active stock, which can easily have a 5-10% move in a single day. With leverage, you can capture higher returns on a smaller market movement. More importantly, leverage allows traders to increase their buying power and utilize less capital to trade. Of course, increasing leverage increases risk.
Margin Trading: Stocks vs Forex
The word "margin" means something very different in forex than it does in stocks.
With stocks, trading on margin means that a trader can borrow up to 50% of a stock's value to buy that stock. This can be a costly move because the investor must pay interest to the brokerage firm on the amount borrowed. This is not the case in forex trading.
* For example, at $400/share, 100 shares of Google are valued at $40,000 ($400 x 100 shares). To trade this stock on margin, the money required for the trade is 50%, or $20,000. The remaining $20,000 is borrowed and interest must be paid on that amount. Margin interest is different from broker to broker, but a good rule of thumb is typically Prime plus 1-3% or more.
In forex, margin is the minimum required balance to place a trade. When you open a forex trading account, the money you deposit acts as collateral for your trades. This deposit, called margin, is typically 1% of the value of the position.
* For example, if you want to purchase $100,000 of USD/JPY at 100:1 leverage, the money required is 1%, or $1000. The other $99,000 is collateralized with your remaining account balance. You pay no interest.
It is very important to remember that increasing leverage increases risk. You should monitor your account balance on a regular basis and utilize stop-loss orders on every open position in an attempt to limit downside risk.
Here's a hypothetical example that demonstrates the upside of leverage:
With a US$5,000 balance in your account, you decide that the US Dollar (USD) is undervalued against the Swiss Franc (CHF).
To execute this strategy, you must buy Dollars (simultaneously selling Francs), and then wait for the exchange rate to rise.
The current bid/ask price for USD/CHF is 1.2322/1.2327 (meaning you can buy $1 US for 1.2327 Swiss Francs or sell $1 US for 1.2322 francs)
Your available leverage is 100:1 or 1%. You execute the trade, buying a one lot: buying 100,000 US dollars and selling 123,270 Swiss Francs. At 100:1 leverage, your initial margin deposit for this trade is $1,000.
As you expected, USD/CHF rises 50 pips to 1.2372/77. Since you're long dollars (and are short francs), you must now sell dollars and buy back the francs to realize any profit.
You close out the position, selling one lot (selling 100,000 US dollars and receiving 123,720 CHF) Since you originally sold (paid) 123,270 CHF, your profit is 450 CHF.
To calculate your P&L in terms of US dollars, simply divide 450 by the current USD/CHF rate of 1.2372. Your profit on this trade is $364.3
SUMMARY
Initial Investment: $1000
Profit: $364.31
Return on investment: 36%
If you had executed this trade without using leverage, your return on investment would be less than 1%.
This information was provided by Forex,44 Wall Street, 7th Floor, New York 10005.
The Benefits of Forex Trading
No Short Selling Restrictions
Forex trading always involves buying one currency and selling another, so traders can easily trade in a rising or falling market. There is no Zero Uptick rule or any other restriction against shorting a currency.
At $3.2 Trillion Per Day, Forex is the Most Traded Market in the World
The sheer volume of Forex helps to facilitates price stability in most market conditions. What's more, almost 85% of all currency transactions involve the 7 major currency pairs.
Trade on Your Schedule; Respond to Changes in the Market
Forex is a true 24-hour market, open continuously from 5:00pm ET on Sunday to 5:00 pm on Friday. With three distinct trading sessions in the US, Europe and Asia, you can trade on your own schedule and respond to breaking news.
Keep 100% of Your Trading Profits
FOREX.com charges no commissions or transaction fees, while still offering free access to real-time quotes, news, charts, research, and more. The cost of trading is built into the bid/ask spread. Also, dealing spreads as low as 3 pips (.0003) are available in currency trading. Even at a penny ($.01), the bid/ask on a stock trade is 30x wider, in addition to the brokerage commission.
Up to 200:1 Leverage
With more buying power, you can increase your total return on investment with less cash outlay. Of course, increasing leverage increases risk. With $1,000 cash in a margin account that allows 200:1 leverage (.5%), you can trade up to $200,000 in notional value.
This information was provided by Forex,44 Wall Street, 7th Floor, New York 10005.
Forex trading always involves buying one currency and selling another, so traders can easily trade in a rising or falling market. There is no Zero Uptick rule or any other restriction against shorting a currency.
At $3.2 Trillion Per Day, Forex is the Most Traded Market in the World
The sheer volume of Forex helps to facilitates price stability in most market conditions. What's more, almost 85% of all currency transactions involve the 7 major currency pairs.
Trade on Your Schedule; Respond to Changes in the Market
Forex is a true 24-hour market, open continuously from 5:00pm ET on Sunday to 5:00 pm on Friday. With three distinct trading sessions in the US, Europe and Asia, you can trade on your own schedule and respond to breaking news.
Keep 100% of Your Trading Profits
FOREX.com charges no commissions or transaction fees, while still offering free access to real-time quotes, news, charts, research, and more. The cost of trading is built into the bid/ask spread. Also, dealing spreads as low as 3 pips (.0003) are available in currency trading. Even at a penny ($.01), the bid/ask on a stock trade is 30x wider, in addition to the brokerage commission.
Up to 200:1 Leverage
With more buying power, you can increase your total return on investment with less cash outlay. Of course, increasing leverage increases risk. With $1,000 cash in a margin account that allows 200:1 leverage (.5%), you can trade up to $200,000 in notional value.
This information was provided by Forex,44 Wall Street, 7th Floor, New York 10005.
Forex Market Drivers
How Interest Rate Increases Drive Currency Prices
A common way to think about U.S. interest rates is how much it's going to cost to borrow money, whether for our mortgages or how much we'll earn on our bond and money market investments. Currency traders think bigger. Interest rate policy is actually a key driver of currency prices and typically a strategy for new currency traders.
Fundamentally, if a country raises its interest rates, the currency of that country will strengthen because the higher interest rates attract more foreign investors. When foreign investors invest in U.S. treasuries, they must sell their own currency and buy U.S. Dollars in order to purchase the bonds. If you believe U.S. interest rates will continue to rise, you could express that view by going long U.S. Dollars.
If you believe that the Fed has finished raising rates for the time being, you could capitalize on that view by buying a currency with a higher interest rate, or at least the prospect of relatively higher rates. For example, U.S. rates may be higher than those of Euroland now but the prospect of higher rates in Euroland, albeit still lower than the U.S., may drive investors to purchase Euros.
How Rising Gold Prices Affect Currencies
It's not hard to understand why we've experienced a run-up in gold prices lately. In the US, we're dealing with the threat of inflation and a lot of geo-political tension. Historically, gold is a country-neutral alternative to the U.S. dollar. So given the inverse relationship between gold and the U.S. Dollar, currency traders can take advantage of volatility in gold prices in innovative ways.
For example, if gold breaks an important price level, one would expect gold to move higher in coming periods. With this in mind, forex traders would look to sell dollars and buy Euros, for example, as a proxy for higher gold prices. Moreover, higher gold prices frequently have a positive impact on the currencies of major gold producers. For example, Australia is the world's third largest exporter of gold, and Canada is the world's third largest producer of gold. Therefore, if you believe the price of gold will continue to rise you could establish long positions in Australian Dollar or the Canadian Dollar - or even position to be long those currencies against other major countries like the UK or Japan.
Translating Rising Oil Prices to Currency Trading Opportunities
Equity investors already know that higher oil prices negatively impact the stock prices of companies that are highly dependent on oil such as airlines, since more expensive oil means higher expenses and lower profits for those companies.
In much the same way, a country's dependency on oil determines how its currency will be impacted by a change in oil prices. The US's massive foreign dependence on oil makes the US dollar more sensitive to oil prices than other countries. Therefore, any sharp increase in oil prices is typically dollar-negative.
If you believe the price of oil will continue to increase for the near term, you could express that viewpoint in the currency markets by once again favoring commodity-based economies like Australia and Canada or selling other energy-dependent countries like Japan.
This information was provided by Forex,44 Wall Street, 7th Floor, New York 10005.
A common way to think about U.S. interest rates is how much it's going to cost to borrow money, whether for our mortgages or how much we'll earn on our bond and money market investments. Currency traders think bigger. Interest rate policy is actually a key driver of currency prices and typically a strategy for new currency traders.
Fundamentally, if a country raises its interest rates, the currency of that country will strengthen because the higher interest rates attract more foreign investors. When foreign investors invest in U.S. treasuries, they must sell their own currency and buy U.S. Dollars in order to purchase the bonds. If you believe U.S. interest rates will continue to rise, you could express that view by going long U.S. Dollars.
If you believe that the Fed has finished raising rates for the time being, you could capitalize on that view by buying a currency with a higher interest rate, or at least the prospect of relatively higher rates. For example, U.S. rates may be higher than those of Euroland now but the prospect of higher rates in Euroland, albeit still lower than the U.S., may drive investors to purchase Euros.
How Rising Gold Prices Affect Currencies
It's not hard to understand why we've experienced a run-up in gold prices lately. In the US, we're dealing with the threat of inflation and a lot of geo-political tension. Historically, gold is a country-neutral alternative to the U.S. dollar. So given the inverse relationship between gold and the U.S. Dollar, currency traders can take advantage of volatility in gold prices in innovative ways.
For example, if gold breaks an important price level, one would expect gold to move higher in coming periods. With this in mind, forex traders would look to sell dollars and buy Euros, for example, as a proxy for higher gold prices. Moreover, higher gold prices frequently have a positive impact on the currencies of major gold producers. For example, Australia is the world's third largest exporter of gold, and Canada is the world's third largest producer of gold. Therefore, if you believe the price of gold will continue to rise you could establish long positions in Australian Dollar or the Canadian Dollar - or even position to be long those currencies against other major countries like the UK or Japan.
Translating Rising Oil Prices to Currency Trading Opportunities
Equity investors already know that higher oil prices negatively impact the stock prices of companies that are highly dependent on oil such as airlines, since more expensive oil means higher expenses and lower profits for those companies.
In much the same way, a country's dependency on oil determines how its currency will be impacted by a change in oil prices. The US's massive foreign dependence on oil makes the US dollar more sensitive to oil prices than other countries. Therefore, any sharp increase in oil prices is typically dollar-negative.
If you believe the price of oil will continue to increase for the near term, you could express that viewpoint in the currency markets by once again favoring commodity-based economies like Australia and Canada or selling other energy-dependent countries like Japan.
This information was provided by Forex,44 Wall Street, 7th Floor, New York 10005.
What is a pip ?
n the Forex market, prices are quoted in pips. Pip stands for "percentage in point" and is the fourth decimal point, which is 1/100th of 1%.
In EUR/USD, a 3 pip spread is quoted as 1.2500/1.2503
Among the major currencies, the only exception to that rule is the Japanese yen. In USD/JPY, the quotation is only taken out to two decimal points (i.e. to 1/100 th of yen, as opposed to 1/1000th with other major currencies).
In USD/JPY, a 3 pip spread is quoted as 114.05/114.08
This information was provided by Forex,44 Wall Street, 7th Floor, New York 10005.
In EUR/USD, a 3 pip spread is quoted as 1.2500/1.2503
Among the major currencies, the only exception to that rule is the Japanese yen. In USD/JPY, the quotation is only taken out to two decimal points (i.e. to 1/100 th of yen, as opposed to 1/1000th with other major currencies).
In USD/JPY, a 3 pip spread is quoted as 114.05/114.08
This information was provided by Forex,44 Wall Street, 7th Floor, New York 10005.
Understanding Forex Quotes
Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed is the base currency and 2) the value of the base currency is always 1.
The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", 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/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.
When the U.S. dollar is the base unit and
a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.
The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.
In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.
Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.
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).
This information was provided by Forex,44 Wall Street, 7th Floor, New York 10005.
The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", 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/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.
When the U.S. dollar is the base unit and
a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.
The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.
In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.
Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.
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).
This information was provided by Forex,44 Wall Street, 7th Floor, New York 10005.
Currancy Markets .
Foreign Exchange Markets
Participants of a Foreign Exchange Markets
The main participants of a foreign exchange market are:
* Commercial Banks
* Exchange Markets
* Central Banks
* Firms that conduct foreign trade transactions
* Investment Funds * Broker companies
* Private Persons
Commercial Banks conduct the main volume of exchange transactions. Other participants of the market have their accounts at the banks, conducting necessary conversion transactions. Banks accumulate (through transactions with the clients) the combined needs of the market in exchange conversions as well as in calling and distributing money, breaking with it into new banks. Besides satisfying clients' requests, banks can operate independently, using their own assets. In the end, a foreign exchange market is a market of interbank dealings, and when speaking about the exchange rates movement, one should bear in mind the existence of an interbank foreign exchange market. In international foreign exchange markets, international banks with the daily volume of transactions of billions dollars have the biggest influence. These are Barclays Bank, Citibank, Chase Manhatten Bank, Deutsche Bank, Swiss Bank Corporation, Union Bank of Switzerland, etc.
Exchange Markets Contrary to stock markets and markets for terminal exchange dealings, exchange markets do not work in a definite building and they do not have definite business hours. Thanks to the development of telecommunications most of the leading financial institutions of the world use services of exchange markets directly and via mediators 24 hours a day. The biggest international exchange markets are the London, New York and Tokyo exchange markets. In some countries with transitional economies there are exchange markets for currency exchange by juristic persons and for forming a market exchange rate. The state usually regulates the exchange rate in an active manner, using the compactness of the exchange market.
Central Banks control currency reserves, realize interventions that influence the exchange rate, and regulate the interest investment rate in the national currency. The central bank of the United States, the US Federal Reserve Bank, or "FED", has the greatest influence in the international exchange markets. It is followed by the central banks of Germany, (the Deutsche Bundesbank or BUBA) and of Great Britain (the Bank of England, nicknamed the "Old Lady").
Firms that conduct foreign trade transactions. Companies participating in international trade have a stable demand for foreign currency (importers) and supply (exporters). As a rule, these organizations do not have direct access to exchange markets, and they conduct their conversion and deposit transactions via commercial banks.
Investment Funds. These companies, represented by various international investment, pension,and mutual funds, insurance companies, and trusts, realize the policy of diversified management of portfolio of assets by placing there money in securities of the governments and corporations of different countries. The world-know fund, Quantum, is owned by George Soros, and it executes successful exchange speculations. Big international corporations as Xerox, Nestle, General Motors a.o. that make foreign industrial investments (creating branches, joint ventures etc.), also are firms of this kind.
Broker Companies bring together a buyer and a seller of foreign currency and conduct a conversion dealing between them. Broker companies take a broker's fee. As a rule, in the FOREX market there is no fee as a per cent from the sum of a transaction, or as a sum agreed in advance. Usually the dealers of broker companies quote currency with a spread, that includes their fee. A broker company, having the information about the asked rates, is a place where the real exchange rate is formed according to closed deals. Commersial banks get their information about the current exchange rate from broker companies. The biggest international broker companies are Lasser Marshall, Harlow Butler, Tullett and Tokio, Coutts, and Tradition.
Private Persons. Natural persons realize a wide range of non-commercial transactions in the sphere of foreign tourism, transfers of salaries, pensions, royalties, buying and selling foreign currency. This is also the biggest group that realizes speculative exchange transactions.
The working hours of the markets
Exchange markets work all the time. Their work in the calendar twenty-four-hour period is started in the Far East, in New Zealand (Wellington), passing the time zones in Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt-on-Main, London, then finishing the day in New York and Los Angeles. The count of time zones begins from the zero meridian in Greenwich near London, and the time itself is called Greenwich Mean Time (GMT). Depending on the season (summer or winter), the time in different financial centers of the globe will differ from the GMT.
The working day of exchange brokers of Western commercial banks starts, as a rule, at 7:30 am by local time. At 8:00 am the dealers are already closing deals. The morning hours are usually devoted to short analyses of events on the international exchange markets at the moment. The dealers use economic and technical analyses of the situation in the market, read analytical articles in newspapers, then exchange points of view and the latest rumors with each other and with dealers from other commercial banks. On the basis of various data, a picture of possible behavior of the exchange rate on the coming day is put together, with variants of all sorts of possible events.
By 8:00 am the market, consisting of individual dealers, will have worked out the tactics of its behavior, and it enters the operations of the international exchange market, giving a new and powerful impulse to the movement of the exchange rate. Various territorial markets can be given the following characteristics of an average typical activity during a 24 hour day.
Far East. Here the most active deals in the market are conversion transactions with the dollar to the Japanese yen, the dollar to Euro, Euro to yen, and the dollar to the Australian dollar. Very often fluctuations of exchange rates at that time are insignificant, but there are days when currencies, especially the dollar against the yen, make breath-taking flights. Especially so when the central bank of Japan makes an intervention. In Moscow its night and morning at that time, so till noon one can work with Tokyo, till mid-day with Singapore.
Western Europe. At 10:00 am Moscow time the market in the European financial centers of Zurich, Frankfurt-on-Main, Paris, Luxembourg are open. However, the really powerful movement of the exchange rate against the main currencies starts after 11:00 am Moscow time, when the London market is opened. This continues, as a rule, for 2 to 3 hours, after that the dealers of the European banks go to have lunch, and the activity of the market falls down a bit.
North America. The situation livens up with the opening of the New York market at 4:00 pm Moscow time, when dealers of American banks start working, and when European dealers come back from their lunch. Powers of European and American banks are about equal, that is why fluctuations of the rate do not go out of the limits of usual European fluctuations. Nevertheless, exchange dealers look forward to the opening of the New York market in order to receive fresh data about a possible movement of the rate (the more so if the European market has been sluggish). But when the European market is closed about 7p m or 8pm Moscow time, aggressive American banks, left alone on the "thin" market, are able to cause a sharp change of the exchange rate of the dollar against other currencies.
What is a FX speculator?
In modern conditions practically all financial transactions in the market are speculative by their nature, and there's nothing abnormal or criminal in it. One of the most vivid indices of markets' globalization is their daily volume of exchange transactions. Only in 10 major financial centers it increased from 206 billion dollars in 1986 to 967 billion dollars in 1992. According to the IMF, on the whole the volume is over 1 trillion dollars a day, and on some days it reaches 3 trillions. It is enough to say that the volume of gold and foreign exchange reserves of all developed countries was only 555.2 billion dollars in 1992, which is two times less than a daily volume of market transactions. According to some calculations, the volume of exchange transactions is 40 times bigger that the daily volume of foreign trade transactions. Therefore, most of the deals are caused not by a commercial necessity, but by financial reasons. And a financial transaction is always caused by the fact that money is looking for some profitable usage.
The international exchange system functioning in the world at the moment develops among people dealing with exchange and financial transactions: the so-called speculative psychology. In the world where exchange rates fluctuate for some per cent every week, where currencies, that are considered to be stable can lose 20 to 30 per cent of their cost during a few months, it's absolutely clear that the manager of a fund, trying to compensate for inevitable losses, has to use speculative operations. For example, a reasonable owner of dollars has to get rid of them very quickly and exchange them for Euro every time the expected fall of the dollar against Euro surpasses the difference between the profit from American notes and the profit from the respective German notes. For instance, if in the coming months the dollar is expected to fall against the Euro by 6%, and the profit from American notes is 6 per cent bigger than the profit from German notes, a speculator will probably decide to keep dollars. If the gap in the interest rates is less than the expected fall of the rate, the "running away from the dollar" begins.
Who are these speculators ? An analysis shows that the main speculators acting in the market are institutional investors. Among them one can single out, first of all, official state institutions, and, secondly, private financial and other institutions. Thus according to the report of the "Group of Ten", state investors in Europe and Japan keep about 20 per cent of their assets in the form of foreign securities (in the USA only 7.5 per cent). However, the main feature of the 1980s was the growing international activity of private financial institutions: pension funds, insurance companies, and mutual funds. The Globalization of international financial markets is an objective process, reflecting the growing degree of economic relations in the world. It promotes a more effective distribution of financial resources.
Major World Exchange Markets:
AMEX - American Stock Exchange
BOVESPA - Sao Paulo Stock Exchange
CBOT - Chicago Board of Trade
CHX - Chicago Stock Exchange
CME - Chicago Mercantile Exchange
LIFFE - London International Financial Futures and Options Exchange
London Stock Exchange -London Stock Exchange
Nasdaq
NYMEX - New York Mercantile Exchange
NYSE - New York Stock Exchange
SBF - la Bourse de Paris
SES - Singapore Exchange
SET - Stock Exchange of Thailand
TSE - Tokyo Stock Exchange
TSE - Toronto Stock Exchange
LSEX - London Stock Exchange
CBOE - Chicago Board Options Exchange CBOE
PHLX - Philadelphia Stock Exchange
This information was provided by 2000-2008 VIGRI Ltd.
Participants of a Foreign Exchange Markets
The main participants of a foreign exchange market are:
* Commercial Banks
* Exchange Markets
* Central Banks
* Firms that conduct foreign trade transactions
* Investment Funds * Broker companies
* Private Persons
Commercial Banks conduct the main volume of exchange transactions. Other participants of the market have their accounts at the banks, conducting necessary conversion transactions. Banks accumulate (through transactions with the clients) the combined needs of the market in exchange conversions as well as in calling and distributing money, breaking with it into new banks. Besides satisfying clients' requests, banks can operate independently, using their own assets. In the end, a foreign exchange market is a market of interbank dealings, and when speaking about the exchange rates movement, one should bear in mind the existence of an interbank foreign exchange market. In international foreign exchange markets, international banks with the daily volume of transactions of billions dollars have the biggest influence. These are Barclays Bank, Citibank, Chase Manhatten Bank, Deutsche Bank, Swiss Bank Corporation, Union Bank of Switzerland, etc.
Exchange Markets Contrary to stock markets and markets for terminal exchange dealings, exchange markets do not work in a definite building and they do not have definite business hours. Thanks to the development of telecommunications most of the leading financial institutions of the world use services of exchange markets directly and via mediators 24 hours a day. The biggest international exchange markets are the London, New York and Tokyo exchange markets. In some countries with transitional economies there are exchange markets for currency exchange by juristic persons and for forming a market exchange rate. The state usually regulates the exchange rate in an active manner, using the compactness of the exchange market.
Central Banks control currency reserves, realize interventions that influence the exchange rate, and regulate the interest investment rate in the national currency. The central bank of the United States, the US Federal Reserve Bank, or "FED", has the greatest influence in the international exchange markets. It is followed by the central banks of Germany, (the Deutsche Bundesbank or BUBA) and of Great Britain (the Bank of England, nicknamed the "Old Lady").
Firms that conduct foreign trade transactions. Companies participating in international trade have a stable demand for foreign currency (importers) and supply (exporters). As a rule, these organizations do not have direct access to exchange markets, and they conduct their conversion and deposit transactions via commercial banks.
Investment Funds. These companies, represented by various international investment, pension,and mutual funds, insurance companies, and trusts, realize the policy of diversified management of portfolio of assets by placing there money in securities of the governments and corporations of different countries. The world-know fund, Quantum, is owned by George Soros, and it executes successful exchange speculations. Big international corporations as Xerox, Nestle, General Motors a.o. that make foreign industrial investments (creating branches, joint ventures etc.), also are firms of this kind.
Broker Companies bring together a buyer and a seller of foreign currency and conduct a conversion dealing between them. Broker companies take a broker's fee. As a rule, in the FOREX market there is no fee as a per cent from the sum of a transaction, or as a sum agreed in advance. Usually the dealers of broker companies quote currency with a spread, that includes their fee. A broker company, having the information about the asked rates, is a place where the real exchange rate is formed according to closed deals. Commersial banks get their information about the current exchange rate from broker companies. The biggest international broker companies are Lasser Marshall, Harlow Butler, Tullett and Tokio, Coutts, and Tradition.
Private Persons. Natural persons realize a wide range of non-commercial transactions in the sphere of foreign tourism, transfers of salaries, pensions, royalties, buying and selling foreign currency. This is also the biggest group that realizes speculative exchange transactions.
The working hours of the markets
Exchange markets work all the time. Their work in the calendar twenty-four-hour period is started in the Far East, in New Zealand (Wellington), passing the time zones in Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt-on-Main, London, then finishing the day in New York and Los Angeles. The count of time zones begins from the zero meridian in Greenwich near London, and the time itself is called Greenwich Mean Time (GMT). Depending on the season (summer or winter), the time in different financial centers of the globe will differ from the GMT.
The working day of exchange brokers of Western commercial banks starts, as a rule, at 7:30 am by local time. At 8:00 am the dealers are already closing deals. The morning hours are usually devoted to short analyses of events on the international exchange markets at the moment. The dealers use economic and technical analyses of the situation in the market, read analytical articles in newspapers, then exchange points of view and the latest rumors with each other and with dealers from other commercial banks. On the basis of various data, a picture of possible behavior of the exchange rate on the coming day is put together, with variants of all sorts of possible events.
By 8:00 am the market, consisting of individual dealers, will have worked out the tactics of its behavior, and it enters the operations of the international exchange market, giving a new and powerful impulse to the movement of the exchange rate. Various territorial markets can be given the following characteristics of an average typical activity during a 24 hour day.
Far East. Here the most active deals in the market are conversion transactions with the dollar to the Japanese yen, the dollar to Euro, Euro to yen, and the dollar to the Australian dollar. Very often fluctuations of exchange rates at that time are insignificant, but there are days when currencies, especially the dollar against the yen, make breath-taking flights. Especially so when the central bank of Japan makes an intervention. In Moscow its night and morning at that time, so till noon one can work with Tokyo, till mid-day with Singapore.
Western Europe. At 10:00 am Moscow time the market in the European financial centers of Zurich, Frankfurt-on-Main, Paris, Luxembourg are open. However, the really powerful movement of the exchange rate against the main currencies starts after 11:00 am Moscow time, when the London market is opened. This continues, as a rule, for 2 to 3 hours, after that the dealers of the European banks go to have lunch, and the activity of the market falls down a bit.
North America. The situation livens up with the opening of the New York market at 4:00 pm Moscow time, when dealers of American banks start working, and when European dealers come back from their lunch. Powers of European and American banks are about equal, that is why fluctuations of the rate do not go out of the limits of usual European fluctuations. Nevertheless, exchange dealers look forward to the opening of the New York market in order to receive fresh data about a possible movement of the rate (the more so if the European market has been sluggish). But when the European market is closed about 7p m or 8pm Moscow time, aggressive American banks, left alone on the "thin" market, are able to cause a sharp change of the exchange rate of the dollar against other currencies.
What is a FX speculator?
In modern conditions practically all financial transactions in the market are speculative by their nature, and there's nothing abnormal or criminal in it. One of the most vivid indices of markets' globalization is their daily volume of exchange transactions. Only in 10 major financial centers it increased from 206 billion dollars in 1986 to 967 billion dollars in 1992. According to the IMF, on the whole the volume is over 1 trillion dollars a day, and on some days it reaches 3 trillions. It is enough to say that the volume of gold and foreign exchange reserves of all developed countries was only 555.2 billion dollars in 1992, which is two times less than a daily volume of market transactions. According to some calculations, the volume of exchange transactions is 40 times bigger that the daily volume of foreign trade transactions. Therefore, most of the deals are caused not by a commercial necessity, but by financial reasons. And a financial transaction is always caused by the fact that money is looking for some profitable usage.
The international exchange system functioning in the world at the moment develops among people dealing with exchange and financial transactions: the so-called speculative psychology. In the world where exchange rates fluctuate for some per cent every week, where currencies, that are considered to be stable can lose 20 to 30 per cent of their cost during a few months, it's absolutely clear that the manager of a fund, trying to compensate for inevitable losses, has to use speculative operations. For example, a reasonable owner of dollars has to get rid of them very quickly and exchange them for Euro every time the expected fall of the dollar against Euro surpasses the difference between the profit from American notes and the profit from the respective German notes. For instance, if in the coming months the dollar is expected to fall against the Euro by 6%, and the profit from American notes is 6 per cent bigger than the profit from German notes, a speculator will probably decide to keep dollars. If the gap in the interest rates is less than the expected fall of the rate, the "running away from the dollar" begins.
Who are these speculators ? An analysis shows that the main speculators acting in the market are institutional investors. Among them one can single out, first of all, official state institutions, and, secondly, private financial and other institutions. Thus according to the report of the "Group of Ten", state investors in Europe and Japan keep about 20 per cent of their assets in the form of foreign securities (in the USA only 7.5 per cent). However, the main feature of the 1980s was the growing international activity of private financial institutions: pension funds, insurance companies, and mutual funds. The Globalization of international financial markets is an objective process, reflecting the growing degree of economic relations in the world. It promotes a more effective distribution of financial resources.
Major World Exchange Markets:
AMEX - American Stock Exchange
BOVESPA - Sao Paulo Stock Exchange
CBOT - Chicago Board of Trade
CHX - Chicago Stock Exchange
CME - Chicago Mercantile Exchange
LIFFE - London International Financial Futures and Options Exchange
London Stock Exchange -London Stock Exchange
Nasdaq
NYMEX - New York Mercantile Exchange
NYSE - New York Stock Exchange
SBF - la Bourse de Paris
SES - Singapore Exchange
SET - Stock Exchange of Thailand
TSE - Tokyo Stock Exchange
TSE - Toronto Stock Exchange
LSEX - London Stock Exchange
CBOE - Chicago Board Options Exchange CBOE
PHLX - Philadelphia Stock Exchange
This information was provided by 2000-2008 VIGRI Ltd.
The Main Principles of Trading
In contrast to exchange transactions with real supply or real currency the participants of FOREX use trading with a margin deposit; i.e. marginal or leverage trading. In marginal trading, each transaction has two obligatory stages (they can be divided by period of time, which can be as long as you like): buying (selling) of currency at one price, and then selling (buying) it at another (or at the same) price. The first transaction is called opening the position , the second one, closing the position.
Opening a position, a trader furnishes a deposit sum from 0.5 to 4 per cent of the credit line, granted for the transaction. So, in order to buy or sell 100,000 US dollars for Japanese yens, you will not need the whole sum, but only from 500 to 2000 US dollars depending on your policy of controlling risks. When the position is closed, the deposit sum returns, and calculation of profits or losses is done. All the profit or losses caused by the change of currency rates is credited on your account.
Let's take a concrete example of getting a profit from the changing the rate of the Euro, from 0,9162 to 0,9292. If you have anticipated this change by using technical or fundamental analysis, you can buy the Euro cheaper for dollars, and then sell it back at a higher price. For example, if you choose leverage 1:100, then 99,000 dollars of the credit line, granted by the Internet broker, is added to 1000 dollars, and you buy the Euro at the price of 0.9162. As a result of this transaction we get: $ 100,000 / 0.9162 = Euro 109.146, 47.
When the rate changes (an average daily change of Euro is about 70 to 100 pips), you close the position and sell the Euro for dollars, but at the rate of 0.9292. You get 109,146. 47*0.9292 =101,418.89 dollars. Your profit is $ 1,418.89. The same transaction with leverage 1:200 would give you $2, 837.78 of profit, with leverage 1:50 the profit would be 709.45, with leverage 1:25 - 354.72.
We'd like to remind you that the higher the credit leverage, the higher is your profit if the fluctuation of the currency rate was anticipated correctly. However, if your anticipation was wrong, your losses will be bigger.
One cannot feel confident in the FOREX market without a thorough knowledge of the terms used there.
Foreign exchange quotes are a relation between currencies.
* USDCHF - the cost of $1 in Swiss Francs.
* USDJPY - the cost of $1 in Japanese yens.
* EURUSD - the cost of Euro 1 in US dollars.
* GBPUSD - the cost of 1 GBP in US dollars.
That is, quotes are expressed in the units of the second currency for a unit of the first one. For example, quote USDJPY 108,91 shows that $1 costs 108,91 Japanese yens. Quote EURUSD 0.9561 shows that 1 Euro costs 0.9561 US dollars.
The last figure in the quote is called "pip". The cost of the pip is different for every currency, and depends on the leverage and current quote.
The formula for calculating 1 pip is:
100,000/current quote without commas * K
where К=1 at leverage 1:100,
К=2 at leverage 1:200,
К=0,5 at leverage 1:50,
K=0,25 at leverage 1:25.
Examples:
USDJPY = 108.91 leverage 1:100
100.000 / 10891 Ñ… 1 = 9,18 USD
EURUSD = 0.9561 leverage1:200
100.000 / 9561 Ñ… 2 =20,92 USD
GBPUSD and EURUSD are direct quotes, i.e. when the chart goes up, GBP and EUR become more expensive, and when it goes down, the currencies become cheaper. USDCHF and USDJPY are backward quotes, and when the chart grows, prices on CHF and JPY fall, and when the chart goes down, the prices grow.
On direct quotes you buy according to ASK and sell according to BID. With backward quotes, you buy according to BID and sell according to ASK .
Trading in the FOREX market is realized in lots. When you open a position, you can choose the number of lots you want from 1 to 10. One lot equals $ 100,000. The deposit sum for one lot will vary from $500 to $2000, depending on the credit leverage you choose. Leverage is a financial mechanism that allows crediting speculative transactions with a small deposit. We give you an opportunity to choose a credit leverage in the range of 1:200 to 1:25.
In the course of trading you can fix your profit or cut off your losses according to the commands LIMIT and STOP that have been set up.
LIMIT is set up higher than the current meaning of the price.
STOP is set up lower than the current meaning of the price.
With these commands the positions is closed without additional orders when the price reaches the agreed level.
In the process of trading you can create pending positions, that will be activated when the price reaches the agreed level (open price). When creating and closing orders, a temporary delay occurs, and lasts for about 30 to 40 seconds. When you make an inquiry, you are given a real market price, which is the current price at the moment of proposal, not at the moment of inquiry.
The main terms that characterize the account:
* Deal, realization of 2 trade transactions, when currency is bought (sold), and then the reverse conversion is realized.
* Balance, the sum on the account of a client after the last transaction is conducted.
* Floating Profit, the current profit on open positions.
* Floating storage, fee for postponement of an opened position over midnight GMT.
* Equity = Balance + Floating + Floating storage.
* Margin requirement, a necessary deposit sum calculated according to the formula
* 100,000 / K + 100,000 / K,
* where K = leverage, and the number of items equals the number of open positions.
* Percentage, index of an account.
* Percentage = Equity / Margin Requirement. At Percentage lower than 50 % it's impossible to open new positions.
* Margin call, condition of an account when all opened positions are closed by the Internet broker according to current quotes. It occurs at a Percentage lower than 10%.
Please note that contrary to the majority of other companies, in PRO-FOREX.com price levels of client's orders may differ from the current price only by 5 pips. However, very rarely are orders executed worse than requests, because of the high market volatility.
An Other Example of How to Trade
You can open your account with as little as $100, many beginners start with $1000 so that they have room when the price goes up and down during the day.
Price of currency moves in thousandths 0.000
It might change from 120.000 to 120.001
That is called 1 pip
100 lets you control 10000
You choose a currency pair to trade.
The currency price can either go up or down. The price quote is shown with a bid price and an ask price. bid is buying price, ask is selling price.
If you think the price is going to go up, then you buy it. You pay the bid price
If you think the currency price is going to go down then choose to sell it. You pay the ask price.
For this example we will say you have 10000 in your account:
FOREX wording:
position -- which pair you decide to trade - buy or sell
deal size -- amount you decide to buy or sell
deal rate -- amount you pay per pip movement
Price of currency moves in thousandths 0.000
It might change from 120.000 to 120.001
That is called 1 pip
100 lets you control 10000
You choose a currency pair to trade.
The currency price can either go up or down. The price quote is shown with a bid price and an ask price. bid is buying price, ask is selling price.
If you think the price is going to go up, then you buy it. You pay the bid price
If you think the currency price is going to go down then choose to sell it. You pay the ask price.
For this example we will say you have 10000 in your account:
FOREX wording:
position -- which pair you decide to trade - buy or sell
deal size -- amount you decide to buy or sell
deal rate -- amount you pay per pip movement
with more leverage you control more money, so you can open more positions
Open Free Trading Account : Leverages of up to 1:400
This information was provided by 2000-2008 Ayeel Marketing Inc.
Understanding Forex Trading
Investors and traders around the world are looking to the Forex market as a new speculation opportunity. But, how are transactions conducted in the Forex market? Or, what are the basics of Forex Trading? Before adventuring in the Forex market we need to make sure we understand the basics, otherwise we will find ourselves lost where we less expected. This is what this article is aimed to, to understand the basics of currency trading.
The instrument traded by Forex traders and investors are currency pairs. A currency pair is the exchange rate of one currency over another. The most traded currency pairs are:
EUR/USD: Euro
GBP/USD: Pound
USD/CAD: Canadian dollar
USD/JPY: Yen
USD/CHF: Swiss franc
AUD/USD: Aussie
These currency pairs generate up to 85% of the overall volume generated in the Forex market.
So, for instance, if a trader goes long or buys the Euro, she or he is simultaneously buying the EUR and selling the USD. If the same trader goes short or sells the Aussie, she or he is simultaneously selling the AUD and buying the USD.
The first currency of each currency pair is referred as the base currency, while second currency is referred as the counter or quote currency.
Each currency pair is expressed in units of the counter currency needed to get one unit of the base currency.
If the price or quote of the EUR/USD is 1.2545, it means that 1.2545 US dollars are needed to get one EUR
All currency pairs are commonly quoted with a bid and ask price. The bid (always lower than the ask) is the price your broker is willing to buy at, thus the trader should sell at this price. The ask is the price your broker is willing to sell at, thus the trader should buy at this price.
EUR/USD 1.2545/48 or 1.2545/8
The bid price is 1.2545
The ask price is 1.2548
A pip is the minimum incremental move a currency pair can make. Pip stands for price interest point. A move in the EUR/USD from 1.2545 to 1.2560 equals 15 pips. And a move in the USD/JPY from 112.05 to 113.10 equals 105 pips.
In contrast with other financial markets where you require the full deposit of the amount traded, in the Forex market you require only a margin deposit. The rest will be granted by your broker.
The leverage provided by some brokers goes up to 400:1. This means that you require only 1/400 or .25% in balance to open a position (plus the floating gains/losses.) Most brokers offer 100:1, where every trader requires 1% in balance to open a position.
The standard lot size in the Forex market is $100,000 USD.
For instance, a trader wants to get long one lot in EUR/USD and he or she is using 100:1 leverage.
To open such position, he or she requires 1% in balance or $1,000 USD.
Of course it is not advisable to open a position with such limited funds in our trading balance. If the trade goes against our trader, the position is to be closed by the broker. This takes us to our next important term.
A margin call occurs when the balance of the trading account falls below the maintenance margin (capital required to open one position, 1% when the leverage used is 100:1, 2% when leverage used is 50:1, and so on.) At this moment, the broker sells off (or buys back in the case of short positions) all your trades, leaving the trader “theoretically” with the maintenance margin.
Most of the time margin calls occur when money management is not properly applied.
The trader, after an extensive analysis, decides there is a higher probability of the British pound to go up. He or she decides to go long risking 30 pips and having a target (reward) of 60 pips. If the market goes against our trader he/she will lose 30 pips, on the other hand, if the market goes in the intended way, he or she will gain 60 pips. The actual quote for the pound is 1.8524/27, 4 pips spread. Our trader gets long at 1.8530 (ask). By the time the market gets to either our target (called take profit order) or our risk point (called stop loss level) we will have to sell it at the bid price (the price our broker is willing to buy our position back.) In order to make 60 pips, our take profit level should be placed at 1.8590 (bid price.) If our target gets hit, the market ran 64 pips (60 pips plus the 4 pip spread.) If our stop loss level is hit, the market ran 26 (26 pips plus the 4 pip spread equals 30 pips) pips against us.
It’s very important to understand every aspect of trading. Start first from the very basic concepts, then move on to more complex issues such as Forex trading systems, trading psychology, trade and risk management, and so on. And make sure you master every single aspect before adventuring in a live trading account.
This information was provided by a-forextrading.com
The instrument traded by Forex traders and investors are currency pairs. A currency pair is the exchange rate of one currency over another. The most traded currency pairs are:
EUR/USD: Euro
GBP/USD: Pound
USD/CAD: Canadian dollar
USD/JPY: Yen
USD/CHF: Swiss franc
AUD/USD: Aussie
These currency pairs generate up to 85% of the overall volume generated in the Forex market.
So, for instance, if a trader goes long or buys the Euro, she or he is simultaneously buying the EUR and selling the USD. If the same trader goes short or sells the Aussie, she or he is simultaneously selling the AUD and buying the USD.
The first currency of each currency pair is referred as the base currency, while second currency is referred as the counter or quote currency.
Each currency pair is expressed in units of the counter currency needed to get one unit of the base currency.
If the price or quote of the EUR/USD is 1.2545, it means that 1.2545 US dollars are needed to get one EUR
All currency pairs are commonly quoted with a bid and ask price. The bid (always lower than the ask) is the price your broker is willing to buy at, thus the trader should sell at this price. The ask is the price your broker is willing to sell at, thus the trader should buy at this price.
EUR/USD 1.2545/48 or 1.2545/8
The bid price is 1.2545
The ask price is 1.2548
A pip is the minimum incremental move a currency pair can make. Pip stands for price interest point. A move in the EUR/USD from 1.2545 to 1.2560 equals 15 pips. And a move in the USD/JPY from 112.05 to 113.10 equals 105 pips.
In contrast with other financial markets where you require the full deposit of the amount traded, in the Forex market you require only a margin deposit. The rest will be granted by your broker.
The leverage provided by some brokers goes up to 400:1. This means that you require only 1/400 or .25% in balance to open a position (plus the floating gains/losses.) Most brokers offer 100:1, where every trader requires 1% in balance to open a position.
The standard lot size in the Forex market is $100,000 USD.
For instance, a trader wants to get long one lot in EUR/USD and he or she is using 100:1 leverage.
To open such position, he or she requires 1% in balance or $1,000 USD.
Of course it is not advisable to open a position with such limited funds in our trading balance. If the trade goes against our trader, the position is to be closed by the broker. This takes us to our next important term.
A margin call occurs when the balance of the trading account falls below the maintenance margin (capital required to open one position, 1% when the leverage used is 100:1, 2% when leverage used is 50:1, and so on.) At this moment, the broker sells off (or buys back in the case of short positions) all your trades, leaving the trader “theoretically” with the maintenance margin.
Most of the time margin calls occur when money management is not properly applied.
The trader, after an extensive analysis, decides there is a higher probability of the British pound to go up. He or she decides to go long risking 30 pips and having a target (reward) of 60 pips. If the market goes against our trader he/she will lose 30 pips, on the other hand, if the market goes in the intended way, he or she will gain 60 pips. The actual quote for the pound is 1.8524/27, 4 pips spread. Our trader gets long at 1.8530 (ask). By the time the market gets to either our target (called take profit order) or our risk point (called stop loss level) we will have to sell it at the bid price (the price our broker is willing to buy our position back.) In order to make 60 pips, our take profit level should be placed at 1.8590 (bid price.) If our target gets hit, the market ran 64 pips (60 pips plus the 4 pip spread.) If our stop loss level is hit, the market ran 26 (26 pips plus the 4 pip spread equals 30 pips) pips against us.
It’s very important to understand every aspect of trading. Start first from the very basic concepts, then move on to more complex issues such as Forex trading systems, trading psychology, trade and risk management, and so on. And make sure you master every single aspect before adventuring in a live trading account.
This information was provided by a-forextrading.com
What is FOREX ?
Foreign Exchange Market (Forex) is the arena where a nation's currency is exchanged for that of another at a mutually agreed rate. It was created in the 70's when international trade transitioned from fixed to floating exchange rates, and nowadays is considered to be the largest financial market in the world because of its tremendous turnover.
Introduction to Forex
All currencies are traded in pairs and each is assigned with an abbreviation.
Here are some of them (Table 1):
EUR Euro
USD US Dollar
GBP British Pound
JPY Japanese Yen
CHF Swiss Franc
AUD Australian Dollar
CAD Canadian Dollar
NZD New Zealand Dollar
SGD Singapore Dollar
Base currency is the first currency in the pair. Quote currency is the second currency in the pair.
USD / JPY = 120.25
Base currency Quote currency Rate
This abbreviation specifies how much you have to pay in quote currency to obtain one unit of the base currency (in this example, 120.25 Japanese Yen for one US Dollar). The minimum rate fluctuation is called a point or pip.
Most currencies, except USD/JPY, EUR/JPY, CHF/JPY and GBP/JPY where a pip is 0.01, have 4 digits after the period (a pip is 0.0001), and sometimes they are abbreviated to the last two digits. For example, if EURUSD is traded at 1.2389/1.2394 the quote may be abbreviated to 89/94.
The currency pairs on Forex are quoted as the Bid and Ask (or Offer) prices:
Bid Ask
USD / JPY = 120.25 / 120.30
Bid is the rate at which you can sell the base currency, in our case it's US dollar, and buy the quote currency, i.e Japanese Yen.
Ask ( or Offer) is the rate at which you can buy the base currency, in our case US dollars, and sell the quote currency, i.e. Japanese Yen.
Spread is the difference between the Bid and the Ask price.
Pip is the smallest price increment a currency can make. Also known as a point. e.g. 1 pip = 0.0001 for EUR/USD, and 0.01 for USD/JPY.
Currency Rate is the value of one currency expressed in terms of another. The rate depends on the supply and demand on the market or restrictions by a government or by a central bank.
1.0 lot size for different currency pairs (Table 2)
Currency 1.0 lot size 1 pip
EURUSD EUR 100,000 0.0001
USDCHF USD 100,000 0.0001
EURUSD EUR 100,000 0.0001
GBPUSD GBP 70,000 0.0001
USDJPY USD 100,000 0.01
AUDUSD AUD 200,000 0.0001
USDCAD USD 100,000 0.0001
EURCHF EUR 100,000 0.0001
EURJPY EUR 100,000 0.01
EURGBP EUR 100,000 0.0001
GBPJPY GBP 70,000 0.01
GBPCHF GBP 70,000 0.0001
EURCAD EUR 100,000 0.0001
NZDUSD NZD 200,000 0.0001
USDSEK USD 100,000 0.0001
USDDKK USD 100,000 0.0001
USDNOK USD 100,000 0.0001
USDSGD USD 100,000 0.0001
USDZAR USD 100,000 0.0001
CHFJPY CHF 100,000 0.01
Spreads & Margins
Margin is the collateral required to open and maintain a position:
* 1% of transaction size for account balances below $ 100,000
* 2% of transaction size for account balances up to $ 250,000
* 4% of transaction size for account balances above $ 250,000
Balance is the total financial result of all completed transactions and deposits/withdrawals on the trading account.
Floating Profit/Loss is current profit/loss on open positions calculated at the current prices.
Equity is calculated as balance + floating profit - floating loss.
Free margin means funds on the trading account, which may be used to open a position. It is calculated as equity less necessary margin.
Calculating profit/loss
For example, EUR/USD exchange rate is 1.2505/1.2509 and your leverage is 1:100. You believe that EUR/USD will go up and buy 0.1 lot of EUR/USD at 1.2509 (Ask price) - for the contract size refer to Table 2. As we can see from Table 2, 1.0 lot of EUR/USD is 100,000 EUR, which means that 0.1 lot (our example deal size) is 10,000 EUR.
So, you buy 10,000 EUR and sell 10,000*1.2509=12,509 USD. In fact to fund this position you do not have to have 12,509 USD but only 125.09 USD. The rest of the money (in our example 12,383.91 USD) is leveraged to you by Alpari (UK).
Leverage (or gearing) mechanism allows you to open and hold a position much larger than your trading account value. 1:100 leverage means that when you wish to open a new position, then you need to support a deposit 100 times less than the value of the contract you are interested in.
For example, you believe that EUR/USD is moving higher and buy 10,000 EUR and sell 12,509 USD. Assuming you are right and EUR/USD goes up to 1.2599/1.2603 and you decide to close the position: when you close a long position you sell the base currency (10,000 EUR in our example) and buy the quote currency (10,000*1.2599 = 12,599 USD):
Transaction EUR USD
Open a position: buy EUR and sell USD + 10,000 - 12,509
Close a position: sell EUR and buy USD - 10,000 + 12,599
Total: 0 + 90
NB: When you close a short position you buy the base currency and sell the quote currency.
To fund this position you only need 100 EUR (approximately 125 USD) not 10,000 EUR. The profit on this position is 90 pips (1.2599-1.2509=0.0090). A pip or point is a minimal rate fluctuation. For EUR/USD 1 pip is 0.0001 of the price (see Table 2).
This example shows a favourable outcome. If EUR/USD had fallen you would realise a loss not a profit and with leverage this loss will be magnified. For example, if you close the position at 1.2419, your loss would be $90. Should you have doubts about your understanding of risks, please consult your financial adviser.
Lot Size is the number of base currency, underlying asset or shares in one lot defined in the contract specifications. For details refer to the Table 2.
Lot is an abstract notion of the number of base currency, shares or other underlying asset in the trading platform.
Transaction (or deal) size is lot size multiplied by number of lots.
Long Position is a buy position whereby you profit from an increase in price. In respect of currency pairs: buying the base currency against the quote currency.
Short Position is a sell position whereby you profit from a decrease in price. For currency pairs: selling the base currency against the quote currency.
Completed Transaction consists of two counter deals of the same size (open and close a position): buy then sell or vice versa.
Leverage is the term used to describe margin requirements: the ratio between the collateral and the value of the contract. 1:100 leverage means that you can control $100,000 with only $1,000 (1%).
As a result, positions are subject to a swap charge or credit based on the "Rollover/Interest Policy" webpage.
The cost of rollover is based on the interest rate differential of the two currencies. Let’s assume that the interest rates in the EU and USA are 4.25% p.a and 3.5% p.a respectively. Every currency trade involves borrowing one currency to buy another. If you have a buy position of 1.0 lot in EUR/USD, then you earn 4.25% on your Euros and borrow USD at 3.5% per year.
In other words:
* If you have a long position (i.e. bought) and the first currency in the currency pair has a higher overnight interest rate than the second currency, then you receive a gain.
* If you have a short position (i.e. sold) and the first currency in the currency pair has a higher overnight interest rate than the second currency, then you lose the difference.
* If you have a long position (i.e. bought) and the first currency in the currency pair has a lower overnight interest rate than the second currency, then you lose the difference.
* If you have a short position (i.e. sold) and the first currency in the currency pair has a lower overnight interest rate than the second currency, then you receive a gain.
Please note that if you open and close a position before 10:59:45 p.m. (London time) you will not be subject to a rollover.
The act of rolling the currency pair over is known as tom.next, which stands for tomorrow and the next day.
Why trade Forex?
Unlike other financial markets Forex has no physical location, like stock exchanges, for example. It operates through the electronic network of banks, computer terminals or via telephone. The lack of a physical exchange enables Forex to operate on a 24-hour basis, spanning from one time zone to another across the major financial centres (Sydney, Tokyo, Hong Kong, Frankfurt, London, New York etc). In every financial centre there are many dealers, who buy and sell currencies 24 hours a day during the whole business week. Trading begins in the Far East, New Zealand (Wellington), then Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt-on-Maine, London and ends in New York and Los Angeles. Below there are approximate trading hours for regional markets (London time):
Japan 00:00-06:30
Continental Europe 06:30-13:00
Great Britain 8:30-15:30
USA 14:30-21:30
Forex has some advantages which make it very popular among investors:
* Liquidity. Forex is the largest financial market in the world, with the equivalent of over $3-4 trillion changing hands daily whereas traded volume on the stock markets equates to only 500 billion US dollars.
* Flexibility. Forex is a 24-hour market, which offers a major advantage over other markets, for example, stock exchanges which are only open during regional business hours. You can respond to breaking news immediately if the situation requires it and customise your trading schedule.
* Lower transaction costs. Traditionally there are no commissions or charges on Forex, except for the spread.
* Margin. Our 1:100 leverage (only for deposits below $ 100,000) is a powerful tool. You need to support a deposit of 1,000 US dollars to make a deal with $100,000. Such high leverage combined with rapid rate fluctuations can make this market profitable but at the same time risky: please see Risk Warning below.
Risk Warning
Under margin trading conditions even small market movements may have a great impact on the customer's trading account. You must consider that if the market moves against you, you may sustain a total loss greater than the funds deposited. You are responsible for all the risks, financial resources you use and for the chosen trading strategy.
This information was provided by 2004-2007 Alpari (UK) Limited
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