Although some retail dealers trade exotic currencies such as the Thai baht or the Czech koruna, the majority trade the seven most liquid currency pairs in the world, which are the four "majors":
* EUR/USD (euro/dollar)
* USD/JPY (dollar/Japanese yen)
* GBP/USD (British pound/dollar)
* USD/CHF (dollar/Swiss franc)
and the three commodity pairs:
* AUD/USD (Australian dollar/dollar)
* USD/CAD (dollar/Canadian dollar)
* NZD/USD (New Zealand dollar/dollar)
These currency pairs, along with their various combinations (such as EUR/JPY, GBP/JPY and EUR/GBP), account for more than 95% of all speculative trading in FX. Given the small number of trading instruments - only 18 pairs and crosses are actively traded - the FX market is far more concentrated than the stock market. (To read more, check out Popular Forex Currencies.)
What is a currency carry trade?
Carry is the most popular trade in the currency market, practiced by both the largest hedge funds and the smallest retail speculators. The carry trade rests on the fact that every currency in the world has an interest rate attached to it. These short-term interest rates are set by the central banks of these countries: the Federal Reserve in the U.S., the Bank of Japan in Japan and the Bank of England in the U.K.
The idea behind the carry is quite straightforward. The trader goes long the currency with a high interest rate and finances that purchase with a currency with a low interest rate. For example, in 2005, one of the best pairings was the NZD/JPY cross. The New Zealand economy, spurred by huge commodity demand from China and a hot housing market, saw its rates rise to 7.25% and stay there, while Japanese rates remained at 0%. A trader going long the NZD/JPY could have harvested 725 basis points in yield alone. On a 10:1 leverage basis, the carry trade in NZD/JPY could have produced a 72.5% annual return from interest rate differentials, without any contribution from capital appreciation. Now you can understand why the carry trade is so popular!
But before you rush out and buy the next high-yield pair, be aware that when the carry trade is unwound, the declines can be rapid and severe. This process is known as carry trade liquidation and occurs when the majority of speculators decide that the carry trade may not have future potential. With every trader seeking to exit his or her position at once, bids disappear and the profits from interest rate differentials are not nearly enough to offset the capital losses. Anticipation is the key to success: the best time to position in the carry is at the beginning of the rate-tightening cycle, allowing the trader to ride the move as interest rate differentials increase. (To learn more about this type of trade, see Currency Carry Trades 101.)
Forex Market Jargon
Every discipline has its own jargon, and the currency market is no different. Here are some terms to know that will make you sound like a seasoned currency trader:
* Cable, sterling, pound - alternative names for the GBP
* Greenback, buck - nicknames for the U.S. dollar
* Swissie - nickname for the Swiss franc
* Aussie - nickname for the Australian dollar
* Kiwi - nickname for the New Zealand dollar
* Loonie, the little dollar - nicknames for the Canadian dollar
* Figure - FX term connoting a round number like 1.2000
* Yard - a billion units, as in "I sold a couple of yards of sterling."
To learn more about FX trading, see A Primer On The Forex Market, Getting Started In Forex and Demo Before You Dive In.
by Boris Schlossberg
Boris Schlossberg is the director of currency research at GFT. He is a weekly contributor to CNBC's "Squawk Box" and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO Magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of "Technical Analysis of the Currency Market" and the co-author of "Millionaire Traders" with Kathy Lien.
Sunday, 21 August 2011
What are you really selling or buying in the currency market?
The short answer is "nothing". The retail FX market is purely a speculative market. No physical exchange of currencies ever takes place. All trades exist simply as computer entries and are netted out depending on market price. For dollar-denominated accounts, all profits or losses are calculated in dollars and recorded as such on the trader's account.
The primary reason the FX market exists is to facilitate the exchange of one currency into another for multinational corporations that need to trade currencies continually (for example, for payroll, payment for costs of goods and services from foreign vendors, and merger and acquisition activity). However, these day-to-day corporate needs comprise only about 20% of the market volume. Fully 80% of trades in the currency market are speculative in nature, put on by large financial institutions, multibillion dollar hedge funds and even individuals who want to express their opinions on the economic and geopolitical events of the day.
Because currencies always trade in pairs, when a trader makes a trade he or she is always long one currency and short the other. For example, if a trader sells one standard lot (equivalent to 100,000 units) of EUR/USD, she would, in essence, have exchanged euros for dollars and would now be "short" euros and "long" dollars. To better understand this dynamic, let's use a concrete example. If you went into an electronics store and purchased a computer for $1,000, what would you be doing? You would be exchanging your dollars for a computer. You would basically be "short" $1,000 and "long" one computer. The store would be "long" $1,000 but now "short" one computer in its inventory. The exact same principle applies to the FX market, except that no physical exchange takes place. While all transactions are simply computer entries, the consequences are no less real.
The primary reason the FX market exists is to facilitate the exchange of one currency into another for multinational corporations that need to trade currencies continually (for example, for payroll, payment for costs of goods and services from foreign vendors, and merger and acquisition activity). However, these day-to-day corporate needs comprise only about 20% of the market volume. Fully 80% of trades in the currency market are speculative in nature, put on by large financial institutions, multibillion dollar hedge funds and even individuals who want to express their opinions on the economic and geopolitical events of the day.
Because currencies always trade in pairs, when a trader makes a trade he or she is always long one currency and short the other. For example, if a trader sells one standard lot (equivalent to 100,000 units) of EUR/USD, she would, in essence, have exchanged euros for dollars and would now be "short" euros and "long" dollars. To better understand this dynamic, let's use a concrete example. If you went into an electronics store and purchased a computer for $1,000, what would you be doing? You would be exchanging your dollars for a computer. You would basically be "short" $1,000 and "long" one computer. The store would be "long" $1,000 but now "short" one computer in its inventory. The exact same principle applies to the FX market, except that no physical exchange takes place. While all transactions are simply computer entries, the consequences are no less real.
Where is the commission in forex trading?
Investors who trade stocks, futures or options typically use a broker, who acts as an agent in the transaction. The broker takes the order to an exchange and attempts to execute it as per the customer's instructions. For providing this service, the broker is paid a commission when the customer buys and sells the tradable instrument. (For further reading, see our Brokers And Online Trading tutorial.)
The FX market does not have commissions. Unlike exchange-based markets, FX is a principals-only market. FX firms are dealers, not brokers. This is a critical distinction that all investors must understand. Unlike brokers, dealers assume market risk by serving as a counterparty to the investor's trade. They do not charge commission; instead, they make their money through the bid-ask spread.
In FX, the investor cannot attempt to buy on the bid or sell at the offer like in exchange-based markets. On the other hand, once the price clears the cost of the spread, there are no additional fees or commissions. Every single penny gain is pure profit to the investor. Nevertheless, the fact that traders must always overcome the bid/ask spread makes scalping much more difficult in FX. (To learn more, see Scalping: Small Quick Profits Can Add Up.)
What is a pip?
Pip stands for "percentage in point" and is the smallest increment of trade in FX. In the FX market, prices are quoted to the fourth decimal point. For example, if a bar of soap in the drugstore was priced at $1.20, in the FX market the same bar of soap would be quoted at 1.2000. The change in that fourth decimal point is called 1 pip and is typically equal to 1/100th of 1%. Among the major currencies, the only exception to that rule is the Japanese yen. One Japanese yen is now worth approximately US$0.01; so, in the USD/JPY pair, the quotation is only taken out to two decimal points (i.e. to 1/100th of yen, as opposed to 1/1000th with other major currencies).
The FX market does not have commissions. Unlike exchange-based markets, FX is a principals-only market. FX firms are dealers, not brokers. This is a critical distinction that all investors must understand. Unlike brokers, dealers assume market risk by serving as a counterparty to the investor's trade. They do not charge commission; instead, they make their money through the bid-ask spread.
In FX, the investor cannot attempt to buy on the bid or sell at the offer like in exchange-based markets. On the other hand, once the price clears the cost of the spread, there are no additional fees or commissions. Every single penny gain is pure profit to the investor. Nevertheless, the fact that traders must always overcome the bid/ask spread makes scalping much more difficult in FX. (To learn more, see Scalping: Small Quick Profits Can Add Up.)
What is a pip?
Pip stands for "percentage in point" and is the smallest increment of trade in FX. In the FX market, prices are quoted to the fourth decimal point. For example, if a bar of soap in the drugstore was priced at $1.20, in the FX market the same bar of soap would be quoted at 1.2000. The change in that fourth decimal point is called 1 pip and is typically equal to 1/100th of 1%. Among the major currencies, the only exception to that rule is the Japanese yen. One Japanese yen is now worth approximately US$0.01; so, in the USD/JPY pair, the quotation is only taken out to two decimal points (i.e. to 1/100th of yen, as opposed to 1/1000th with other major currencies).
How does the forex market differ from other markets?
Unlike stocks, futures or options, currency trading does not take place on a regulated exchange. It is not controlled by any central governing body, there are no clearing houses to guarantee the trades and there is no arbitration panel to adjudicate disputes. All members trade with each other based on credit agreements. Essentially, business in the largest, most liquid market in the world depends on nothing more than a metaphorical handshake.
At first glance, this ad-hoc arrangement must seem bewildering to investors who are used to structured exchanges such as the NYSE or CME. (To learn more, see Getting To Know Stock Exchanges.) However, this arrangement works exceedingly well in practice; because participants in FX must both compete and cooperate with each other, self regulation provides very effective control over the market. Furthermore, reputable retail FX dealers in the United States become members of the National Futures Association (NFA), and by doing so they agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies do so only through an NFA member firm.
The FX market is different from other markets in some other key ways that are sure to raise eyebrows. Think that the EUR/USD is going to spiral downward? Feel free to short the pair at will. There is no uptick rule in FX as there is in stocks. There are also no limits on the size of your position (as there are in futures); so, in theory, you could sell $100 billion worth of currency if you had the capital to do it. If your biggest Japanese client, who also happens to golf with the governor of the Bank of Japan tells you on the golf course that BOJ is planning to raise rates at its next meeting, you could go right ahead and buy as much yen as you like. No one will ever prosecute you for insider trading should your bet pay off. There is no such thing as insider trading in FX; in fact, European economic data, such as German employment figures, are often leaked days before they are officially released.
Before we leave you with the impression that FX is the Wild West of finance, we should note that this is the most liquid and fluid market in the world. It trades 24 hours a day, from 5pm EST Sunday to 4pm EST Friday, and it rarely has any gaps in price. Its sheer size and scope (from Asia to Europe to North America) makes the currency market the most accessible market in the world.
At first glance, this ad-hoc arrangement must seem bewildering to investors who are used to structured exchanges such as the NYSE or CME. (To learn more, see Getting To Know Stock Exchanges.) However, this arrangement works exceedingly well in practice; because participants in FX must both compete and cooperate with each other, self regulation provides very effective control over the market. Furthermore, reputable retail FX dealers in the United States become members of the National Futures Association (NFA), and by doing so they agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies do so only through an NFA member firm.
The FX market is different from other markets in some other key ways that are sure to raise eyebrows. Think that the EUR/USD is going to spiral downward? Feel free to short the pair at will. There is no uptick rule in FX as there is in stocks. There are also no limits on the size of your position (as there are in futures); so, in theory, you could sell $100 billion worth of currency if you had the capital to do it. If your biggest Japanese client, who also happens to golf with the governor of the Bank of Japan tells you on the golf course that BOJ is planning to raise rates at its next meeting, you could go right ahead and buy as much yen as you like. No one will ever prosecute you for insider trading should your bet pay off. There is no such thing as insider trading in FX; in fact, European economic data, such as German employment figures, are often leaked days before they are officially released.
Before we leave you with the impression that FX is the Wild West of finance, we should note that this is the most liquid and fluid market in the world. It trades 24 hours a day, from 5pm EST Sunday to 4pm EST Friday, and it rarely has any gaps in price. Its sheer size and scope (from Asia to Europe to North America) makes the currency market the most accessible market in the world.
How does the forex market differ from other markets?
Unlike stocks, futures or options, currency trading does not take place on a regulated exchange. It is not controlled by any central governing body, there are no clearing houses to guarantee the trades and there is no arbitration panel to adjudicate disputes. All members trade with each other based on credit agreements. Essentially, business in the largest, most liquid market in the world depends on nothing more than a metaphorical handshake.
At first glance, this ad-hoc arrangement must seem bewildering to investors who are used to structured exchanges such as the NYSE or CME. (To learn more, see Getting To Know Stock Exchanges.) However, this arrangement works exceedingly well in practice; because participants in FX must both compete and cooperate with each other, self regulation provides very effective control over the market. Furthermore, reputable retail FX dealers in the United States become members of the National Futures Association (NFA), and by doing so they agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies do so only through an NFA member firm.
The FX market is different from other markets in some other key ways that are sure to raise eyebrows. Think that the EUR/USD is going to spiral downward? Feel free to short the pair at will. There is no uptick rule in FX as there is in stocks. There are also no limits on the size of your position (as there are in futures); so, in theory, you could sell $100 billion worth of currency if you had the capital to do it. If your biggest Japanese client, who also happens to golf with the governor of the Bank of Japan tells you on the golf course that BOJ is planning to raise rates at its next meeting, you could go right ahead and buy as much yen as you like. No one will ever prosecute you for insider trading should your bet pay off. There is no such thing as insider trading in FX; in fact, European economic data, such as German employment figures, are often leaked days before they are officially released.
Before we leave you with the impression that FX is the Wild West of finance, we should note that this is the most liquid and fluid market in the world. It trades 24 hours a day, from 5pm EST Sunday to 4pm EST Friday, and it rarely has any gaps in price. Its sheer size and scope (from Asia to Europe to North America) makes the currency market the most accessible market in the world.
At first glance, this ad-hoc arrangement must seem bewildering to investors who are used to structured exchanges such as the NYSE or CME. (To learn more, see Getting To Know Stock Exchanges.) However, this arrangement works exceedingly well in practice; because participants in FX must both compete and cooperate with each other, self regulation provides very effective control over the market. Furthermore, reputable retail FX dealers in the United States become members of the National Futures Association (NFA), and by doing so they agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies do so only through an NFA member firm.
The FX market is different from other markets in some other key ways that are sure to raise eyebrows. Think that the EUR/USD is going to spiral downward? Feel free to short the pair at will. There is no uptick rule in FX as there is in stocks. There are also no limits on the size of your position (as there are in futures); so, in theory, you could sell $100 billion worth of currency if you had the capital to do it. If your biggest Japanese client, who also happens to golf with the governor of the Bank of Japan tells you on the golf course that BOJ is planning to raise rates at its next meeting, you could go right ahead and buy as much yen as you like. No one will ever prosecute you for insider trading should your bet pay off. There is no such thing as insider trading in FX; in fact, European economic data, such as German employment figures, are often leaked days before they are officially released.
Before we leave you with the impression that FX is the Wild West of finance, we should note that this is the most liquid and fluid market in the world. It trades 24 hours a day, from 5pm EST Sunday to 4pm EST Friday, and it rarely has any gaps in price. Its sheer size and scope (from Asia to Europe to North America) makes the currency market the most accessible market in the world.
How do I find a reliable Forex broker?
Unlike stock and futures brokers, not all Forex brokers are regulated. It is very important to open an account with a regulated broker or bank that is a registered member of a regulating body. Since there is no central market, there is no global regulatory agency responsible for monitoring the activity of the currency markets. Therefore, regulation is left to each country. In the United States the Federal Reserve Bank monitors the banking system and the Commodity Futures Trading Commission (CFTC) has jurisdiction over all Futures and Forex activity. When trading in the foreign exchange markets, individuals should only trade with a CFTC registered entity that is also a member
of the National Futures Association (NFA) and is regulated by the CFTC. For non- US broker/ bank entities, be sure that the broker or bank is registered with that country’s appropriate regulatory bodies.
In addition to working with a regulated broker, you want a broker that has low spreads. These spreads are calculated in pips, which is the difference between the price at which a currency can be bought and the price at which it can be sold at any given point in time. This is how the forex brokers or banks make their money since they don’t charge commissions. So, obviously, lower spreads will save you more money.
Trading tools are also very important when choosing a Forex broker. Specifically, you want a broker that will give you good charting and trading software that has the ability to plot the indicators that your trading method uses. This brings up an important point. You should never go looking for charting software first and then try to use or develop a trading method. Instead, you should first get educated on a good trading method (or develop your own) and then find charting software that will let you implement this method.
I’ve seen too many traders stubbornly use inadequate charting software just because their broker gave it to them. Don’t make this mistake.
Thankfully, unlike stock brokers, many forex brokers do provide you with very adequate charting and trading software, all bundled together.
Other aspects to watch for when selecting a broker are the leverage levels and account types (standard and mini accounts) offered. Most brokers offer at least 100:1 leverage which is more than adequate for most traders. Some brokers also offer greater leverage, up to 400:1. This type of leverage is completely unnecessary as the risk
reward ratio can quickly go against you if you use excessive leverage. (I’ll cover this in more detail later in the report in the question about risk management.) Depending on your account size, you will want to be sure the broker you choose offers the appropriate account types.
Standard and mini accounts are typical. The standard account typically requires minimum initial capital of $2,000 or more, while the mini account typically requires $300 or more. Leverage of 100:1 should be available for either a standard or a mini account.
of the National Futures Association (NFA) and is regulated by the CFTC. For non- US broker/ bank entities, be sure that the broker or bank is registered with that country’s appropriate regulatory bodies.
In addition to working with a regulated broker, you want a broker that has low spreads. These spreads are calculated in pips, which is the difference between the price at which a currency can be bought and the price at which it can be sold at any given point in time. This is how the forex brokers or banks make their money since they don’t charge commissions. So, obviously, lower spreads will save you more money.
Trading tools are also very important when choosing a Forex broker. Specifically, you want a broker that will give you good charting and trading software that has the ability to plot the indicators that your trading method uses. This brings up an important point. You should never go looking for charting software first and then try to use or develop a trading method. Instead, you should first get educated on a good trading method (or develop your own) and then find charting software that will let you implement this method.
I’ve seen too many traders stubbornly use inadequate charting software just because their broker gave it to them. Don’t make this mistake.
Thankfully, unlike stock brokers, many forex brokers do provide you with very adequate charting and trading software, all bundled together.
Other aspects to watch for when selecting a broker are the leverage levels and account types (standard and mini accounts) offered. Most brokers offer at least 100:1 leverage which is more than adequate for most traders. Some brokers also offer greater leverage, up to 400:1. This type of leverage is completely unnecessary as the risk
reward ratio can quickly go against you if you use excessive leverage. (I’ll cover this in more detail later in the report in the question about risk management.) Depending on your account size, you will want to be sure the broker you choose offers the appropriate account types.
Standard and mini accounts are typical. The standard account typically requires minimum initial capital of $2,000 or more, while the mini account typically requires $300 or more. Leverage of 100:1 should be available for either a standard or a mini account.
What types of orders do I use with Forex trading?
There are different order types for different trading needs. Market Order: This order type is used to enter or exit the market immediately at the current quoted price. If you want to buy you will be filled at the asking price. If you want to sell you will be filled at the bid price. Limit Order: This order type is used to buy or sell a pair at a predetermined price. A buy limit order will only be filled if the market trades (ask) at or below the limit price. A sell limit order will only be filled if the market trades (bid) at or above the limit price. Stop Order: This order type is used to buy or sell a pair at a predetermined price. A buy stop order will only be filled if the market trades (ask) at or above the stop price. A sell stop order will only be filled if the market trades (bid) at or below the stop price.
How much can I expect to make with Forex trading?
It is very important to have realistic expectations. The truth is that Forex trading is not a get rich quick proposition, despite all of the hype to the contrary. That does not mean though that there isn’t money to be made. One of the appeals of Forex trading is the great leverage that is offered. However, leverage can work for or against you and therefore it is critical that you follow good trading methods along with sound risk management principles to have the opportunity to unlock the profit potential that the Forex markets have to offer.
Forex seems to be quite different from trading stocks. What are the benefits and risks in comparison and would a much bigger account be needed? In addition to the Forex attributes explained in the “basics of Forex question” above, the Forex markets are indeed different from the stock markets in that their price behavior is different with usually more abrupt price swings. This requires different trading methods than those typically used for stocks in order to take full advantage of the profit potential that Forex has to offer while at the same time designing the right strategy to minimize risk. On the other hand, they are alike in that both Forex and stocks are markets that develop repeatable price behavior that present profit opportunities for those
traders with good trading methods, sound money management principles and disciplined trading.
Because of the high leverage that Forex offers, Forex positions require a much smaller account size than do stocks trading similar sized positions as Forex margin requirements are much smaller than stock margin requirements. And so the reward can be much greater with Forex, but at the same time, the risk is much greater. But this can be dealt with effectively with good trading tactics and good money management rules that allow for maximizing profit potential and minimizing risk.
How much can I expect to make with Forex trading?
It is very important to have realistic expectations. The truth is that Forex trading is not a get rich quick proposition, despite all of the hype to the contrary. That does not mean though that there isn’t money to be made. One of the appeals of Forex trading is the great leverage that is offered. However, leverage can work for or against you and therefore it is critical that you follow good trading methods along with sound risk management principles to have the opportunity to unlock the profit potential that the Forex markets have to offer.
Forex seems to be quite different from trading stocks. What are the benefits and risks in comparison and would a much bigger account be needed? In addition to the Forex attributes explained in the “basics of Forex question” above, the Forex markets are indeed different from the stock markets in that their price behavior is different with usually more abrupt price swings. This requires different trading methods than those typically used for stocks in order to take full advantage of the profit potential that Forex has to offer while at the same time designing the right strategy to minimize risk. On the other hand, they are alike in that both Forex and stocks are markets that develop repeatable price behavior that present profit opportunities for those
traders with good trading methods, sound money management principles and disciplined trading.
Because of the high leverage that Forex offers, Forex positions require a much smaller account size than do stocks trading similar sized positions as Forex margin requirements are much smaller than stock margin requirements. And so the reward can be much greater with Forex, but at the same time, the risk is much greater. But this can be dealt with effectively with good trading tactics and good money management rules that allow for maximizing profit potential and minimizing risk.
Can you take me through a typical trade scenario?
Let’s say the current bid/ask quote for EUR/USD is 1.3802/05 and you want to buy the pair because you think the Euro is going to gain on the US dollar. So you buy 1 standard lot. When you do that you are actually buying 100,000 Euros (1 standard lot) for $138,050 US dollars (100,000 x 1.3805). At 100:1 leverage, your initial margin deposit would be $1,381 for this trade. So in our example, let’s say the Euro pair goes up and is now trading at 1.3865/68 and you decide to sell and take profits. You would then sell your 1 standard lot. When you do that you are actually selling 100,000 Euros (1 standard lot) for $138,650 US dollars (100,000 x 1.3865). Since you bought 100,000 Euros for $138,050 and sold them for $138,650, you made a profit of $600 or 60 pips. If on the other hand the Euro pair wentdown to 1.3775/78 and you sold at 1.3775, you would have a loss of $300 ($138,050 - $137,750). And again, if the account equity fell below the margin requirement, the trade would be automatically liquidated. However, this should never happen to you if you follow sound risk management rules.
Brief Overview of The Basics of Forex?
Unlike stocks and futures that trade through exchanges or the NASDAQ, Forex trading is done through market makers that include major banks as well as small to large brokerage firms located around the world who collectively make a market on a 24/7 basis. The Forex market is always “open” and is the largest financial network in the world (daily average turnover of trillions of dollars). Forex trading involves trading currency pairs such as the EUR/USD pair (Euro/US dollar pair) where a buyer of this pair would actually be buying the Euro and simultaneously selling short the US dollar. The format of a Forex pair is YYY/ZZZ, where the first currency is called the “base” currency and the second currency is called the “counter” currency. The price for a Forex pair is expressed in terms of the counter currency.
For example, the price of the EUR/USD pair is expressed in US dollars (the counter currency) as 1.3667. This means that the base currency, the Euro in this case, equals US$ 1.3667. The price of the USD/JPY pair is expressed in Japanese Yen as 108.02, because for this pair the Japanese Yen is the counter currency. This means that the base currency, the US dollar in this case, equals 108.02 Japanese Yen.
Prices are expressed in pips, which are nothing more than the minimum
increment that a currency pair price can change. For example, if the EUR/USD price changes from 1.3790 to 1.3791, the price is said to have gone up by 1 pip. Most major pairs are priced to 4 decimals which is the equivalent of 1/100th of one percent. The exception would be the Japanese Yen pair that only trades to 2 decimals. This is because there are usually over 100 yen to the dollar. Forex pair quotes are on a bid-ask basis. The bid is the price that the market is willing to pay a seller at a point in time for a specific currency pair. The ask is the
price that the market is willing to sell to a buyer at a point in time for a specific currency pair. The difference between the bid and the ask is called the bid/ask spread. For example, a typical EUR/USD quote could be 1.3784 bid 1.3787 ask which is a spread of 3 pips. Since the spread is how the market makers are compensated, there is no commission when placing a trade. Also, it is important to note that the spread will vary depending on market conditions. So the quote itself for any given Forex pair is the bid-ask combination at a point in time based on the market driven floating exchange rate. The quotation lists the bid price first, then the ask price. For the EUR/USD example above, the quote would be expressed simply as 1.3784/1.3787 or 1.3784/87.
Trading is done in lots, either 100,000 unit standard or 10,000 unit mini lots. For example, for a standard lot purchase, if the EUR/USD quote was 1.3784/1.3787, then buying an EUR/USD pair means buying 100,000 Euros and selling short $137,870 US dollars. Therefore, for a standard lot in which the USD is the counter currency, 1 pip will equal $10 ($1 for a mini lot). For other major counter currency pairs 1 pip will range from $8 to $10. Forex dealers offer leverage as high as 100:1 and sometimes higher. At 100:1 leverage, 1 standard lot pair in which the USD in the base currency would require $1,000 in margin ($100,000/100). On the other hand, a 1 mini lot pair would require only $100 in margin ($10,000/100). If the account value falls below the
margin requirement, the dealer will close out the trade automatically.
For example, the price of the EUR/USD pair is expressed in US dollars (the counter currency) as 1.3667. This means that the base currency, the Euro in this case, equals US$ 1.3667. The price of the USD/JPY pair is expressed in Japanese Yen as 108.02, because for this pair the Japanese Yen is the counter currency. This means that the base currency, the US dollar in this case, equals 108.02 Japanese Yen.
Prices are expressed in pips, which are nothing more than the minimum
increment that a currency pair price can change. For example, if the EUR/USD price changes from 1.3790 to 1.3791, the price is said to have gone up by 1 pip. Most major pairs are priced to 4 decimals which is the equivalent of 1/100th of one percent. The exception would be the Japanese Yen pair that only trades to 2 decimals. This is because there are usually over 100 yen to the dollar. Forex pair quotes are on a bid-ask basis. The bid is the price that the market is willing to pay a seller at a point in time for a specific currency pair. The ask is the
price that the market is willing to sell to a buyer at a point in time for a specific currency pair. The difference between the bid and the ask is called the bid/ask spread. For example, a typical EUR/USD quote could be 1.3784 bid 1.3787 ask which is a spread of 3 pips. Since the spread is how the market makers are compensated, there is no commission when placing a trade. Also, it is important to note that the spread will vary depending on market conditions. So the quote itself for any given Forex pair is the bid-ask combination at a point in time based on the market driven floating exchange rate. The quotation lists the bid price first, then the ask price. For the EUR/USD example above, the quote would be expressed simply as 1.3784/1.3787 or 1.3784/87.
Trading is done in lots, either 100,000 unit standard or 10,000 unit mini lots. For example, for a standard lot purchase, if the EUR/USD quote was 1.3784/1.3787, then buying an EUR/USD pair means buying 100,000 Euros and selling short $137,870 US dollars. Therefore, for a standard lot in which the USD is the counter currency, 1 pip will equal $10 ($1 for a mini lot). For other major counter currency pairs 1 pip will range from $8 to $10. Forex dealers offer leverage as high as 100:1 and sometimes higher. At 100:1 leverage, 1 standard lot pair in which the USD in the base currency would require $1,000 in margin ($100,000/100). On the other hand, a 1 mini lot pair would require only $100 in margin ($10,000/100). If the account value falls below the
margin requirement, the dealer will close out the trade automatically.
Can you day trade Forex?
Yes.
Do you have to? Not at all. In fact, recent analysis of part of the online advertising world confirms that brokers dominate several sectors of the Forex advertising landscape, even to the point of driving up ad costs. At first glance, this would appear counterproductive, until you
realize the influx of hundreds of thousands of new traders to Forex is paying for itself in the form of new accounts and spiraling spread profits. With more companies coming online to offer services related to Forex, you must take a smart approach to trading currencies. There is a logical reason that the number of brokers offering Forex trades has increased dramatically over the last few years: brokers are making money on your trades, whether you do or not. In fact, you should repeat that line to yourself: My Forex broker makes money whether I do or not.
This is not to blame brokers, but it is to point out what is a simple fact: if you, the trader, do not take an educated approach to trading Forex, you will lose your money. It should also remind you that you need to know HOW to trade Forex. You must have a complete trading method that helps you take advantage of every opportunity the market offers. While Forex presents exciting and profitable trading opportunities, it is very important that you learn how to trade currencies and that you have a trading plan that you can execute every day of the week – no matter what happens in the markets. Too many traders have jumped into the Forex waters without proper planning or learning, and have drowned. Don’t be one of them. Instead, be one of the successful Forex traders who have a solid trading method
and execute their trading plan diligently to take money out of the market, again and again. I hear a lot about Forex trading and am very
interested in learning more about it.
Do you have to? Not at all. In fact, recent analysis of part of the online advertising world confirms that brokers dominate several sectors of the Forex advertising landscape, even to the point of driving up ad costs. At first glance, this would appear counterproductive, until you
realize the influx of hundreds of thousands of new traders to Forex is paying for itself in the form of new accounts and spiraling spread profits. With more companies coming online to offer services related to Forex, you must take a smart approach to trading currencies. There is a logical reason that the number of brokers offering Forex trades has increased dramatically over the last few years: brokers are making money on your trades, whether you do or not. In fact, you should repeat that line to yourself: My Forex broker makes money whether I do or not.
This is not to blame brokers, but it is to point out what is a simple fact: if you, the trader, do not take an educated approach to trading Forex, you will lose your money. It should also remind you that you need to know HOW to trade Forex. You must have a complete trading method that helps you take advantage of every opportunity the market offers. While Forex presents exciting and profitable trading opportunities, it is very important that you learn how to trade currencies and that you have a trading plan that you can execute every day of the week – no matter what happens in the markets. Too many traders have jumped into the Forex waters without proper planning or learning, and have drowned. Don’t be one of them. Instead, be one of the successful Forex traders who have a solid trading method
and execute their trading plan diligently to take money out of the market, again and again. I hear a lot about Forex trading and am very
interested in learning more about it.
The Current State of the Forex Market
Forex is more popular than ever. Let’s take a look at the average daily turnover in the Forex markets over the past 20 years. $3.2 TRILLION a day in 2007, with no signs of slowing down. This spells opportunity for you as a Forex trader, and this is one of the best times I can recall to learn to trade and to start trading the enormously popular and potentially profitable Forex markets.
Why? Most of the major Forex pairs have been consolidating in a sideways, nontrending fashion for several weeks now, which is setting the stage for potential mega-trend breakouts which can create significant trading opportunities. The problem, though, is that too many traders aren’t sure how to take advantage of those opportunities, or how to spot those trades they could be making. As of this writing, the U.S. Dollar remains weak against most major currencies, and the continued economic fallout from the recent housing, banking and credit crises, continued weak growth of the economy, and the risk of continued inflation hasmade a dollar rally tough to sustain. But as those problems lessen, the dollar will strengthen at some point and someone will be riding a long run of hundreds, or even thousands of pips when it does.
Why? Because the difficulties with the U.S. economy along with the record high prices of oil are beginning to strain other economies. Europe and Asia now face similar inflationary fears as in the U.S. and a report from established central banks expects continued pressures on currencies as economies around the globe suffer.
Economists and other media gurus are predicting that the global economic pressures of high oil prices, inflation, weak growth (and even possibly recession)
could continue into 2009. At first glance, you might take such gloomy reporting and ask, “Why would I want to trade in this market?”
Here’s why: Those economic difficulties around the world create trading
opportunities almost daily. And, as I said before, the sideways trending of currency pairs means sooner or later, those pairs are going to break out and run (up OR down, either way gives you some huge profit potential). Which means this is the best time to begin trading Forex because you could have the opportunity to
catch a huge run. This is also the best time to LEARN to trade Forex because you can take your trading method as you learn it and apply it to the markets to watch those breakouts happen. Plus, you’ll be able to get a real hands-on experience understanding how those breakouts form, where you would enter and exit the market and how you would protect yourself with proper risk management. So, if you’ve been sitting on the sidelines waiting to trade Forex, I think now is one of the best times to begin or to learn to trade Forex because many of the “surprises” of last year are now behind us and are already factored into the market.
The Forex markets are creating trading opportunities right now. If you’ve been missing those market-moving opportunities, don’t miss another one. I think it’s important to say, though, that as Forex trading continues to gain popularity one of the underlying problems you may face is the idea that you must trade Forex ‘to-the-minute’ (or day trade) – this drives you out of the picture if you can’t commit that kind of time, and it creates inevitable losses if you’re illprepared
for the demands of day trading. I believe this talk about having to day trade Forex is wrong; that it is, in part, driven by brokers, who earn the difference in the spread on every trade, and who would naturally want the constant flow of spread profits.
Why? Most of the major Forex pairs have been consolidating in a sideways, nontrending fashion for several weeks now, which is setting the stage for potential mega-trend breakouts which can create significant trading opportunities. The problem, though, is that too many traders aren’t sure how to take advantage of those opportunities, or how to spot those trades they could be making. As of this writing, the U.S. Dollar remains weak against most major currencies, and the continued economic fallout from the recent housing, banking and credit crises, continued weak growth of the economy, and the risk of continued inflation hasmade a dollar rally tough to sustain. But as those problems lessen, the dollar will strengthen at some point and someone will be riding a long run of hundreds, or even thousands of pips when it does.
Why? Because the difficulties with the U.S. economy along with the record high prices of oil are beginning to strain other economies. Europe and Asia now face similar inflationary fears as in the U.S. and a report from established central banks expects continued pressures on currencies as economies around the globe suffer.
Economists and other media gurus are predicting that the global economic pressures of high oil prices, inflation, weak growth (and even possibly recession)
could continue into 2009. At first glance, you might take such gloomy reporting and ask, “Why would I want to trade in this market?”
Here’s why: Those economic difficulties around the world create trading
opportunities almost daily. And, as I said before, the sideways trending of currency pairs means sooner or later, those pairs are going to break out and run (up OR down, either way gives you some huge profit potential). Which means this is the best time to begin trading Forex because you could have the opportunity to
catch a huge run. This is also the best time to LEARN to trade Forex because you can take your trading method as you learn it and apply it to the markets to watch those breakouts happen. Plus, you’ll be able to get a real hands-on experience understanding how those breakouts form, where you would enter and exit the market and how you would protect yourself with proper risk management. So, if you’ve been sitting on the sidelines waiting to trade Forex, I think now is one of the best times to begin or to learn to trade Forex because many of the “surprises” of last year are now behind us and are already factored into the market.
The Forex markets are creating trading opportunities right now. If you’ve been missing those market-moving opportunities, don’t miss another one. I think it’s important to say, though, that as Forex trading continues to gain popularity one of the underlying problems you may face is the idea that you must trade Forex ‘to-the-minute’ (or day trade) – this drives you out of the picture if you can’t commit that kind of time, and it creates inevitable losses if you’re illprepared
for the demands of day trading. I believe this talk about having to day trade Forex is wrong; that it is, in part, driven by brokers, who earn the difference in the spread on every trade, and who would naturally want the constant flow of spread profits.
Tuesday, 9 August 2011
Are You Dependent… or Independent?
When it comes to trading Forex (or any market), I find there are two types of traders. And the type of trader you are could drastically impact the amount of money you make in the markets… it could even forever determine, in part, what the rest of your life looks like, how much longer you work a regular job, where you go on vacation (and how often), where you live, and even your overall health. That may sound like an exaggeration, but if you plan on supplementing or replacing your current income with trading Forex, then I think you’ll find those
statements above are quite accurate. Here’s why…
You’re probably well aware at this stage in your life that anything that requires almost little or no effort produces limited, temporary, or nonexistent results. And that anything that requires you to think for yourself produces lasting, ongoing, and perhaps even permanent results. This is especially true when it comes to trading the Forex markets. Over the years, I’ve observed that there are two types of “traders”. Now, I realize these are generalizations, but they illustrate two very common mindsets. Which one are you?
The Dependent Trader: This type of person is usually looking for the easy way out, looking to make a quick buck, or wants to strike it rich. They think it’s possible to “follow the crowd”, blindly place trades pumped out by a system that “can’t lose”, and quit their job. The bottom line is that this type of trader is dependent on someone else for their financial success – forever, for life. Yes, The Dependent Trader can be successful with this attitude, but I believe the odds of
success are low (probably around 5%).The Independent Trader: This type of person wants to have as much control of their financial destiny as possible. They understand that when they know how the markets work, they’re empowered to place informed trades without having to rely on someone else. Someone who is an Independent Trader knows they are
maximizing their odds of success in the markets, which can make their financial and lifelong dreams come true that much more quickly. The bottom line is that this type of trader holds the keys to the kingdom, and has control of their financial future for their entire life, no matter what happens. If you think you might have a little of the Dependent Trader mentality in you, that’s OK. I understand, because you are not alone. It’s only natural. But when you learn to break out of that mindset and move toward becoming an Independent Trader, everything can begin to change. That’s why one of my goals with this report is to help make you an Independent Trader. Will this report alone do it? No, of course not. However, it should give you a “fast track” toward discovering the right way to trade the Forex markets for you. I want you to understand and feel the power, peace of mind, and excitement that come with placing a trade independently. Everything makes sense. Everything is done for a reason. You know what to do, no matter what the market does. Every single time.
It’s awesome…
statements above are quite accurate. Here’s why…
You’re probably well aware at this stage in your life that anything that requires almost little or no effort produces limited, temporary, or nonexistent results. And that anything that requires you to think for yourself produces lasting, ongoing, and perhaps even permanent results. This is especially true when it comes to trading the Forex markets. Over the years, I’ve observed that there are two types of “traders”. Now, I realize these are generalizations, but they illustrate two very common mindsets. Which one are you?
The Dependent Trader: This type of person is usually looking for the easy way out, looking to make a quick buck, or wants to strike it rich. They think it’s possible to “follow the crowd”, blindly place trades pumped out by a system that “can’t lose”, and quit their job. The bottom line is that this type of trader is dependent on someone else for their financial success – forever, for life. Yes, The Dependent Trader can be successful with this attitude, but I believe the odds of
success are low (probably around 5%).The Independent Trader: This type of person wants to have as much control of their financial destiny as possible. They understand that when they know how the markets work, they’re empowered to place informed trades without having to rely on someone else. Someone who is an Independent Trader knows they are
maximizing their odds of success in the markets, which can make their financial and lifelong dreams come true that much more quickly. The bottom line is that this type of trader holds the keys to the kingdom, and has control of their financial future for their entire life, no matter what happens. If you think you might have a little of the Dependent Trader mentality in you, that’s OK. I understand, because you are not alone. It’s only natural. But when you learn to break out of that mindset and move toward becoming an Independent Trader, everything can begin to change. That’s why one of my goals with this report is to help make you an Independent Trader. Will this report alone do it? No, of course not. However, it should give you a “fast track” toward discovering the right way to trade the Forex markets for you. I want you to understand and feel the power, peace of mind, and excitement that come with placing a trade independently. Everything makes sense. Everything is done for a reason. You know what to do, no matter what the market does. Every single time.
It’s awesome…
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