Category Archives: Pip School

Forex Trading For Beginners – Common Used Forex Terms #3

Forex Trading For Beginners – Common Used Forex Terms #3

In the world of Forex, there are plenty of jargon that you will likely to encounter. It is important that you should be able to familiarize first with the common used Forex terms before delving into deeper level to learn to trade Forex in general and use the many major Forex trading strategy / strategies available.

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Common Used Terms:

  • Cross Rate – The currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in. This phrase is also sometimes used to refer to currency quotes which do not involve the U.S. dollar, regardless of which country the quote is provided in.

For example, if an exchange rate between the Australian Dollar and the Korean Won was quoted in an American newspaper, this would be considered a cross rate in this context, because neither the Australian Dollar or the Korean Won is the standard currency of the U.S. However, if the exchange rate between the Australian Dollar and the U.S. dollar were quoted in that same newspaper, it would not be considered a cross rate because the quote involves the U.S. official currency.

  • Leverage – The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

For example, if a trader opens an account with a $200,000 position from a $2,000 margin, his leverage accounts for a 1:100 ratio.

  • Margin – The capital required to hold on a certain position in the market. It is either “free” or “used” margin, where in the “free” margin is the available money to be allocated for future positions, while “used” margin is the money already invested in a certain position.
  • Exchange Rate – It is the price of one country’s currency expressed in another country’s currency.
  • Pip – The movement of price that a given currency can make.
  • Spread – The difference between the bid and ask price.
  • Bid Price – The bid is the price that you will quote a broker.
  • Ask Price – The ask price is the price that your broker will quote you.
  • Currency Pair – The quotation and pricing structure of the currencies traded in the forex market: the value of a currency is determined by its comparison to another currency. The first currency of a currency pair is called the “base currency”, and the second currency is called the “quote currency”. The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency.

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The ones mentioned are the most common terms being used but there are more terms that you need to learn as we go along with our journey to learn to trade Forex. I would recommend the site Investopedia for more Forex terminology for a good reference and also Learn What Is the Forex Exchange and Learn How to Trade Currencies. I understand that it is difficult Learning Forex but with great perseverance and determination, nothing is impossible. With this being said, Understanding Forex Trading should be an everyday goal! Don’t worry there are many resources available online to Learn to Trade Forex Free of charge. What are you waiting for? Learn and invest!

Source:

  • Forex Trading Terminology by Nial Fuller. Retrieved April 08, 2013. http://www.learntotradethemarket.com/forex-university/forex-trading-terminology
  • Forex Trading Terms. Retrieved April 08, 2013. http://www.investopedia.com/categories/forex.asp

FOREX TRADING FOR BEGINNERS:

  1. Introduction to Forex Market
  2. History of Forex Market
  3. Common Used Forex Terms

Forex Trading For Beginners – Introduction to Forex Market #1

Forex Trading For Beginners – Introduction to Forex Market #1

Least volatile financial market in existence, the Foreign Market is one of the most dynamic, fast paced and exciting place to engage financial transactions – currency exchange. Here I am going to give you a concise introduction to the complex world of the Forex Market. It will be a step-by-step beginner guide to learn to trade Forex.  As much as possible, I’ll make things simple and of course, fun because learning is supposed to be fun!

Read more about Forex Trading Strategy: Price Action Trading Patterns

Forex Market also known as Forex Exchange Market, FX Market, Currency Market, Foreign Exchange Currency Market, or Foreign Currency Market, is a place where currencies are traded. It has been a place for currency speculation of large financial institutions, corporations, banks, governments, investors, hedge funds and of course, traders. This speculation and exchanges of currencies are important in order for countries to thrive through foreign trades and businesses. For example, an exporter from the Philippines will sell corn and wheat to the U.S., the consumer country needs to pay the seller country in Philippine pesos. With this, the U.S. importer will need to exchange the equivalent value of U.S. dollars into Philippines pesos. The same principle goes for traveling as well.

The Forex Market is the largest, and most liquid financial market in the world. With an average traded value of around $2,000 billion per day, it somehow belittles other markets including the stock market. As of August 2012, the Bank of International Settlements (BIS), reported that the Forex Market traded beyond U.S. $4.9 trillion per day. It is open 24 hours a day, 5 times a week, with its world trading centers located in London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.

With the advent of technology and emergence of the internet, it is possible for average investors to engage in currency exchanges easily within a click of a mouse through online brokerage firms. One unique aspect to be noted is that there is no central marketplace for the Forex Market. Currency trading is conducted “Over the counter”, where in all transactions are made online between traders through out the world. Unlike stocks where in there is a central market with all orders processed, the Forex Market relies on the different quotations made by all major banks in differing prices, then the brokerage firms take all these quotes from these banks. The quotes are an approximate average of the exact price. Basically, the broker is the one making the market for you. When you buy a currency, the broker is the one selling it for you and not another trader.

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In order to be a successful currency trader, one has to understand the basics behind currency movements and fluctuations. It is definitely a place that could provide vast opportunities but also it could be a double-edge sword, which poses threats for large losses.

Bottom line is the goal of this step by step learn to trade Forex for Beginners tutorial is to lay down a good and firm foundation for traders, who are still new to the Forex Market. In the coming chapters of our Forex Trading Tutorial, I’ll be sharing  the history of Forex Market, Terminologies, Basic Exchange Rates and many more! There are just plenty of things to learn from Best Forex Platform for Beginners to Best Forex Trading Strategies. All we need is time and a warm cup of coffee to be able to sit back, relax and enjoy every learning that we get from reading. Above all, happy investing and most importantly happy learning Forex Trading For Beginners!

Source:

  • What is Forex Trading? – A Definition & Introduction by Nial Fuller. Retrieved April 02, 2013. http://www.learntotradethemarket.com/forex-university/introduction-what-is-forex-trading
  • Forex Tutorial: Introduction to Currency Trading. Retrieved April 02, 2013. http://www.investopedia.com/university/forexmarket/

FOREX TRADING FOR BEGINNERS:

  1. Introduction to Forex Market
  2. History Of Forex Market
  3. Common Used Forex Terms

Basic Forex Trading Strategies For Beginners Revealed

Basic Forex Trading Strategies For Beginners

The concepts about the Forex market might be daunting because of its very complicated out of this world, non average terms being used, however, it is quite funny that most of us already have a first hand experience with the said market. The mere fact that every time we go to a currency exchange station to change our money into another currency is already a basic participation of the Forex market.

It is understandable that we get overwhelmed because of its encompassing entity to other capital markets but the concepts about trading currencies are let’s say, simple. Now, I would want to share to you the basic Forex Trading Strategies for Beginners out there.

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Forex Trading Strategy : 8 Majors

If you have an experience in trading in the stock market, you need to choose a stock out of thousands of stocks however in the currency market, you only need to be updated with the Economic data being released almost daily by the countries that belong to the 8 Majors. It will provide you the best undervalued or overvalued opportunities.

Here are the countries that make up the 8 Majors in the currency market:

  • United States
  • Eurozone (the ones to watch are Germany, France, Italy and Spain)
  • Japan
  • United Kingdom
  • Switzerland
  • Canada
  • Australia
  • New Zealand

The following countries belong to the most sophisticated financial markets in the world. It is strictly advised that following the 8 Majors is a way to take advantage of earning interest income on the most credit-worthy and liquid instruments in the market.

Forex Trading Strategy : Yield & Return

“Yield drives return” is a key to always remember.

A spot market is a commodities or securities market in which goods are sold for cash and delivered immediately. In dealing with foreign exchange spot market, you are actually buying and selling two paired currencies because each currency is valued in relation to another. For example, if the PHP/USD pair is quoted as 39.8500 that means it takes PHP 39.8500 to purchase one USD. Therefore, in every foreign exchange transaction, you are buying one currency and selling another. Furthermore, the country’s central bank places an interest on the currency, which means that you are obligated to pay the interest when the currency is sold however earning potentials are possible on the currencies that you have brought.

For example, let’s look at the New Zealand dollar/Japanese yen pair (NZD/JPY). Let’s assume that New Zealand has an interest rate of 8% and that Japan has an interest rate of 0.5% In the currency market, interest rates are calculated in basis points. A basis point is simply 1/100th of 1%. So, New Zealand rates are 800 basis points and Japanese rates are 50 basis points. If you decide to go long NZD/JPY you will earn 8% in annualized interest, but have to pay 0.5% for a net return of 7.5%, or 750 basis points. (Source: Investopedia)

Forex Trading Strategy : Leveraging Returns

Sometimes leveraging creates good profits but sometimes too, it generates huge losses. It can be a double-edged sword which comes with great risk and great opportunity. The Forex market offers tremendous leverage, as high as 100:1, which means that when you can control $10,000 worth of assets with a capital of $100.

Using the most conservative 10:1 leverage, the 7.5% yield on NZD/JPY would translate into a 75% return annually. Therefore, if you were to hold a 100,000 unit position in NZD/JPY using $5,000 worth of equity, you will have a daily interest of $9.40, which could be translated to a $3,760 annually. It is quite different when you would invest your money in a bank that will only give you a yield of $250 in return however the only edge it gives is assurance because it is much risk free compared to the Forex market.

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Forex Trading Strategy : Carry Trades

Since currency values is constantly dynamic, it paved way to one popular Forex trading strategy of all time, the carry trade. Carry traders look for positions to appreciate in value other than earn the interest rate differential between paired currencies. Here are some historical examples of carry trades:

Between 2003 and the end of 2004, the AUD/USD currency pair offered a positive yield spread of 2.5%. Although this may seem very small, the return would become 25% with the use of 10:1 leverage. During that same time, the Australian dollar also rallied from 56 cents to close at 80 cents against the U.S. dollar, which represented a 42% appreciation in the currency pair. This means that if you were in this trade – and many hedge funds at the time were – you would have not only earned the positive yield, but you would have also seen tremendous capital gains in your underlying investment. (Source: Investopedia)

Australian Dollar Composite

Figure 1: Australian Dollar Composite (2003 – 2005)
Source: eSignal

The carry trade opportunity was also seen in USD/JPY in 2005. Between January and December of that year, the currency rallied from 102 to a high of 121.40 before ending at 117.80. This is equal to an appreciation from low to high of 19%, which was far more attractive than the 2.9% return in the S&P 500 during that same year. In addition, at the time, the interest rate spread between the U.S. dollar and the Japanese yen averaged around 3.25%. Unleveraged, this means that a trader could have earned as much as 22.25% over the course of the year. Introduce 10:1 leverage, and that could be as much as 220% gain. (Source: Investopedia)

Japan Yen Composite

Figure 2: Japan Yen Composite (2005)
Source: eSignal

Forex Trading Strategy : Carry Trade Success

It is not only pairing up two currencies with the highest interest rate against a currency with the lowest rate for the goal of earning but also look for paired currencies that have the potential to appreciate in value. Here is an example of a currency with an interest rate that is in the process of expanding against another currency.

In the previous USD/JPY example, between 2005 and 2006 the U.S. Federal Reserve was aggressively raising interest rates from 2.25% in January to 4.25%, an increase of 200 basis points. During that same time, the Bank of Japan sat on its hands and left interest rates at zero. Therefore, the spread between U.S. and Japanese interest rates grew from 2.25% (2.25% – 0%) to 4.25% (4.25% – 0%). This is what we call an expanding interest rate spread. (Source: Investopedia)

Forex Trading Strategy : Getting to know interest rates

It is compulsory to monitor the economic data being released by every country to be able to know the health of its economy, whether it is conditioned for investment. To know the underlying economics of the country is a way to know where interest rates are heading. In general, countries that have good economic condition, meaning strong growth rates and increasing inflation will likely increase interest rates to be able to control inflation and growth. On the other hand, countries in an economic crisis ranging from a broad slowdown in demand to a full recession will likely to reduce interest rates.

Bottomline is the abundant resources that are readily available and accessible are right at your finger tips. In the advent of technology, there are programs that are available for you to use in monitoring your position in trading. It is just a way on how you would exhaust such availability of these things. Happy Investing with the basic list of Forex trading strategies!

Source:

  • 8 Basic Forex Market Concepts. Retrieved April 02, 2013. http://www.investopedia.com/articles/forex/08/forex-concepts.asp

Forex Trading Strategy: Price Action Trading Patterns

One of the most fundamental Forex Trading Strategies that every trader should be familiar of is the Forex Signal that pertains to Price Action. In relation to this, I would like to share the three common price action Forex trading strategies that would give you an edge as a Forex trader. These are the Pin Bar, Inside Bar and Fakey, likely to called, Mr. Inside, Ms. Pin and Doctor Fakey for easier retention. These three trading patterns are quite simple to understand yet very powerful, with discipline and determination combined. Therefore, it should not be taken for granted because it is a very potent tool for successful Forex trading.

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Forex Trading Strategy: Pin Bar Setup

pinbar1

Pin Bars typically have a very high accuracy rate in trending markets, especially when they occur at significant confluence levels such as support and resistance levels. Pins may be taken against the trend if they are well defined and if they significantly exceed surrounding price bars. See example below, to see how the pin bar appears in a bullish trendline from a bearish trendline.

pinbar2

Forex Trading Strategy: Fakey Setup

Fakey1

The Fakey trading setup indicates rejection of an important level within the market, and it can offer some overwhelming moves in the market. Oftentimes, the market will appear to move in one direction and then a reversal motion happens, and the price will go back in the opposite direction. In the example below, it consists of an inside bar then followed by a false break of the inside bar and then a close back within its range.

It is seen that in the example below, the market is moving higher before the Fakey forms. The Fakey is formed on the false break of an inside bar setup that occurred as all the amateurs tried to pick the market top, then the pros stepped in and interrupted the amateurs through a series of buying.

Fakey2

Forex Trading Strategy: Inside Bar Setup

Insidebar1

The Inside Bars are a very common pattern on the chart. It is a great trend continuation signal, but can also be as a turning point signal. In here, I will discuss about the inside bar that acts as a continuation signal. In the example below, the inside bar is completely contained within the range of the previous bar. It shows a brief consolidation and then it breaks out in the dominant trend direction. With inside bars best being played on daily and weekly charts, it also allows for very small risks and yet offers large rewards.  Furthermore, the inside bar setup in the example, comes off to the downside with the existing bearish market momentum. After the market breaks down below a key support level, a good inside bar is formed.

Insidebar2

Bottom line is that most charts conveys a very complicated and intricate lines yet when these basic patterns will be understood, then it is easier to predict the outcome of your trade. It will easily give you a good Forex signal to guide you in every step of your trading career. Once you have mastered a few solid price action Forex Strategy like the ones above, you are on the right track on becoming a more confident and well-informed trader. Happy investing!

Forex Trading Strategy Made Very Simple – Price Action

If you plan to trade in the market using the technical analysis perspective of trading, you have to keep in mind the basic Forex Trading Strategy that most profound trader would use, which is price action. It is the use of “lagging indicators” as a primary decision making tool. With the knowledge and application of price action, a trader can technically analyze the market without the much exhaustion of other indicators. More importantly, it could guide traders in controlling the possible risk in trading.

The goal in this article is to teach you one of the important Forex trading strategies in relation on how to analyze and grade trends, enter trades, and manage risk while looking at support and resistance. Before we begin in depth, there are few important points to establish first.

Forex Trading Strategy: Price Action

Analyzing Trends

Before jumping in, you should observe and analyze if there are any trends that are occurring on the chart. After a thorough assessment, by then you have already distinguished any biases that may exist or how the attitude is fluctuating at the time.

Refer to the Diagram A-1, it depicts the higher-highs and higher-lows in currency pairs to denote up-trends, lower-lows, and lower-highs to qualify for a downtrend.

1

Diagram A-1

Entering Trades

After the trend analysis, you are well equipped to look for trades in the market since you already have an idea of the sentiment on the chart and also the trend in currency pair.

Here are some of the different Forex Trading Strategies in entering trade that you can use:

1. Price Action Pin Bars – The Pin Bar is highlighted by the elongated wick that ‘sticks out’ from price action. It is a reversal price bar on a chart which shows an obvious change in sentiment during that period. The price bar has a long tail with the close price near the open.  Pin Bar occurs after an extended move up or down.  The bar looks like a pin thus the name Pin Bar. To visualize what a Pin Bar looks like, refer to Diagram A-2.

 

2

Diagram A-2

2. Fake Pin Bars – If the long wick does not stick out from previous price action; they are not a genuine Pin Bar, but rather ‘Fake Pin Bars’, which differs Fake Pin Bars from Pin Bars. Basically, the difference between a Pin Bar and a Fake Pin Bar is determined by recent price action. Trading Fake Pin Bars requires additional analysis, as the signal of a short-term reversal in prices may not be as consistent as that of a genuine pin bar. To visualize what a Fake Pin Bar looks like, refer to Diagram A-3.

3

Diagram A-3

3. Double-Spikes – There are two types of Double-Spikes that you should know of: Double-Spike Breakout and Double-Spike Fade.

  • Double-Spike Breakout – If the price is rebuked for more than once by the support or resistance then the trader should anticipate a Double-Spike Breakout.
  • 4Double-Spike Fade – If there is a continuous anticipation of support and resistance then it is considered to be Double-Spike Fade.

5

Managing Risks

  • Identify Price Action swings

6

  • Identify an up-trend

7

  • Identify Positive Risk-Reward Ratios

8

 

Bottom line is that the price action is one of the most important Forex Trading Strategies out there in relation to analyzing the trend, trading and managing risks.

Breaking through Dynamic Support and Resistance

Breaking through Dynamic Support and Resistance

From the previous article, it has now become clear that moving earnings could possibly behave as support and resistance.  By mixing a few of them creates what we call the zone. But it’s also wise to know that they’ll break, as with every support and level of resistance!

Let us visit again the 50 EMA on GBP/USD’s 15-min chart.

Dynamic Support and Resistance

Within the chart above, we have seen the 50 EMA held like a strong level of resistance for some time as GBP/USD frequently returned off it.

However, as we have outlined with the box, cost finally broke through and increased. Cost then retraced and examined the 50 EMA again, which demonstrated to become a strong support level.

So this means that moving averages may also behave as dynamic support and resistance levels.

One thing to remember about  using moving averages is the fact that they are always changing, meaning you can easily let it rest in your chart and do not have to keep searching in time for you to place potential support and resistance levels.

 

You will know that the line probably represents a moving market. The only issue obviously is determining which moving average to make use of!