Tag Archives: Forex Market

Trend Lines

Trend Lines

Trend line is most likely the most typical type of technical analysis. They’re most likely the most underutilized ones too.

If attracted properly, they may be as accurate just like any other method. Regrettably, most traders don’t draw them properly or come up with the road fit the marketplace rather than the other way round.

Within their most fundamental form, an uptrend lines are attracted along the foot of easily identifiable support areas (valleys). Inside a downtrend, the trend lines are attracted along the top of easily identifiable resistance areas (peaks).

How can you draw trend lines?

To attract trend lines correctly, all you need to do is locate two major tops or bottoms and fasten them.

What’s next?

Nothing.

Yep, it’s that easy.

Listed here are trend lines for action! Take a look at these waves!

Examples of Uptrend, downtrend & sideways trend lines

Kinds of Trends

You will find three kinds of trends:

Uptrend (greater lows)

Downtrend (lower levels)

Sideways trends (varying)

Here are a few important thing to remember about trend lines:

1. It requires a minimum of two tops or bottoms to attract a legitimate trend line however it takes THREE to verify a trend line.

2. The STEEPER the popularity line you draw, the less reliable it will be and the much more likely it’ll break.

3. Like horizontal support and resistance levels, trend lines become more powerful the greater occasions they’re examined.

4. And more importantly, Never draw trend lines by forcing these to fit the marketplace. If they don’t fit right, then that trend line is not a legitimate one!

Time To Make Some Money in Trading Forex

Trading Forex – Time to Make Some Dough

Time To Make Some Money

We are going to use some fundamental analysis in the following examples to help us decide whether to buy or sell a certain currency pair.

Fundamental analysis has been taught during your economic class, but if you were asleep during that time, then don’t worry. We will cover the basics of analysis in a later lesson pretty soon.

As of this moment, you need to pretend that you know what’s happening in trading forex.

Trading EUR/USD

In this kind of example in trading, the Euro is considered to be the base currency, thus the basis for the buy/sell when trading.

In this case, if you think that the U.S economy will continue to weaken & deteriorate, which is certainly bad for the U.S. dollar, then you would perform a BUY EUR/USD order. By doing so, you have purchased euros in the expectation that they will increase versus the U.S dollar.

In different scenario, if you think that the U.S economy is getting stronger and will continue to get stronger while the euro is weakening  against the U.S dollar, then you would perform a SELL EUR/USD order. By doing so, you have sold euros in the expectation that they will depreciate versus the U.S. dollar.

Trading USD/JPY

In this kind of example in trading, the USD is considered to be the base currency, thus the basis for the buy/sell when trading.

In this case, if you think that the Japanese government will continue to weaken & deteriorate the yen in order to help its export industry, then you would perform a BUY USD/JPY order. By doing so, you have purchased US dollars in the expectation that they will increase versus the yen of Japan.

In different scenario, if you think that the Japanese investors are pulling moolah out of US financial markets and converting all their US dollars back to yen which will certainly hurt the US dollar, then you would perform a SELL USD/JPY order. By doing so, you have sold US dollars in the expectation that they will depreciate versus the yen of Japan.

Trading USD/CHF

In this kind of example in trading, the USD is considered to be the base currency, thus the basis for the buy/sell when trading.

In this case, if you think that the Swiss franc is overrated, you would perform a BUY USD/CHF order. By doing so, you have purchased U.S. dollars in the expectation that they will appreciate against the Swiss Franc.

In different scenario,  if you believe that the U.S. housing market weakness will hurt economic growth in the future, which will certainly weaken the dollar, you would perform a SELL USD/CHF order. By doing so you have sold U.S. dollars in the expectation that they will depreciate against the Swiss franc.

Margin Trading

When you want to buy an egg in a grocery store, it is uncommon to just buy a single egg. You can’t just buy one egg at a time. You need to purchase a dozen or “lots” of 12. Right?

In forex trading, it would be a silly situation to buy or sell 1 euro, so they usually come in “lots” of 1,000 units of currency (Micro), 10,000 units (Mini), or 100,000 units (Standard) depending on your broker and the type of account you have. We  will discuss “lots”  later.

“I’m not rich! I don’t have enough moolah to buy 10,000 Euros! Can I still join forex trading?”

The answer is a big, YES!

You can certainly join forex trading through margin trading.

Margin trading is simply the term used for trading with borrowed capital. This is how you’re able to open $1,250 or $50,000 positions with as little as $25 or $1,000. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital.

Let’s discuss it.

Okay. Take note of this explanation as this is very essential when trading forex using Margin trading process.

1. You believer that the market signals are suggesting that the British pound will rise versus the USD.

2. You open 1 standard lot, that is 100, 000 units GBP/USD, purchasing with the with the British pound at 2% margin and wait for the exchange rate to increase. When you buy one lot of 100,000 units of GBP/USD at a price of 1.50000, you are purchasing 100,000 pounds, which is worth US$150,000 (100,000 units of GBP * 1.50000).

If the margin requirement was 2%, then US$3,000 would be set aside in your account to open up the trade (US$150,000 * 2%). With this kind of situation, with just US$3, 000, you now manipulate and control 100,000 pounds.

Margin topic will be discussed more in-depth in a while, but I hope that you’re able to understand the basic idea of how it works.

3. Your predictions and conjectures come try and you decide to sell. You close the position at 1.50500. That earns you $500.

When deciding to close a position, it is expected for the deposit that you originally made to be returned to you and a computation of your profits or losses will be done.

The profit or loss is then credited to your account.

Some brokers allow market players to have custom lots in forex trading. This is due to the development of of retail forex trading. This process allows you not to trade in micro, mini, or standard lots! If 1,542 is your favourite number and that’s how many units you want to trade, then you absolutely can.

Rollover

Wait a minute! This is not the same thing from your cellphone operators! For positions open at your broker’s “cut-off time” which is usually 5:00 PM EST, there is an everyday to day rollover interest rate that a trader either pays or earns, depending on your established margin and position in the market.

The established end of the market day is at 5:00 PM EST, thus if you don’t want to earn or pay an interest on your current positions, make sure they are closed before the market day ends.

You have to remember that currency trade involved borrowing one currency to buy another, thus interest rollover charges are part of the forex trading. Interest is paid on the currency that is being owed, and earned on the one that is purchased.

Also, it is important for you to remember that if you are purchasing a currency with a much higher interest rate than the one you are owing, then the net interest rate differential will be positive, that is USD/JPY, and you will gain funds as results.

On the other hand, if the interest rate differential is negative that you will have to pay.

For more information about rollover, it is a good idea and practice to ask your broker or dealer.

Also note that many retail brokers do adjust their rollover rates based on different factors (e.g., account leverage, interbank lending rates). Please check with your broker for more information on rollover rates and crediting/debiting procedures.

Below is a chart to help you find out the interest rate differentials of the major currenry pairs. The data below is accurate as of 10/4/2010.

Trading Forex

In our next lesson, you will learn and understand all about how you can use interest rate differentials to your reward. Trading forex is getting exciting, isn’t it?

Proceed to the Next Lesson: Pips & Pippetes

Go Back to the Previous Lesson: How You Make Money in Trading Forex

How You Make Money in Forex

Forex – How You Make Money in Trading Forex?

When we talk about Forex market, it means you buy or sell currencies like Yen, Dollars, Euro and many more.

In the forex market, placing a trade is pretty simple: the mechanics is almost similar to the mechanics that you can find other markets like the one in stock market. So, having an experience in trading stocks gives you an advantage in trading forex.

The object of forex trading is to exchange one currency for another in the expectation that soon prices will change, so that the currency you bought will increase in value compared to the one you sold.

Example:

Make Money in Trading Forex

An exchange rate is simply the ratio of 1 currency valued against another currency. Let say for example, the USD/CHF exchange rate suggests how many U.S. dollars can buy one Swiss franc, or how many Swiss francs do you actually need to buy one U.S. dollar. Let’s take a look at the example below on how to read Forex quote.

How To Read a Forex Quote

In the world of market and trading, currencies are always quotes in pairs. Most common pairs are GBP/USD or USD/JPY. NOw, what’s the reason why these currencies come in pair? They are quoted in pairs because in every forex transaction, you are simultaneously buying one currency and selling another. Below is an example of a forex rate for the British pound versus the U.S. dollar:

Forex Quote

The GBP currency to the left of the slash (“/”) is known as the base currency, while the USD on the right is called the counter or quote currency.

When you are buying, it is the exchange rate that tells you how much you need to pay in the units of the quote currency in order to buy one unit of the base currency. Just by looking at the example above, it clearly indicates that you have to pay 1.51258 USD to be able to buy one British pound.

Always remember that the basis for the buy or the sell is the base currency. If you buy EUR/USD, that simply means that you are buying the base currency while simultaneously selling the quote currency. In simpler terms, “buy Euro, sell US Dollars.”

As a market player, you would always want to buy the pair if the base currency will gain value relative to the quote currency. On the other hand, you would want to see the pair if you think that the base currency will lose value relative to the quote currency.

Long/Short

Before everything else, it is imperative for you to know and determine whether you want to buy or to sell.

If you want to buy the base currency and sell the quote currency, you want the base currency to rise in value  and then you would probably sell it back at a higher price. As a market player, this process is called “going long”or taking a “long position. All you have to remember is long = buy. 

On the other hand, if you want to sell the base currency and buy the qote currency, you want the base currency to depreciate in value and then you would purchase it back at a lower price. In a trader’s talk, this is what we call “going short”or taking a “short position”. Always remember: short = sell

Bid/Ask

EUR-USD Forex Market

In forex market, all foreign exchange quotes are always quotes with 2 prices: the bid and ask. For the most part, the ask price is higher that the bid price.

What is a Bid in Forex Market?

The bid is the value at which your broker is inclined toward buying the base currency in exchange for the quote currency. This only means that the bid is the best available value or price at which the trader will sell to the forex market.

What is an Ask in Forex Market?

The ask is the value at which the broker will sell the base currency in exchange for the quote. This only means that the ask price is the best available value at which the trader buys from the forex market. In a much simpler term, ask price is the offer price. 

Now, what’s the difference between the bid and the ask price?

The difference between the 2 is popularly known as the spread.

When we talk about the EUR/USD quote as indicated above, the bid price is 1.34568 and the ask price is 1.34588. Look at how this broker makes it so easy for you to trade away your money.

This is what will happen. If you are going to click the “Sell” button, then you are selling the Euros at 1.3456. On the other hand, if you are going to click the “Buy” button, then you are buying the Euros at 1.34588.

In the next lesson, we will find more examples about trading forex. Are you ready to make some money?

Proceed to the Next Lesson: Time To Make Some Money or Dough

Go Back to the previous Lesson : How Do You Trade Forex?

 

London Session

London Session

London Session

From the time the Asian market or Tokyo market starts to close the shop, the European market known as the London session is just starting their day.

Market participants keep their eyes on London session in spite of the other financial centers all around the Europe.

Even before, London has always been at the center of every trade, this is because of their strategical location. Due to its strategic location, London has been considered to be the forex capital of the world with thousands of businessmen trade every single minute. During the London session, about 30% of all the foreign exchange transactions happen.

Look at the table below. It shows the London session ranges of the major currency pairs.

London Currency Pairs

The values above were calculated using averages if past data from the month of May 2012. Depending on liquidity and other market conditions, these values may vary. Thus, considered to be not absolute values. If you are going back to the table, you will notice that the session range for EUR/CHF has not been included since the Swiss currency Franc has been nailed to the Euro at 1.2000 during that time.

Hear are some of the conceptions about the European session or London session:

1. London session crosses with the two other major trading session. London session is also the key financial center in Europe. A lot of forex transactions take place during this period. With this kind of situation, high liquidity and potential lower transaction costs are expected.

2. London trading session is considered to be the most volatile session due to the large amount of transactions that take place.

3. During the London session, most of the trends begin and continue until the New York session starts.

4. At lunch time, volatility tends to slow down during the middle of the London session because traders go on break while waiting for the New York session to start.

5. Trends can sometimes reverse at the end of the London session, as European traders may decide to lock in profits.

Which Pair Should You Trade during London Session?

During the London session, there is so much liquidity that any pair can be traded. This is due to the volume of transactions that take place.

It is best to stick with the major currency pairs such as EUR/USD, GBP/USD, USD/JPY, and USD/CHF. These currency pairs normally have the tightest spreads.

Also, it is these pairs that are normally directly influenced by any news reports that come out during the European session.

Yen crosses are also a good choice. These currency pairs EUR/JPY and GBP/JPY are pretty volatile during this time. However, you have to bear in mind that cross pairs may cause spreads to be a little wider.

That’s all about the London Session. It’s now time to learn the New York session. 

Proceed to the next lesson: New York Session

Go back to the previous lesson: Tokyo Sesssion

Forex Market Structure

Forex Market & Its Structure

For us to have a baseline data  for the Forex Market, let us first analyze the market that is common to everyone market player or trader: the stock market. The infographic below shows the structure of stock market. This is how stock market’s structure looks like:

Centralized Market

Centralized Market

It is the nature of stock market to be very monopolistic. That is, one entity and one specialist. This entity solely controls the prices. On the other hand, all trades must pass and go through this specialist. Due to this monopolistic nature, prices can easily be manipulated an altered to benefit the specialist, and not the traders.

How does this happen?

Specialist in the stock market is always forced to fulfill the order of its clients. If the number of sellers exceed the number of buyers, then the specialist which is primarily forced to fulfill the order of its clients, the sellers in this case, is left with a cluster of stocks that he cannot sell-off to the side of the buyer.

To prevent this kind of things from happening, widening the spread or increasing the transaction cost to prevent sellers from entering the market must be practiced by the specialist. In other words, the specialists can simply manipulate the quotes their offering to accommodate the needs.

Trading Spot FX is Decentralized

When trading futures or stocks, it is expected for every trader to go through a centralized exchanged with just one price just like the New York Stock Exchange. This is not the case when trading in a forex market. In the forex market, there is no single price. Take a look at the infographic below to see how a decentralized market works.

Decentralized Market

Forex Market Trading

When you are in a decentralized market, then you have a lot of options to choose from. ! That’s how cool a Forex Market is.

The illustration above seems very complicated and overwhelming, but that is what makes the forex market very advantageous and beneficial. Always remember that the forex market is a huge market. If it’s a huge one, then expect to have more dealers competing with each other. The higher the competition is, the better deals will surely arise. This will allow you to choose the best deal almost every single moment. I bet you like it, isn’t it?

One of the awesome things you can do when trading forex is that, you can do it anywhere. It’s like buying a computer online. You get to choose among stores. One store may offer $2000 computer with 1 year warranty while the other stores offer same computer with the same price but with different year of warranty plus additional freebies.

The Forex Market Ladder

In spite being a decentralized market, forex market is not pure and may express chaos. In order for us to understand this better, I have created this very neat illustration. The participants can be organized into a ladder.

Forex Market Hierarchy

Interbank Market is located at the very top of the forex market ladder. Most of the participants of the forex market include the largest banks of the world and some smaller banks. They trade directly with each other or electronically through the innovative Electronic Brokering Services or through the Reuters Dealing 3000-Spot Matching.

The EBS or Electronic Brokering Services and Reuters Dealing 3000-Spot Matching compete with each other. The competition is similar to that of the most famous companies, Coke and Pepsi or Samsung and Apple. These companies are in constant competition for clients and continually try to one-up each other for market share. Both companies offer most currency pairs. However, it is not uncommon for some currency pairs to be more liquid from one than the other.

When we talk about the Electronic Brokering Services platform, EUR/USD, USD/JPY, EUR/JPY, EUR/CHF, and USD/CHF are more liquid. On the other hand, GBP/USD, EUR/GBP, USD/CAD, AUD/USD, and NZD/USD are more liquid for the Reuters Dealing 3000-Spot Matching platform.

Now who can see these currency rates? The answer is, all.

All the banks that comprise the interbank market can see the rates that each other is offering, but not all of them can make deals at those prices.

Established Credit relationship between the trading parties is still the basis for these rates. In other words, you can get higher and better rates if you have a good credit standing, just like credit card companies and banks.

After the medium sized and small banks, next in line are the hedge funds, corporations, retail market makers, and retail ECNs. These entities have to do their transactions via commercial banks. This is because they do not have constricted or closed relationships with the participants of the interbank market. With this kind of ruling, medium sized and small banks, next in line are the hedge funds, corporations, retail market makers, and retail ECN have higher and more expensive rates compared to those who are part of the interbank market.

The last but not the least are the retail traders. They are located at the very bottom of the ladder. In the past, participating in the forex market was very difficult most especially for many individuals belonging to lower and middle earner. However, that difficulties changed significantly with the advent of the internet, electronic trading, and retail brokers. Those difficult barriers to entry in forex market trading have all been taken down. With these development, entering and joining in forex market trading becomes easier and more rewarding.

Knowing the forex market structure gives you an idea on how the forex market trading works.   Now that you have already learned and understood the forex market structure, it’s time to know the forex market players or traders.

Proceed to the Next Lesson: Market Players

Forex vs Futures Market

Forex or Futures?

In this battle, we will be able to see if Forex can still uphold its banner on top. Previously, we were able to learn & understand that Forex is bigger and better than stocks. Now, let’s take a look at the Future’s future.

As we all know, forex market has a lot of advantages and benefits over stocks, but it’s not only that. Forex has a lot more things to offer compared to futures market.  So, what  is the edge, or I must say, “edges” of Forex over futures? Let’s name them one by one.

Liquidity (Forex)

Forex market trades four trillion dollars volume daily, which is considered to be the largest and most liquid market in the entire world. This is the reason why it can absorb the trading volume and transaction sizes which makes any other market smaller and weaker. So how much does a futures market trade per day? It’s $30 billion. That’s huge right? But wait, again, that’s nothing compared to the $4 trillion dollars volume that forex trades per day.

When we talk about liquidity, futures market can never compete to forex. Forex market is always liquid. Its positions can be liquidate and stop orders can be executed with no or little spillage except in extremely eruptive market conditions.

24-Hour Market

Trading begins at 5:00 PM EST Sunday in Australia, and it closes at 7:00 PM EST when Tokyo Market opens, followed by London at 3:00 AM EST. New York market opens at 8:00 am EST and closes at 4:00 PM EST. Sydney market opens before the New York trading closes. This only means that the market never sleeps.

As a market player or trader, this market’s characteristic will allow you to react to a favorable or unfavorable news by trading as soon as possible. If an important data comes in from the United Kingdom or Japan while the US futures market is closed, then expect that the next day’s opening could be a wild ride.

Futures currency contracts can exist in overnight markets, but since they are not very liquid like Forex, futures market are thinly traded. This makes difficult for the average investors to access.

Minimal or No commissions

With the advancement of technology and recent innovations, many brokers require you to pay commissions through an Electronic Communications Brokers. However, the commission fees you will be paying is a very small amount compared to what you pay in the futures market. In line with this, a lot of brokers compete with each other offering traders and market players the lowest quotes and very low transaction costs all the same time. This is due to a fierce competition. Now, all you have to do is to choose among the best brokers that offer the best worth for your money.

Certainty of the Price

In forex trading, you will get a rapid execution and price certainty under normal market conditions. On the other hand, futures and equities markets do not offer certainty of the prices or instant trade execution. In spite of the limited guarantees and the advent of electronic trading, the price for fills for futures and equities on market orders are indeed far from certain.

Brokers quote prices, and you have to always remember that the prices they quote represent the last trade. However, you have to be certain that the price do not necessarily represent the price for which the contract will be filled.

Guaranteed Limited Risk

Risk management is a very important factor when you trade. Traders and market players need to have position limits for this purpose. In spot forex market, risk is minimized. The reason behind this is that, the online capabilities of the trading platform automatically generated a margin call when the required margin amounts exceeds the available trading capital in your account,.

Remember: All open positions will be immediately closed during normal market conditions. On the other hand, during the fast market conditions, your position could be closed beyond your loss level.

Now, how about in the futures market?

Your position may be liquidated at a loss more than what you actually had in your account, that is, in the futures market. Furthermore, you will also become liable for any leading shortfall in the account.

Forex vs Futures Market

Just by looking at the table, you will clearly notice that Forex has it all. This is yet another victory for Forex.

In the next lesson, we will find out who trades forex.

Back to Previous Lesson: Forex vs. Stocks

Proceed to the Next Lesson: Who Trades Forex