Forex Trading|How to trade foreign currencies
Jun
30
Filed Under (Finance) by admin
The foreign exchange market exists wherever one currency is traded for another. This is an international exchange market where simultaneous buying of one currency and selling of another is done. Currencies are traded in pairs, for example Euro/US Dollars (EUR/USD) or US Dollars/Japanese Yen (USD/JPY). It is by far the largest market in the world, in terms of cash value traded and includes trading between large banks, central banks, multinational corporations, governments and other financial market and institutions.
The foreign exchange market is unique because of its trading volume, the extreme liquidity of the market (i.e. price stability even with the fastest buying or selling), the large number and variety of traders in the market, its geographical dispersion, its long trading hours (24 hours a day – except weekends) and the variety of factors that affect exchange rates.
The minimum trading size in this market is usually $1 million, with an overall trading volume of about $1.9 trillion per day worldwide. Buying and Selling of currencies is basically for two reasons. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is mostly for profit. In fact, this market has the potential to earn almost $100,000 with an initial capital of only $500!
The ten most active traders account for almost 73% of trading volume. These are Deutsche Bank (17%), UBS (12.5%), Citigroup (7.5%), HSBC (6.4%), Barclays (5.9%), Merrill Lynch (5.7%), J.P. Morgan Chase (5.3%), Goldman Sachs (4.4%), ABN AMRO (4.2%), Morgan Stanley (3.9%). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell (”ask”, or “offer”) and the price at which a market-maker will buy (”bid”) from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 1-3 pips. One pip is the smallest measure of price move used in forex trading and refers to 1/10,000 of the bid/ask spread. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 (i.e. 3 pips difference).
Although the banks get the least and most stable bid/ask spread they never offer the same rates to their customers, since their key purpose of participating in this market is for profit.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar. According to April 2004’s BIS (Bank for International Settlement) study, the most heavily traded products were: EUR/USD (28 %), USD/JPY (17 %) GBP/USD (14 %). The US currency was involved in 89% of transactions, followed by the euro (37%), the yen (20%) and sterling (17%) – (Note that volume percentages should add up to 200% – 100% for all the sellers, and 100% for all the buyers). Although trading in the euro has grown considerably since the currency’s creation in January 1999, the foreign exchange market is thus still largely dollar-centred. For instance, trading the euro versus a non-European currency ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The only exception to this is EUR/JPY, which is an established traded currency pair in the inter-bank market.
According to the BIS study, 53% of transactions were strictly inter-dealer (i.e. inter-bank), 33% involved a dealer (i.e. a bank) and a fund manager or some other non-bank financial institution, and only 14% were between a dealer and a non-financial company. The inter-bank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank’s own account.
On the other hand, retail forex brokers handle a minute fraction of the total volume of the foreign exchange market, estimated at $25-50 billion daily, which is about 2% of the whole market. In the retail forex industry market makers more often than not run two separate trading desks- one that they use to actually trade foreign exchange (essentially serving as a proprietary trading desk or “non-dealing desk”) and one that is set up for the expressed purpose of off-exchange trading with retail customers (called the “dealing desk” or “trading desk”). The dealing desk operates much like the currency exchange counter at a bank. Inter-bank exchange rates, those coming in from the inter-bank system and displayed at the non-dealing desk, are adjusted to incorporate spreads that safeguard the bank’s (in this instance the market maker’s) profit before they are displayed in the lobby (at the dealing desk) to the retail customer. Dealing desk pricing is, therefore, not a direct reflection of the currency exchange but artificial pricing created and controlled by the originating broker.
Forex Brokers tend to provide better exchange rates compared to the banks also trading in the forex market as well as companies such as Western Union or MoneyGram in order to keep up their competition against them. Hence dealing with specialist international forex brokering companies is a suitable way to transfer money overseas both in large and small amounts.
By: Ali Jamalan
The foreign exchange market is unique because of its trading volume, the extreme liquidity of the market (i.e. price stability even with the fastest buying or selling), the large number and variety of traders in the market, its geographical dispersion, its long trading hours (24 hours a day – except weekends) and the variety of factors that affect exchange rates.
The minimum trading size in this market is usually $1 million, with an overall trading volume of about $1.9 trillion per day worldwide. Buying and Selling of currencies is basically for two reasons. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is mostly for profit. In fact, this market has the potential to earn almost $100,000 with an initial capital of only $500!
The ten most active traders account for almost 73% of trading volume. These are Deutsche Bank (17%), UBS (12.5%), Citigroup (7.5%), HSBC (6.4%), Barclays (5.9%), Merrill Lynch (5.7%), J.P. Morgan Chase (5.3%), Goldman Sachs (4.4%), ABN AMRO (4.2%), Morgan Stanley (3.9%). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell (”ask”, or “offer”) and the price at which a market-maker will buy (”bid”) from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 1-3 pips. One pip is the smallest measure of price move used in forex trading and refers to 1/10,000 of the bid/ask spread. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 (i.e. 3 pips difference).
Although the banks get the least and most stable bid/ask spread they never offer the same rates to their customers, since their key purpose of participating in this market is for profit.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar. According to April 2004’s BIS (Bank for International Settlement) study, the most heavily traded products were: EUR/USD (28 %), USD/JPY (17 %) GBP/USD (14 %). The US currency was involved in 89% of transactions, followed by the euro (37%), the yen (20%) and sterling (17%) – (Note that volume percentages should add up to 200% – 100% for all the sellers, and 100% for all the buyers). Although trading in the euro has grown considerably since the currency’s creation in January 1999, the foreign exchange market is thus still largely dollar-centred. For instance, trading the euro versus a non-European currency ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The only exception to this is EUR/JPY, which is an established traded currency pair in the inter-bank market.
According to the BIS study, 53% of transactions were strictly inter-dealer (i.e. inter-bank), 33% involved a dealer (i.e. a bank) and a fund manager or some other non-bank financial institution, and only 14% were between a dealer and a non-financial company. The inter-bank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank’s own account.
On the other hand, retail forex brokers handle a minute fraction of the total volume of the foreign exchange market, estimated at $25-50 billion daily, which is about 2% of the whole market. In the retail forex industry market makers more often than not run two separate trading desks- one that they use to actually trade foreign exchange (essentially serving as a proprietary trading desk or “non-dealing desk”) and one that is set up for the expressed purpose of off-exchange trading with retail customers (called the “dealing desk” or “trading desk”). The dealing desk operates much like the currency exchange counter at a bank. Inter-bank exchange rates, those coming in from the inter-bank system and displayed at the non-dealing desk, are adjusted to incorporate spreads that safeguard the bank’s (in this instance the market maker’s) profit before they are displayed in the lobby (at the dealing desk) to the retail customer. Dealing desk pricing is, therefore, not a direct reflection of the currency exchange but artificial pricing created and controlled by the originating broker.
Forex Brokers tend to provide better exchange rates compared to the banks also trading in the forex market as well as companies such as Western Union or MoneyGram in order to keep up their competition against them. Hence dealing with specialist international forex brokering companies is a suitable way to transfer money overseas both in large and small amounts.
By: Ali Jamalan
Jun
23
Filed Under (Finance) by admin
Trading opportunities in the forex market deserve serious consideration as a diversification strategy for your portfolio.
While online equities and futures trading have enjoyed exponential growth and widespread notoriety over the past few years, online foreign exchange trading is only now gaining popularity among seasoned active traders, commodity trading advisors (CTAs), and other professional money managers.
Until recently, large international banks dominated the foreign exchange market, only allowing access via telephone trading to a select few such as Fortune 1000 companies, large funds, high-net worth individuals, and so on. But now, the tide has turned and finally there are established online trading firms that provide individual investors with direct access to the largest, most liquid financial market in the world.
In this market you may buy or sell currencies. The objective is to earn a profit from your position. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless.
Here are an example of how forex trading works. Say, a trader purchases 10,000 euros in the beginning of 2004 at the EUR/USD rate was .9600. In May of 2006 the trader exchanges his 10,000 euro back into US dollar at the market rate of 1.1800. In this example, the trader earned a gross profit of $2,200.
Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the “basis” for the buy or the sell. For example, if you BUY EUR/USD you have bought euros (simultaneously sold dollars). You would do so in expectation that the euro will appreciate (go up) relative to the US dollar.
EUR/USD
In this example euro is the base currency and thus the “basis” for the buy/sell. If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will appreciate versus the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will depreciate versus the US dollar.
GBP/USD
In this example the GBP is the base currency and thus the “basis” for the buy/sell. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. If you believe the British are going to adopt the euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
USD/JPY
In this example the US dollar is the base currency and thus the “basis” for the buy/sell. If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
USD/CHF
In this example the CHF is the base currency and thus the “basis” for the buy/sell. If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.
By: Nofie Iman
While online equities and futures trading have enjoyed exponential growth and widespread notoriety over the past few years, online foreign exchange trading is only now gaining popularity among seasoned active traders, commodity trading advisors (CTAs), and other professional money managers.
Until recently, large international banks dominated the foreign exchange market, only allowing access via telephone trading to a select few such as Fortune 1000 companies, large funds, high-net worth individuals, and so on. But now, the tide has turned and finally there are established online trading firms that provide individual investors with direct access to the largest, most liquid financial market in the world.
In this market you may buy or sell currencies. The objective is to earn a profit from your position. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless.
Here are an example of how forex trading works. Say, a trader purchases 10,000 euros in the beginning of 2004 at the EUR/USD rate was .9600. In May of 2006 the trader exchanges his 10,000 euro back into US dollar at the market rate of 1.1800. In this example, the trader earned a gross profit of $2,200.
Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the “basis” for the buy or the sell. For example, if you BUY EUR/USD you have bought euros (simultaneously sold dollars). You would do so in expectation that the euro will appreciate (go up) relative to the US dollar.
EUR/USD
In this example euro is the base currency and thus the “basis” for the buy/sell. If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will appreciate versus the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will depreciate versus the US dollar.
GBP/USD
In this example the GBP is the base currency and thus the “basis” for the buy/sell. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. If you believe the British are going to adopt the euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
USD/JPY
In this example the US dollar is the base currency and thus the “basis” for the buy/sell. If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
USD/CHF
In this example the CHF is the base currency and thus the “basis” for the buy/sell. If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.
By: Nofie Iman
Jun
23
Filed Under (Currency Trading) by admin
What is FOREX?
The Foreign Exchange Market (Forex) is the arena in which a nation’s currency is exchanged for that of another at a mutually agreed rate. It was created in the 1970’s when international trade transitioned from fixed to floating exchange rates, and is now considered to be the largest financial market in the world because of its huge turnover.
Introduction to Forex
All currencies are traded in pairs and each is assigned with an abbreviation. Here are some of them (Table 1):
EUR Euro
USD US Dollar
GBP British Pound
JPY Japanese Yen
CHF Swiss Franc
AUD Australian Dollar
CAD Canadian Dollar
NZD New Zealand Dollar
SGD Singapore Dollar
‘Base’ currency is the first currency in the pair. ‘Quote’ currency, or ‘term’ currency is the second currency in the pair.
USD / JPY = 120.25
Base currency Quote currency Rate
This abbreviation specifies how much you have to pay in the quote currency to obtain one unit of the base currency (in this example, 120.25 Japanese Yen for one US Dollar). The minimum rate fluctuation is called a point or a pip.
Most currencies, except USD/JPY, EUR/JPY, CHF/JPY and GBP/JPY where a pip is 0.01, have 4 digits after the period (a pip is 0.0001), and sometimes they are abbreviated to the last two digits. For example, if EURUSD is traded at 1.2389/1.2391 the quote may be abbreviated to 89/91.
The currency pairs on Forex are quoted as the Bid and Ask (or Offer) prices:
Bid Ask
USD / JPY = 120.25 / 120.28
Bid is the rate at which you can sell the base currency, in our case it’s the US dollar, and buy the quote currency, i.e the Japanese Yen.
Ask ( or Offer) is the rate at which you can buy the base currency, in our case the US dollar, and sell the quote currency, i.e. the Japanese Yen.
Spread is the difference between the Bid price and the Ask price.
Pip is the smallest price increment a currency can make. Also known as a point. e.g. 1 pip = 0.0001 for EUR/USD, and 0.01 for USD/JPY.
Currency Rate is the value of one currency expressed in terms of another. The rate fluctuation depends on numerous factors including the supply and demand on the market and/or open market operations by a government or by a central bank.
1.0 lot size for different currency pairs (Table 2)
Currency 1.0 lot size 1 pip
EURUSD EUR 100,000 0.0001
USDCHF USD 100,000 0.0001
EURUSD EUR 100,000 0.0001
GBPUSD GBP 100,000 0.0001
USDJPY USD 100,000 0.01
AUDUSD AUD 100,000 0.0001
USDCAD USD 100,000 0.0001
EURCHF EUR 100,000 0.0001
EURJPY EUR 100,000 0.01
EURGBP EUR 100,000 0.0001
GBPJPY GBP 100,000 0.01
GBPCHF GBP 100,000 0.0001
EURCAD EUR 100,000 0.0001
NZDUSD NZD 100,000 0.0001
USDSEK USD 100,000 0.0001
USDDKK USD 100,000 0.0001
USDNOK USD 100,000 0.0001
USDSGD USD 100,000 0.0001
USDZAR USD 100,000 0.0001
CHFJPY CHF 100,000 0.01
Spreads & Margins
Alpari (UK)’s mission is to provide innovative currency trading technology combined with quality execution, tight spreads and competitive margins.
Margin is the collateral required by Alpari (UK) to open and maintain a position:
*
o
+ An open position of less than 3,000,000 USD (3M) nominal value carries a maximum leverage of 1:500.
+ An open position of 3M – 5M USD carries a leverage of 1:500 for the first 3M and a leverage of 1:200 for the remaining 2M.
+ An open position of 5M – 10M USD carries a leverage of 1:500 for the first 3M, a leverage of 1:200 for the next 2M and a leverage of 1:100 for the remaining 5M.
+ For open positions higher than 10M USD, the first 3M carries a leverage of 1:500, the next 2M carries a leverage of 1:200, the next 5M carries a leverage of 1:100. Everything above carries a leverage of 1:33.
For example, a client opens a position of 12 million USD (for example, 120 lots in USDCHF). His margin requirements will be the following:
Nominal value of open position Funds required to open position Maximum leverage offered
First 3 million = 3,000,000 / 500 = 6,000 USD 1:500
Next 2 million = 2,000,000 / 200 = 10,000 USD 1:200
Next 5 million = 5,000,000 / 100 = 50,000 USD 1:100
Remaining 2 million = 2,000,000 / 33 = 60,606 USD 1:33
TOTAL: 12 million = 126,606 USD
Balance is the total financial result of all completed transactions and deposits/withdrawals on the trading account.
Floating Profit/Loss is current profit/loss on open positions calculated at the current prices.
Equity is calculated as balance + floating profit – floating loss.
Free margin means funds on the trading account, which may be used to open a position. It is calculated as equity less necessary margin.
Calculating profit/loss
For example, EUR/USD exchange rate is 1.2505/1.2507 and your leverage is 1:100. You believe that EUR/USD will go up and buy 0.1 lot of EUR/USD at 1.2507 (Ask price) – for the contract size refer to Table 2. As we can see from Table 2, 1.0 lot of EUR/USD is 100,000 EUR, which means that 0.1 lot (our example deal size) is 10,000 EUR.
So, you buy 10,000 EUR and sell 10,000*1.2507=12,507 USD. In fact to fund this position you do not have to have 12,507 USD but only 125.07 USD. The rest of the money (in our example 12,381.93 USD) is leveraged to you by Alpari (UK).
The leverage (or gearing) mechanism allows you to open and hold a position much larger than your trading account value. 1:100 leverage means that when you wish to open a new position, you need to support a deposit 100 times less than the value of the contract you are interested in.
For example, you believe that EUR/USD is moving higher and buy 10,000 EUR and sell 12,507 USD. Assuming you are right and EUR/USD goes up to 1.2599/1.2601 and you decide to close the position: when you close a long position you sell the base currency (10,000 EUR in our example) and buy the quote currency (10,000*1.2599 = 12,599 USD):
Transaction EUR USD
Open a position: buy EUR and sell USD + 10,000 – 12,507
Close a position: sell EUR and buy USD – 10,000 + 12,599
Total: 0 + 92
NB: When you close a short position you buy the base currency and sell the quote currency.
To fund this position you only need 100 EUR (approximately 125 USD) not 10,000 EUR. The profit on this position is 92 pips (1.2599-1.2507=0.0092). A pip or point is a minimal rate fluctuation. For EUR/USD 1 pip is 0.0001 of the price (see Table 2).
This example shows a favourable outcome. If EUR/USD had fallen you would realise a loss and not a profit. This loss will be magnified as a result of leveraging. For example, if you close the position at 1.2419, your loss would be $88. Should you have doubts about your understanding of risks, please consult a qualified financial adviser.
Lot Size is the number of base currency, underlying asset or shares in one lot defined in the contract specifications. For details refer to the Table 2.
Lot is an abstract notion of the amount of base currency, shares or other underlying asset on the trading platform.
Transaction (or deal) size is lot size multiplied by the number of lots.
Long Position is a buy position whereby you profit from an increase in price. In respect of currency pairs: buying the base currency against the quote currency.
Short Position is a sell position whereby you profit from a decrease in price. For currency pairs: selling the base currency against the quote currency.
Completed Transaction consists of two counter deals of the same size (open and close a position): buy then sell or vice versa.
Leverage is the term used to describe margin requirements: the ratio between the collateral and the value of the contract. 1:100 leverage means that you can control $100,000 with only $1,000 (1%).
Rollover / Interest Policy
Foreign exchange trading at Alpari (UK) is dealt on a "Spot" basis only. This means that all trades settle two business days from inception, as per market convention. The settlement date is referred to as the value date. Alpari (UK) does not arrange physical delivery of currencies hence, all positions left open from 10:59:45 p.m. to 10:59:59 p.m. (London time) will be rolled over to a new Value Date.
As a result, positions are subject to a swap charge or credit based on the "Rollover/Interest Policy" webpage.
Please note that since 03 June 2007 Alpari (UK) Limited no longer closes and reopens the positions which are open at 11:00 pm London time. Instead we have introduced a more convenient method of rollover which involves debiting or crediting a customer’s trading account when he/she holds open positions overnight.
The cost of rollover is based on the interest rate differential of the two currencies. Let’s assume that the interest rates in the EU and USA are 4.25% p.a and 3.5% p.a respectively. Every currency trade involves borrowing one currency to buy another. If you have a buy position of 1.0 lot in EUR/USD, then you earn 4.25% on your Euros and borrow USD at 3.5% per year.
In other words:
* If you have a long position (i.e. bought) and the first currency in the currency pair has a higher overnight interest rate than the second currency, then you receive a gain.
* If you have a short position (i.e. sold) and the first currency in the currency pair has a higher overnight interest rate than the second currency, then you lose the difference.
* If you have a long position (i.e. bought) and the first currency in the currency pair has a lower overnight interest rate than the second currency, then you lose the difference.
* If you have a short position (i.e. sold) and the first currency in the currency pair has a lower overnight interest rate than the second currency, then you receive a gain.
Please note that if you open and close a position before 10:59:45 p.m. (London time) you will not be subject to a rollover.
The act of rolling the currency pair over is known as tom.next, which stands for tomorrow and the next day.
NB: When you roll an open position from Wednesday to Thursday, then Monday next week becomes the value date, not Saturday; therefore the rollover charge on a Wednesday evening will be three times the value indicated on the "Rollover/Interest Policy" webpage.
Why trade Forex?
Unlike other financial markets Forex has no physical location, like stock exchanges, for example. It operates through the electronic network of banks, computer terminals or via telephone. The lack of a physical exchange enables Forex to operate on a 24-hour basis, spanning from one time zone to another across the major financial centres (Sydney, Tokyo, Hong Kong, Frankfurt, London, New York etc). In every financial centre there are many dealers, who buy and sell currencies 24 hours a day during the whole business week. Trading begins in the Far East, New Zealand (Wellington), then Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt-on-Maine, London and ends in New York and Los Angeles. Below there are approximate trading hours for regional markets (London time):
Japan 00:00-06:30
Continental Europe 06:30-13:00
Great Britain 8:30-15:30
USA 14:30-21:30
Forex has some advantages which make it very popular among investors:
* Liquidity. Forex is the largest financial market in the world, with the equivalent of over $3-4 trillion changing hands daily whereas traded volume on the stock markets equates to only 500 billion US dollars.
* Flexibility. Forex is a 24-hour market, which offers a major advantage over other markets, for example, stock exchanges which are only open during regional business hours. You can respond to breaking news immediately if the situation requires it and customise your trading schedule.
* Lower transaction costs. Traditionally there are no commissions or charges on Forex, except for the spread.
* Margin. Our 1:100 leverage (only for deposits below $ 100,000) is a powerful tool. You need to support a deposit of 1,000 US dollars to make a deal with $100,000. Such high leverage combined with rapid rate fluctuations can make this market profitable but at the same time risky: please see Risk Warning below.
Risk Warning
Under margin trading conditions even small market movements may have a great impact on the customer’s trading account. You must consider that if the market moves against you, you may sustain a total loss greater than the funds deposited. You are responsible for all the risks, financial resources you use and for the chosen trading strategy.
By: richard
Jun
22
Filed Under (Currency Trading) by admin
Forex market is open 24 hours a day. It provides a great opportunity for traders to trade any time of the day or at night. However, although it seems to be not very important at the beginning, the right time to trade is one of the most crucial points to be successful in trading at the forex market. So, when should one consider trading and why?
The best time to trade is when the market is the most active and therefore has the biggest volume of trades. More active currency moves will create a good chance to catch the trade and make some profit. A calm, slow market is literally wasting of time — turn off your computer and don’t even bother!
What to trade, when to trade
During the 24 hours period currency pairs in Forex market experience several hours, when the volume of trades is the highest and so is the pip movement.
Below are Forex market sessions and examples of the most active currency pairs:
London/ New York sessions:
EUR/USD USD/CHF GBP/USD
Tokyo/Sydney sessions:
EUR/JPY AUD/USD USD/JPY AUD/JPY
Sydney session:
AUD/USD EUR/USD
During the week the most active Forex trading days are: Tuesday, Wednesday and Thursday. Sundays (opening) and Mondays are days when traders are mostly watching and analyzing the market and predict further price moves. Fridays are traded approximately till noon, after that all actions slow down and almost freeze before the actual market closing at 5 pm EST.
Some currencies tend to move in the same direction, some — in opposite. This is a powerful knowledge for those who trade more than one currency pair. It helps to hedge, diversify or double profitable positions.
Statistically measured by performance, currency pairs are given so called “correlation coefficients” from +1 to -1. A correlation of +1 means two currency pairs will move in the same direction 100% of the time. A correlation of -1 means they will move in the opposite direction 100% of the time. A correlation of zero means no relation between currency pairs exists
Examples of same direction moving currency pairs are:
•
EUR/USD and GBP/USD EUR/USD and NZD/USD USD/CHF and USD/JPY AUD/USD and GBP/USD AUD/USD and EUR/USD
•
Inversely moving pairs are:
•
EUR/USD and USD/CHF GBP/USD and USD/JPY GBP/USD and USD/CHF AUD/USD and USD/CAD AUD/USD and USD/JPY
By: ariesto
The best time to trade is when the market is the most active and therefore has the biggest volume of trades. More active currency moves will create a good chance to catch the trade and make some profit. A calm, slow market is literally wasting of time — turn off your computer and don’t even bother!
What to trade, when to trade
During the 24 hours period currency pairs in Forex market experience several hours, when the volume of trades is the highest and so is the pip movement.
Below are Forex market sessions and examples of the most active currency pairs:
London/ New York sessions:
EUR/USD USD/CHF GBP/USD
Tokyo/Sydney sessions:
EUR/JPY AUD/USD USD/JPY AUD/JPY
Sydney session:
AUD/USD EUR/USD
During the week the most active Forex trading days are: Tuesday, Wednesday and Thursday. Sundays (opening) and Mondays are days when traders are mostly watching and analyzing the market and predict further price moves. Fridays are traded approximately till noon, after that all actions slow down and almost freeze before the actual market closing at 5 pm EST.
Some currencies tend to move in the same direction, some — in opposite. This is a powerful knowledge for those who trade more than one currency pair. It helps to hedge, diversify or double profitable positions.
Statistically measured by performance, currency pairs are given so called “correlation coefficients” from +1 to -1. A correlation of +1 means two currency pairs will move in the same direction 100% of the time. A correlation of -1 means they will move in the opposite direction 100% of the time. A correlation of zero means no relation between currency pairs exists
Examples of same direction moving currency pairs are:
•
EUR/USD and GBP/USD EUR/USD and NZD/USD USD/CHF and USD/JPY AUD/USD and GBP/USD AUD/USD and EUR/USD
•
Inversely moving pairs are:
•
EUR/USD and USD/CHF GBP/USD and USD/JPY GBP/USD and USD/CHF AUD/USD and USD/CAD AUD/USD and USD/JPY
By: ariesto
Jun
21
Filed Under (Trading USD-EUR) by admin
Understanding how exchange rates work and how they affect Forex markets is essential if you’re going to last as a Forex market trader. Exchange rates, Euros, dollars, yens, marks, francs,floating exchange rates, pips, points – the whole concept of the exchange rate can be daunting for a beginner trader What the heck is an exchange rate?
The exchange rate refers to the relative worth of one type of currency against another. To make it simple, let’s use an example with a simple exchange rate that everyone is familiar with – the exchange rate of dollars to dimes. Suppose you have 10 one-dollar bills. You know that each of those dollar bills is worth 10 dimes. You could, if you wanted, go to the bank and exchange your 10-dollar bills for 100 dimes. The exchange rate would be expressed as DOL/DIM=.10 or DIM/DOL=10. In other words, you can exchange one dollar for 10 dimes or 10 dimes for one dollar.
This example can be expanded to include foreign currencies. Instead of dollars and dimes though you’re dealing with Euros, yen, pounds and francs. EUR/USD=1.1023 means that each euro is worth $1.1023 (the fourth decimal point is used due to the large volume of trading). In reverse, that would be expressed as USD/EUR=.9071. In other words, if you want to trade US dollars for Euros, it will cost you $1,102.30 to get 1000 Euros.
Exchange rates do however move up and down and here’s how that works. The dollars and dimes example can be used to illustrate the point. For example your local store has decided that it will now only accept payment in dimes. If you want to buy a loaf of bread your dollar bills are now worthless. In order to buy that loaf, you’re going to have to find 17 dimes for your two dollars. What happens when there becomes a shortage of dimes. You find a source of dimes and you negotiate. You tell the person holding the dimes that you’ll give them two dollars for 17 dimes. In doing so you’ve changed the currency exchange rate from DOL/DIM=.10 to DOL/DIM=.11. That means every dollar is now worth 11 dimes instead of ten – and if you want to buy $100 worth of dimes, you’ll get 90 dimes, not 100.
The same holds true for the international currency market. If you want to buy goods in Japan, you need to trade with Japanese money. If all you have is dollars, then you need to exchange your dollars for yen. If lots of people are trying to buy yen at the same time, then you’re going to end up paying (exchanging) more dollars for less yen and the products that you’re buying are going to cost you more.
When a country’s economy is strong, people know that they’ll make more money if they invest in businesses and products in that country. In order to buy products or invest money there, they need to exchange their currency for that country’s currency. If there’s a rumour that a major industry in that country is about to fail, people will want to get out – and will start trading in their yen for dollars or Euros or Aussies – whichever is the best exchange rate you can get.
It’s all about supply and demand. There are a couple of other factors that influence exchange rates. One of those is the interest rate. When you hold currency, you earn interest in that country’s currency at their prevailing rate. If the interest rate is higher for yen than for dollars, then people will trade in their dollars for yen in order to earn a higher rate. A second factor is the inflation rate. When the inflation rate in a country is high, people don’t want to hold that country’s currency since the value of the money is going down. Likewise, if the inflation rate is low, people are more likely to want the country’s currency because the value isn’t expected to go down.
One other important factor in the exchange rate is trade with other countries. If world prices for a country’s exports go up in relation to their imports, they’ll be making more on what they sell than they are spending for what they buy. You can see this most clearly in the price of oil. The US buys a large percentage of its oil from Canada. As the price of oil on the world market increases, the exchange rate of Canadian dollars to US dollars goes down – Canadian dollars become more valuable because the Canadian economy is growing stronger.
Floating currency exchange rates are intricate. When you research the subject further you’ll be able to better understand more in-depth writings on the subject.
By: David Mclauchlan
The exchange rate refers to the relative worth of one type of currency against another. To make it simple, let’s use an example with a simple exchange rate that everyone is familiar with – the exchange rate of dollars to dimes. Suppose you have 10 one-dollar bills. You know that each of those dollar bills is worth 10 dimes. You could, if you wanted, go to the bank and exchange your 10-dollar bills for 100 dimes. The exchange rate would be expressed as DOL/DIM=.10 or DIM/DOL=10. In other words, you can exchange one dollar for 10 dimes or 10 dimes for one dollar.
This example can be expanded to include foreign currencies. Instead of dollars and dimes though you’re dealing with Euros, yen, pounds and francs. EUR/USD=1.1023 means that each euro is worth $1.1023 (the fourth decimal point is used due to the large volume of trading). In reverse, that would be expressed as USD/EUR=.9071. In other words, if you want to trade US dollars for Euros, it will cost you $1,102.30 to get 1000 Euros.
Exchange rates do however move up and down and here’s how that works. The dollars and dimes example can be used to illustrate the point. For example your local store has decided that it will now only accept payment in dimes. If you want to buy a loaf of bread your dollar bills are now worthless. In order to buy that loaf, you’re going to have to find 17 dimes for your two dollars. What happens when there becomes a shortage of dimes. You find a source of dimes and you negotiate. You tell the person holding the dimes that you’ll give them two dollars for 17 dimes. In doing so you’ve changed the currency exchange rate from DOL/DIM=.10 to DOL/DIM=.11. That means every dollar is now worth 11 dimes instead of ten – and if you want to buy $100 worth of dimes, you’ll get 90 dimes, not 100.
The same holds true for the international currency market. If you want to buy goods in Japan, you need to trade with Japanese money. If all you have is dollars, then you need to exchange your dollars for yen. If lots of people are trying to buy yen at the same time, then you’re going to end up paying (exchanging) more dollars for less yen and the products that you’re buying are going to cost you more.
When a country’s economy is strong, people know that they’ll make more money if they invest in businesses and products in that country. In order to buy products or invest money there, they need to exchange their currency for that country’s currency. If there’s a rumour that a major industry in that country is about to fail, people will want to get out – and will start trading in their yen for dollars or Euros or Aussies – whichever is the best exchange rate you can get.
It’s all about supply and demand. There are a couple of other factors that influence exchange rates. One of those is the interest rate. When you hold currency, you earn interest in that country’s currency at their prevailing rate. If the interest rate is higher for yen than for dollars, then people will trade in their dollars for yen in order to earn a higher rate. A second factor is the inflation rate. When the inflation rate in a country is high, people don’t want to hold that country’s currency since the value of the money is going down. Likewise, if the inflation rate is low, people are more likely to want the country’s currency because the value isn’t expected to go down.
One other important factor in the exchange rate is trade with other countries. If world prices for a country’s exports go up in relation to their imports, they’ll be making more on what they sell than they are spending for what they buy. You can see this most clearly in the price of oil. The US buys a large percentage of its oil from Canada. As the price of oil on the world market increases, the exchange rate of Canadian dollars to US dollars goes down – Canadian dollars become more valuable because the Canadian economy is growing stronger.
Floating currency exchange rates are intricate. When you research the subject further you’ll be able to better understand more in-depth writings on the subject.
By: David Mclauchlan
Jun
21
Filed Under (Trading Strategies) by admin
I’m interested in trading currencies with a FOREX account, but I’ve also heard plenty of bad things about numerous companies. Does anyone know which company has the best reputation for FOREX trading?
Jun
20
Filed Under (Trading USD-EUR) by admin
Everyone has heard of stocks and shares, probably even the futures market, but trading the FOREX (Foreign Currency Exchange, or FX) market is a relatively new phenomenon. Until recently, FOREX was the domain of the banking fraternity (large banks can trade billions of dollars daily), and the elite in financial and business circles. But now it is possible for the average person to be a part of this incredible – and very profitable – way of making a living, thanks to the personal computer and an internet connection. All done electronically and considered an over-the-counter (OTC) market, trading is far easier and less risky than either the futures or the stock markets. Money can be made both on a rising and falling market, unlike the stock market, which relies on shares increasing in price to create profit.
More and more astute internet entrepreneurs are shunning the traditional financial markets and turning to FOREX trading. They know that it is possible to earn a full-time income from part-time effort – if you’d like to make $200 to $3,000 for as little as ten minutes’ work, and with minimal risk, then FOREX is for you.
FOREX, the spot (cash) market for buying and selling currency, is the largest financial market in the world. Every day more than $1.5 trillion (yes, trillion) is traded globally and, unlike the stock market, which has fixed hours, it is a market that never sleeps. Somewhere in the world, at any time of day or night, FOREX is open for business, six days a week. The market starts each day in Sydney and moves around the globe as other FOREX financial centers open: first to Tokyo, then London and New York.
In simple terms, currencies are traded in pairs, for example the Euro and the US dollar (EUR/USD). The first currency – in this case the Euro – is known as the base currency; the second currency (here, the US dollar), is the counter-currency. All trades result in the simultaneous buying of one currency and the selling of the other. Thus, in this example, if you place an order to buy the EUR/USD, you are buying the Euro and selling the US dollar. If you were to sell the pair, you would be selling the Euro and buying the US dollar. There are many other currency pairs, such as USD/JPY, GBP/USD, EUR/GBP, USD/CHF and so on.
What makes trading FOREX an incredible way to make money online, is that price movements are highly predictable, creating trends that can be anticipated when it comes to decide when to buy and sell. Contrasting with stocks and shares, FOREX trading through brokers is commission free. It is also possible – and definitely recommended – to open a demo (practice) account with a broker first, where you can learn to trade and gain experience before you part with a cent of your own money.
Do you want financial freedom? With huge advantages over other more conventional money markets, why not experience the excitement of pips, rollovers, leverage, lots, long and short positions, limit orders etc. and start to trade FOREX. Good luck!
Penelope Housden.
For more information on FOREX trading, and a FREE report showing how you can turn $300 into $30,000 in as little as 6 months, go to: www.firstclassforex.com
By: Penelope Housden
More and more astute internet entrepreneurs are shunning the traditional financial markets and turning to FOREX trading. They know that it is possible to earn a full-time income from part-time effort – if you’d like to make $200 to $3,000 for as little as ten minutes’ work, and with minimal risk, then FOREX is for you.
FOREX, the spot (cash) market for buying and selling currency, is the largest financial market in the world. Every day more than $1.5 trillion (yes, trillion) is traded globally and, unlike the stock market, which has fixed hours, it is a market that never sleeps. Somewhere in the world, at any time of day or night, FOREX is open for business, six days a week. The market starts each day in Sydney and moves around the globe as other FOREX financial centers open: first to Tokyo, then London and New York.
In simple terms, currencies are traded in pairs, for example the Euro and the US dollar (EUR/USD). The first currency – in this case the Euro – is known as the base currency; the second currency (here, the US dollar), is the counter-currency. All trades result in the simultaneous buying of one currency and the selling of the other. Thus, in this example, if you place an order to buy the EUR/USD, you are buying the Euro and selling the US dollar. If you were to sell the pair, you would be selling the Euro and buying the US dollar. There are many other currency pairs, such as USD/JPY, GBP/USD, EUR/GBP, USD/CHF and so on.
What makes trading FOREX an incredible way to make money online, is that price movements are highly predictable, creating trends that can be anticipated when it comes to decide when to buy and sell. Contrasting with stocks and shares, FOREX trading through brokers is commission free. It is also possible – and definitely recommended – to open a demo (practice) account with a broker first, where you can learn to trade and gain experience before you part with a cent of your own money.
Do you want financial freedom? With huge advantages over other more conventional money markets, why not experience the excitement of pips, rollovers, leverage, lots, long and short positions, limit orders etc. and start to trade FOREX. Good luck!
Penelope Housden.
For more information on FOREX trading, and a FREE report showing how you can turn $300 into $30,000 in as little as 6 months, go to: www.firstclassforex.com
By: Penelope Housden
Jun
19
Filed Under (Trading Strategies) by admin
I saw a commercial on cnbc this morning about a firm that offers stocks, eft, forex and other investment tools that you can trade. But I didn’t get the name. Anyone know of any big firms that will allow me to trade stocks and forex? I tried Scottrade, TD Ameritrade but they don’t offer forex.
Jun
19
Filed Under (Trading Strategies) by admin
Forex is expanding very fast in this few years. A lot of tend to move from ordinary investment to forex trading. Someone claim that forex trading is the most earnable trading and most liquid investment on earth. I am not sure about it but what i know is I still did not heard any success story from anyone about forex trading.
Jun
17
Filed Under (Currency Trading) by admin
Forex Day Trading can be very lucrative. No matter what type of market you chose to day trade you must know the “personality” of the market you are trading. Every market has its own characteristics and it is important to know what they are before attempting to profit from it. The forex market is no different. In this article we will go over very important general day trading principles/rules and then we will see what a day trader has to recognize when specifically day trading the forex market.
As the term implies, day traders are concerned with what happens in the market today. Not tomorrow, not next week and not next month, but today. Forex day trader’s job is to capture intraday price swings. Depending on the system or trading method employed, this can mean capturing one intraday swing or various intraday swings.
The general job of a Forex day trader is: To be disciplined.
This principle is key for any type of trading but particularly for forex day trading. If I had to name one single aspect of a day trader that can make him or her a winner or a loser it is discipline. You can have a so-so system but still make money if you are disciplined. However, you can have the best trading system in the world but if you are not disciplined I guarantee you will not be a successful trader. So, what is all this discipline everyone talks about when discussing trading? Very simple, it’s respecting and strictly following your forex trading plan, your forex trading system, your money management rules, and your commitment to the business. Being disciplined with regard to each and every one of these components is essential for your success.
It is so easy to deviate from your trading plan, the rules of your forex trading system or any of the above mentioned components, especially when day trading. Why? Two reasons. First, because the trader is trading very frequent and does not have time to cool down, think, and evaluate. Second, because reality is replaced by hope. Your trading system rules (reality) say: “get out of the trade” hope says “hang in there, maybe it will still be profitable”. Your money management rules (reality) say “risk only 2% of your account on this trade” hope says “since I lost on the last trade I will risk 4% on this next one so I can make up for the loser and also be profitable”. Your trading plan (reality) says “trade each day 4 hours, give yourself Wednesday or Thursday a vacation to rest” hope says “Since I am not doing very well now I don”t need this rest day, and I will also trade 7 hours per day to make up”. I know (not hope!) you now understand the point!
To control risk:
One of the most important jobs as a day trader is to control your risk exposure. Sure, controlling risk is a concept you must use in any type of trading; however in day trading you must look at this issue from a different angle. Since your job is to capture various price swings during the day naturally your profit objectives will be much smaller then of a swing trader (who places a single trade aiming for a much larger profit objective). So, when placing several trades during the day it can be easy to “drift” away from your pre-determined stop loses. A common (very common actually!) day traders thought is “if I extend my stop loss just a bit I hope the market will turn around”! Hope is one of the trader’s biggest enemies. These little extensions of stop losses add up and suddenly without noticing you are losing more dollars per trade than planed making your risk/reward ratio turn against you.
To focus on the appropriate time frame:
As a day trader your primary concern is to catch intraday swings. Your trades start and finish the same day. Your world is the day you are trading in. You don’t care what will happen in the market tomorrow or the day after tomorrow. Your objective when trading is focusing on the appropriate time frame chart. My opinion is that day trading should be done on a 1, 5 or 10 minute bar chart. Remember, you are looking to capture several fast and short moves during the day and hence you must focus on the charts that best illustrate events as they happen in a short period of time.
However, the fact that you are day trading on a 1,5 or 10 minute bar chart does not mean you cant use a larger time frame chart for the purpose of analysis. This however, is very subjective and depends very much on the traders’ strategies and methods of trading. As an example, many day traders would look at one hour bar charts in order to have a view of how the market has been behaving in the last week. Is it moving sideways (and so maybe I should only place trades between support and resistance areas)? Is it trending (and so maybe I should only be looking at placing trades in the direction of the higher time frame trend)? Are there any major support and/or resistance levels I should be aware of (areas where I should refrain from placing trades since it is uncertain how the market will react when reaching them)? Did the market brake out of a congestion area?
Again, it is very subjective. Some day traders believe that with proper larger time frame analysis they can select better their day trades. My personal opinion is that the more you analyze the more conflicts you will have and the more uncertainties will appear (especially if you are new to trading). I like making things simple and I found it very useful when trading (proof of this is that all of the trading systems I use are 100% mechanical). Don’t get me wrong, this is not to say that larger time frames should not be used at all for analysis purposes. But, try to keep it simple and if you see that looking at larger time frame charts interferes with your correct decision process when placing day trades then simply stop.
To trade volatile and liquid markets:
Since your job as a forex day trader is to capture intraday swings it is crucial that the market you are trading has enough movement to allow you to do this. It is also important that the market you are trading has enough liquidity so that order fills do not suffer from excessive slippage. You have to select a market that it’s volatility is permanent and not a temporary occurrence. Since you are basing your trading method on catching intraday price swings you have to know that you are trading in the right place. As a day trader volatility is your allay and you have to know that you can count on it every single day (or at least 90% of the days). Liquid markets will provide you with good order fills. As a day trader this is very important since you are aiming at smaller profit objectives and hence larger slippage will eat away more of your profits. When trading several times a day this adds up and can be the difference between success and failure.
As a forex day trader you have to apply all the above rules and principles plus other criteria that are unique to the forex market.
Time of day trading:
The forex market is a 24 hour market. Never stops except on weekends. Within this 24 hour period different currencies behave in different manners. As a forex day trader it is very important to know the “personality” of the currency pair you are trading. For example, the GBP/USD is more volatile in early to mid European session then any other liquid pair. For a day trader trading in these hours it would be wise to take advantage of the price swings the GBP/USD pair offers instead of trading some other currency pair that constantly shows no movement. The USD/CAD pair is “silent” in the early to mid European session but starts to have more price movement toward the start of the US session. Every time Non Farm Payroll is released most if not all currency pairs have a very small price range up to release time. As a day trader it wouldn’t be wise to trade during these pre-announcement hours with strategies that are based on breakouts. It would probably be smarter to use strategies that are based on range support and resistance.
Spread and liquidity:
Forex brokers don’t charge you a commission for every trade you make (at least most forex brokers). Instead, they make their profit on the bid/ask spread which is measured in pips. As a forex day trader you are aiming at capturing small price swings sometimes several time per day. Also, your profit objectives are obviously much smaller than the swing trader’s profit objectives. All this means one thing: every pip counts. You cannot afford to trade currency pairs with large spreads; if you do your profit will get eaten up to a point where you will not be trading with an adequate risk/reward ratio. Forex day trading must be done with liquid pairs. Most forex brokers will provide you with a very narrow spread for the most liquid currency pairs. As an example, many brokers are now offering a 2 pip spread for EUR/USD and USD/JPY and a 3 pip spread for USD/CHF and GBP/USD. These are the most liquid pairs and the ones a day trader should focus on.
Specific news announcements:
Currency rates are affected by rumors, news, economic indicators and government reports. As a forex day trader you must always be aware of what economic reports are scheduled on the day you are trading and at what time. Why? Simply because many of these reports can have a strong momentary impact on the market once they hit the news wires. This impact can be of 10 pips or 100 pips depending on the report and it’s difference from the market consensus. The most important and impacting economic indicators and government reports are issued by the US government. They affect every USD/X or X/USD currency pair. Again, always know what are the release times and the importance of the economic report. For example, suppose you are in a EUR/USD trade at 8:25 a.m. You know that an economic report is scheduled for release at 8:30 a.m. You might consider either exiting the trade before the release (in order to avoid unnecessary speculation as to what impact the report will have on the market) or entering your profit objective and stop loss into your deal station (for risk exposure reasons).
Volatility of currency pairs:
As a forex day trader volatility is you friend, a friend you cannot afford to trade without. In it’s basic definition, volatility is simply the amount of price change with relation to time. Volatile currency pairs have various price swings (price changes) during a small period of time (one day). These price swings are what a day trader lives on. In the forex market volatility many times comes hand in hand with liquidity. The most liquid currency pairs are the ones that are the most volatile. The big 4: EUR/USD, GBP/USD, USD/JPY and USD/CHF are the most liquid pairs that provide the best volatility and hence opportunity for the forex day trader. Within these four pairs, the GBP/USD is the most volatile. Although it’s not the most liquid (the EUR/USD is), but it’s the most volatility. This pair, traded with the right forex broker (one that provides a 3 pip spread) can present many profitable opportunities for the astute day trader.
In conclusion, the forex day trader has to be prepared not only with the basic day trading rules, skills and principles. His job is to incorporate into his trading the characteristics and uniqueness of the forex market. Remember, every currency pair might present different opportunities and it is your job to always focus on the ones that best fit the purpose and objectives of forex day trading.
I hope to have contributed to your forex trading education and I thank you for taking the time to read this article.
By: Justin Owen
As the term implies, day traders are concerned with what happens in the market today. Not tomorrow, not next week and not next month, but today. Forex day trader’s job is to capture intraday price swings. Depending on the system or trading method employed, this can mean capturing one intraday swing or various intraday swings.
The general job of a Forex day trader is: To be disciplined.
This principle is key for any type of trading but particularly for forex day trading. If I had to name one single aspect of a day trader that can make him or her a winner or a loser it is discipline. You can have a so-so system but still make money if you are disciplined. However, you can have the best trading system in the world but if you are not disciplined I guarantee you will not be a successful trader. So, what is all this discipline everyone talks about when discussing trading? Very simple, it’s respecting and strictly following your forex trading plan, your forex trading system, your money management rules, and your commitment to the business. Being disciplined with regard to each and every one of these components is essential for your success.
It is so easy to deviate from your trading plan, the rules of your forex trading system or any of the above mentioned components, especially when day trading. Why? Two reasons. First, because the trader is trading very frequent and does not have time to cool down, think, and evaluate. Second, because reality is replaced by hope. Your trading system rules (reality) say: “get out of the trade” hope says “hang in there, maybe it will still be profitable”. Your money management rules (reality) say “risk only 2% of your account on this trade” hope says “since I lost on the last trade I will risk 4% on this next one so I can make up for the loser and also be profitable”. Your trading plan (reality) says “trade each day 4 hours, give yourself Wednesday or Thursday a vacation to rest” hope says “Since I am not doing very well now I don”t need this rest day, and I will also trade 7 hours per day to make up”. I know (not hope!) you now understand the point!
To control risk:
One of the most important jobs as a day trader is to control your risk exposure. Sure, controlling risk is a concept you must use in any type of trading; however in day trading you must look at this issue from a different angle. Since your job is to capture various price swings during the day naturally your profit objectives will be much smaller then of a swing trader (who places a single trade aiming for a much larger profit objective). So, when placing several trades during the day it can be easy to “drift” away from your pre-determined stop loses. A common (very common actually!) day traders thought is “if I extend my stop loss just a bit I hope the market will turn around”! Hope is one of the trader’s biggest enemies. These little extensions of stop losses add up and suddenly without noticing you are losing more dollars per trade than planed making your risk/reward ratio turn against you.
To focus on the appropriate time frame:
As a day trader your primary concern is to catch intraday swings. Your trades start and finish the same day. Your world is the day you are trading in. You don’t care what will happen in the market tomorrow or the day after tomorrow. Your objective when trading is focusing on the appropriate time frame chart. My opinion is that day trading should be done on a 1, 5 or 10 minute bar chart. Remember, you are looking to capture several fast and short moves during the day and hence you must focus on the charts that best illustrate events as they happen in a short period of time.
However, the fact that you are day trading on a 1,5 or 10 minute bar chart does not mean you cant use a larger time frame chart for the purpose of analysis. This however, is very subjective and depends very much on the traders’ strategies and methods of trading. As an example, many day traders would look at one hour bar charts in order to have a view of how the market has been behaving in the last week. Is it moving sideways (and so maybe I should only place trades between support and resistance areas)? Is it trending (and so maybe I should only be looking at placing trades in the direction of the higher time frame trend)? Are there any major support and/or resistance levels I should be aware of (areas where I should refrain from placing trades since it is uncertain how the market will react when reaching them)? Did the market brake out of a congestion area?
Again, it is very subjective. Some day traders believe that with proper larger time frame analysis they can select better their day trades. My personal opinion is that the more you analyze the more conflicts you will have and the more uncertainties will appear (especially if you are new to trading). I like making things simple and I found it very useful when trading (proof of this is that all of the trading systems I use are 100% mechanical). Don’t get me wrong, this is not to say that larger time frames should not be used at all for analysis purposes. But, try to keep it simple and if you see that looking at larger time frame charts interferes with your correct decision process when placing day trades then simply stop.
To trade volatile and liquid markets:
Since your job as a forex day trader is to capture intraday swings it is crucial that the market you are trading has enough movement to allow you to do this. It is also important that the market you are trading has enough liquidity so that order fills do not suffer from excessive slippage. You have to select a market that it’s volatility is permanent and not a temporary occurrence. Since you are basing your trading method on catching intraday price swings you have to know that you are trading in the right place. As a day trader volatility is your allay and you have to know that you can count on it every single day (or at least 90% of the days). Liquid markets will provide you with good order fills. As a day trader this is very important since you are aiming at smaller profit objectives and hence larger slippage will eat away more of your profits. When trading several times a day this adds up and can be the difference between success and failure.
As a forex day trader you have to apply all the above rules and principles plus other criteria that are unique to the forex market.
Time of day trading:
The forex market is a 24 hour market. Never stops except on weekends. Within this 24 hour period different currencies behave in different manners. As a forex day trader it is very important to know the “personality” of the currency pair you are trading. For example, the GBP/USD is more volatile in early to mid European session then any other liquid pair. For a day trader trading in these hours it would be wise to take advantage of the price swings the GBP/USD pair offers instead of trading some other currency pair that constantly shows no movement. The USD/CAD pair is “silent” in the early to mid European session but starts to have more price movement toward the start of the US session. Every time Non Farm Payroll is released most if not all currency pairs have a very small price range up to release time. As a day trader it wouldn’t be wise to trade during these pre-announcement hours with strategies that are based on breakouts. It would probably be smarter to use strategies that are based on range support and resistance.
Spread and liquidity:
Forex brokers don’t charge you a commission for every trade you make (at least most forex brokers). Instead, they make their profit on the bid/ask spread which is measured in pips. As a forex day trader you are aiming at capturing small price swings sometimes several time per day. Also, your profit objectives are obviously much smaller than the swing trader’s profit objectives. All this means one thing: every pip counts. You cannot afford to trade currency pairs with large spreads; if you do your profit will get eaten up to a point where you will not be trading with an adequate risk/reward ratio. Forex day trading must be done with liquid pairs. Most forex brokers will provide you with a very narrow spread for the most liquid currency pairs. As an example, many brokers are now offering a 2 pip spread for EUR/USD and USD/JPY and a 3 pip spread for USD/CHF and GBP/USD. These are the most liquid pairs and the ones a day trader should focus on.
Specific news announcements:
Currency rates are affected by rumors, news, economic indicators and government reports. As a forex day trader you must always be aware of what economic reports are scheduled on the day you are trading and at what time. Why? Simply because many of these reports can have a strong momentary impact on the market once they hit the news wires. This impact can be of 10 pips or 100 pips depending on the report and it’s difference from the market consensus. The most important and impacting economic indicators and government reports are issued by the US government. They affect every USD/X or X/USD currency pair. Again, always know what are the release times and the importance of the economic report. For example, suppose you are in a EUR/USD trade at 8:25 a.m. You know that an economic report is scheduled for release at 8:30 a.m. You might consider either exiting the trade before the release (in order to avoid unnecessary speculation as to what impact the report will have on the market) or entering your profit objective and stop loss into your deal station (for risk exposure reasons).
Volatility of currency pairs:
As a forex day trader volatility is you friend, a friend you cannot afford to trade without. In it’s basic definition, volatility is simply the amount of price change with relation to time. Volatile currency pairs have various price swings (price changes) during a small period of time (one day). These price swings are what a day trader lives on. In the forex market volatility many times comes hand in hand with liquidity. The most liquid currency pairs are the ones that are the most volatile. The big 4: EUR/USD, GBP/USD, USD/JPY and USD/CHF are the most liquid pairs that provide the best volatility and hence opportunity for the forex day trader. Within these four pairs, the GBP/USD is the most volatile. Although it’s not the most liquid (the EUR/USD is), but it’s the most volatility. This pair, traded with the right forex broker (one that provides a 3 pip spread) can present many profitable opportunities for the astute day trader.
In conclusion, the forex day trader has to be prepared not only with the basic day trading rules, skills and principles. His job is to incorporate into his trading the characteristics and uniqueness of the forex market. Remember, every currency pair might present different opportunities and it is your job to always focus on the ones that best fit the purpose and objectives of forex day trading.
I hope to have contributed to your forex trading education and I thank you for taking the time to read this article.
By: Justin Owen
