Wednesday 14 March 2012
Forex Factory: foreign exchange
Forex Factory: foreign exchange: The foreign exchange market (usually referred to as the forex, FX or currency market) is a global financial market where a currency is tra...
Forex Factory: foreign exchange
Forex Factory: foreign exchange: The foreign exchange market (usually referred to as the forex, FX or currency market) is a global financial market where a currency is tra...
Saturday 21 January 2012
Why You Need A Forex Trading System To Succeed - A Story Of Two Forex Traders Just Starting Out
With whatever field or investment you'd like to take on, there are always tools and resources available to assist you. And this is especially true when it comes to Forex. The currency market can be quite overwhelming, and becoming a successful Forex trader does not come from pure luck. There are simply too many factors that can affect the direction that currency prices will move toward.
Here are two important realities to consider:
1. Most newbies try to take on Forex using no assistance or tools. (Most newbies lose all of their money).
2. Most successful traders use a Forex trading system to help them (Successful traders make VERY good money in Forex).
But even with these realities commonly known, newbies still try to attack Forex blind, basing their buying and selling decisions on limited knowledge and experience. It is not until they have lost all of their trading funds that they consider that it probably would have been smarter to invest in a Forex trading system and software from the beginning. Don't make the same mistake. If you want to be successful with currency trading (ie. making consistent profitable trades) then it is highly recommended that you investigate the many Forex trading systems and software on the market.
Let me illustrate further with a story of about two Forex traders:
Tom and Jim have been reading about Forex a lot recently. Both have been spending hours online trying to understand what currency trading is and how (and if) they can make some quick profits. All of the marketing ads that they read say that you can increase your money very, very quickly. Sure, there's some risk involved, but the potential rewards are just too good to pass up. So they both decide to try out Forex and see if they can make a go of it.
Both guys are highly motivated and want to give Forex their best chance. So each of them is going to invest $1000 of their savings into currency trading. If they lose the $1000, then they will quit Forex and re-evaluate whether or not to try again in the future. By investing a thousand bucks, both have shown that they are fully committed to making Forex work for them.
Starting Out:
Tom takes his entire $1000 and transfers it into a retail online Forex broker. Tom will be making all of his trading decisions on his own. He will be doing his own research and will lurking on Forex forums and blogs to see if he can get some much needed tips.
Jim goes a different route. Although he is just as motivated as Tom, he is also aware of the complexity of the Forex market and realizes that he just doesn't have much experience at this point. So he takes $900 and transfers it to the same retail Forex broker as Tom. He saves the remaining $100 in order to get access to tools and resources (ie. Forex trading systems and software) to help him make better trades. He used to day trade stocks and knows first hand the edge that these tools and resources can have (especially if you are just learning the ropes).
Month 1:
Tom jumped right into currency trading. His first trade started off in the positive, but quickly went south. Before he could post his sell request, he had lost $100. Although he did have some minor profitable trades, overall his trading history was very similar to his first trade. Many trades started off good, but for some reason (that he just didn't have the experience or knowledge to understand), then would eventually trend down. At the end of his first month trading currencies, Tom's trading account was down to $400.
Jim, did a little bit of research and found Forex Ambush. This was a membership website that provided its members winning signals. What really caught his eye was that they boldly stated that their trading signals were 99.9% accurate. How could they make such a bold statement? Jim did some more digging and found lots of positive feedback from current members. And there was one more thing that finally swayed Jim into giving Forex Ambush a try: they offered a 7 day trial at a fraction of their normal price.
For less than twenty bucks, Jim had seven days to try out Forex Ambush and their 99.9% accurate trading signals. He was really excited. He had $900 in his Forex trading account and still had $80+ to use in case Forex Ambush didn't help.
The next day Jim received an email with a trading signal from Forex Ambush. He was still very new to Forex, but with the bold accuracy statement still in his mind, Jim put in his order just as the trading signal specified. When his transaction closed later that day, Jim had made a $145 profit. He was very excited! After his 7 day trial ended, Jim went ahead and signed up to be a permanent member of Forex Ambush. Although not every trading signal resulted in profits, almost all of them did. And the losses that he did have were very small. After a month, Jim had $1750 in his Forex trading account.
Month 2:
Tom was feeling deflated. Within a month, he had gone from $1000 to $400. In order to try to make back his money, he did higher valued trades that were much more risky. The end result: he was down to $0 before the month had even ended. Tom was angry and frustrated. He swore off ever doing Forex again, telling anyone that would listen that it was a scam and that they should save their money.
Jim, on the other hand, was on cloud nine. He had turned his initial $900 and turned it into $1750. He was still getting the daily email from Forex Ambush with the trading signals, but he was also testing out a few other Forex trading systems. After a month of profitable trades, he had a much better understand on the Forex market and was full of confidence. By the end of month 2, Jim's trading account was now at $2355.
And the most remarkable thing was that Jim was doing all of this in his spare time. He still had a full-time job to cover his living expenses. Everything he made in Forex was extra. He has been contemplating quitting his job and trading Forex on a full-time basis. But for now, he's happy for the stability his current job brings him and is enjoying the benefits that his "side" money in Forex is providing him.
The moral of the story: if you want to succeed at anything that you have very little knowledge and experience with, it is highly recommended that you invest in the tools and resources to maximize your chances of success.
You need to ask yourself: do you want to be like Tom, poor, angry, and swearing that Forex is just a scam? Or would you rather be like Jim, investing in tools to help you succeed and enjoying the profits that those tools will help you make? If you are serious about making money with Forex, then you owe it to yourself to find a Forex trading system that will give you the winning edg
Here are two important realities to consider:
1. Most newbies try to take on Forex using no assistance or tools. (Most newbies lose all of their money).
2. Most successful traders use a Forex trading system to help them (Successful traders make VERY good money in Forex).
But even with these realities commonly known, newbies still try to attack Forex blind, basing their buying and selling decisions on limited knowledge and experience. It is not until they have lost all of their trading funds that they consider that it probably would have been smarter to invest in a Forex trading system and software from the beginning. Don't make the same mistake. If you want to be successful with currency trading (ie. making consistent profitable trades) then it is highly recommended that you investigate the many Forex trading systems and software on the market.
Let me illustrate further with a story of about two Forex traders:
Tom and Jim have been reading about Forex a lot recently. Both have been spending hours online trying to understand what currency trading is and how (and if) they can make some quick profits. All of the marketing ads that they read say that you can increase your money very, very quickly. Sure, there's some risk involved, but the potential rewards are just too good to pass up. So they both decide to try out Forex and see if they can make a go of it.
Both guys are highly motivated and want to give Forex their best chance. So each of them is going to invest $1000 of their savings into currency trading. If they lose the $1000, then they will quit Forex and re-evaluate whether or not to try again in the future. By investing a thousand bucks, both have shown that they are fully committed to making Forex work for them.
Starting Out:
Tom takes his entire $1000 and transfers it into a retail online Forex broker. Tom will be making all of his trading decisions on his own. He will be doing his own research and will lurking on Forex forums and blogs to see if he can get some much needed tips.
Jim goes a different route. Although he is just as motivated as Tom, he is also aware of the complexity of the Forex market and realizes that he just doesn't have much experience at this point. So he takes $900 and transfers it to the same retail Forex broker as Tom. He saves the remaining $100 in order to get access to tools and resources (ie. Forex trading systems and software) to help him make better trades. He used to day trade stocks and knows first hand the edge that these tools and resources can have (especially if you are just learning the ropes).
Month 1:
Tom jumped right into currency trading. His first trade started off in the positive, but quickly went south. Before he could post his sell request, he had lost $100. Although he did have some minor profitable trades, overall his trading history was very similar to his first trade. Many trades started off good, but for some reason (that he just didn't have the experience or knowledge to understand), then would eventually trend down. At the end of his first month trading currencies, Tom's trading account was down to $400.
Jim, did a little bit of research and found Forex Ambush. This was a membership website that provided its members winning signals. What really caught his eye was that they boldly stated that their trading signals were 99.9% accurate. How could they make such a bold statement? Jim did some more digging and found lots of positive feedback from current members. And there was one more thing that finally swayed Jim into giving Forex Ambush a try: they offered a 7 day trial at a fraction of their normal price.
For less than twenty bucks, Jim had seven days to try out Forex Ambush and their 99.9% accurate trading signals. He was really excited. He had $900 in his Forex trading account and still had $80+ to use in case Forex Ambush didn't help.
The next day Jim received an email with a trading signal from Forex Ambush. He was still very new to Forex, but with the bold accuracy statement still in his mind, Jim put in his order just as the trading signal specified. When his transaction closed later that day, Jim had made a $145 profit. He was very excited! After his 7 day trial ended, Jim went ahead and signed up to be a permanent member of Forex Ambush. Although not every trading signal resulted in profits, almost all of them did. And the losses that he did have were very small. After a month, Jim had $1750 in his Forex trading account.
Month 2:
Tom was feeling deflated. Within a month, he had gone from $1000 to $400. In order to try to make back his money, he did higher valued trades that were much more risky. The end result: he was down to $0 before the month had even ended. Tom was angry and frustrated. He swore off ever doing Forex again, telling anyone that would listen that it was a scam and that they should save their money.
Jim, on the other hand, was on cloud nine. He had turned his initial $900 and turned it into $1750. He was still getting the daily email from Forex Ambush with the trading signals, but he was also testing out a few other Forex trading systems. After a month of profitable trades, he had a much better understand on the Forex market and was full of confidence. By the end of month 2, Jim's trading account was now at $2355.
And the most remarkable thing was that Jim was doing all of this in his spare time. He still had a full-time job to cover his living expenses. Everything he made in Forex was extra. He has been contemplating quitting his job and trading Forex on a full-time basis. But for now, he's happy for the stability his current job brings him and is enjoying the benefits that his "side" money in Forex is providing him.
The moral of the story: if you want to succeed at anything that you have very little knowledge and experience with, it is highly recommended that you invest in the tools and resources to maximize your chances of success.
You need to ask yourself: do you want to be like Tom, poor, angry, and swearing that Forex is just a scam? Or would you rather be like Jim, investing in tools to help you succeed and enjoying the profits that those tools will help you make? If you are serious about making money with Forex, then you owe it to yourself to find a Forex trading system that will give you the winning edg
Wednesday 11 January 2012
Opening a Forex Account
Once the basics of forex trading are understood, you can look at opening an account.
Demo Accounts
The best training method in forex trading is a demo account. With virtual money to practice learning the trading techniques, a demo account allows any trader to improve their skills with no risk of loss. Opening a demo account is usually very simple. Usually, the prospective trader can simply go to a broker's website and apply for a demo account online - and can be trading with the account within minutes. See the Forex Broker List for quick access to many demo account applications.
Types of Accounts
There are 3 basic types of accounts, Full Size, Mini, and Micro.
Full Size or Standard
This account is best suited to the experienced trader, or the trader sufficiently comfortable in trading substantial sums of currencies.
The term standard size describes a common unit of measurement in forex trading. Currency is traded in specific units, described as lots, and the size of a lot is 100,000 units of the currency, as in $100,000 USD.
Full size accounts are often opened only with large initial margin deposits of perhaps $100,000, but they can be available with $25,000, or even $2,000.00. However, a trader must be aware of the risks of leverage.
Mini
A Mini account is usually one/tenth the size of a standard or full size account, or $10.000. Brokers allow lower initial deposits for mini accounts. New traders may be more comfortable with mini accounts, as will experienced traders who prefer to trade in smaller units.
Micro
Micro accounts are usually one/hundredth the size of standard accounts, or $1,000.00. Initial deposits for micro accounts might be available for as little as $25.00, although it might be more reasonable to maintain a balance of $500.00.
Choosing�a Broker
The growth of the Internet and the global nature of the forex market has allowed for a large number of forex brokers, each offering slightly different service levels, and many operating under different laws and differing levels of regulatory scrutiny. The variety might be confusing, but it is important to select a broker with careful consideration. The following are some of the main points to consider when choosing a forex broker.
Trading Platform and Charting
Your forex broker will provide a trading platform-either in the form of a downloaded computer application, or in the form of an online service that must be accessed through your web browser. It is the trading platform from which you will monitor the markets and execute trades. This will be the main tool in your forex trading arsenal. Therefore, using a trading platform that is easy to use, and with which you are comfortable is important. This is a factor that should influence your choice of forex broker.
You should find the trading platform to be quick and responsive, and simple to use. Entering and exiting trades should be simple and direct, and the platform should allow you to easily watch your open trades, and quickly exit them. All trading platforms provide charting capability and some provide additional market information. However, the quality of such features can vary greatly from platform to platform; consideration of those features and other aspects of the trading platform should be included in your appraisal of the broker.
Execution Speed
The speed with which trades are processed by a forex broker is an important consideration closely aligned with the question of trading platform. In some platforms, speedy execution can reduce potential for loss, since quick execution can mean that the price at which the trade occurs has not changed between the time of placing the order, and the time that the trade is executed by the brokerage. However, for many trading platforms, the trade price is fixed at the time the order is placed, and does not change regardless of trade execution speed. Either way, this is an important aspect broker selection.
Regulation
Many countries, such as the United States have regulatory bodies which oversee forex trading, and all forex brokers must be registered with those authorities and comply with their regulations. However, the level of regulation and the protection offered by law can vary dramatically from country to country. Therefore, the regulations under which a broker operates must be carefully examined and considered, especially when choosing a broker from outside your own country.
Minimum Account Size
For many forex traders, another important factor in the selection of a broker is the account size offered. Brokers offer accounts with varying minimum or initial account sizes. Account size is affected by the margin requirements. As forex allows trading on the margin, a smaller account balance means less investment for the profit potential, but can come with increased implied risk of account loss, if the account balance is insufficient to handle short-term unfavorable changes in currency price.
Leverage and Margin
Leverage determines are the amount of funds required to be on deposit (in the trader's trading account) in order to trade a certain amount. For example, if the leverage allowed by the broker is 100:1, then trading of a currency pair valued at $10,000 would require a margin of at least $100.00 be maintained in the trader's account.
Selecting a broker that offers higher leverage allows the trader to trade larger amounts of forex with less margin (and therefore, with a lower trading account balance).
Spreads
The spread is the difference between the purchase and selling price of the currency, in other words, the difference between the Bid and Ask prices. Brokers earn revenue by retaining a portion of the spread. Spreads offered by brokers are usually fixed for each currency pair, and can vary substantially from broker to broker. Ensure that the broker you choose offers narrow (small) spreads leaving more profit for you.
Customer Service
This point should be well-known with description. However do remember that, the level of customer service you receive from the brokerage can affect your trading experience and your profits/losses. Ensure that the level of customer service provided by a broker is responsive and effective.
Demo Accounts
The best training method in forex trading is a demo account. With virtual money to practice learning the trading techniques, a demo account allows any trader to improve their skills with no risk of loss. Opening a demo account is usually very simple. Usually, the prospective trader can simply go to a broker's website and apply for a demo account online - and can be trading with the account within minutes. See the Forex Broker List for quick access to many demo account applications.
Types of Accounts
There are 3 basic types of accounts, Full Size, Mini, and Micro.
Full Size or Standard
This account is best suited to the experienced trader, or the trader sufficiently comfortable in trading substantial sums of currencies.
The term standard size describes a common unit of measurement in forex trading. Currency is traded in specific units, described as lots, and the size of a lot is 100,000 units of the currency, as in $100,000 USD.
Full size accounts are often opened only with large initial margin deposits of perhaps $100,000, but they can be available with $25,000, or even $2,000.00. However, a trader must be aware of the risks of leverage.
Mini
A Mini account is usually one/tenth the size of a standard or full size account, or $10.000. Brokers allow lower initial deposits for mini accounts. New traders may be more comfortable with mini accounts, as will experienced traders who prefer to trade in smaller units.
Micro
Micro accounts are usually one/hundredth the size of standard accounts, or $1,000.00. Initial deposits for micro accounts might be available for as little as $25.00, although it might be more reasonable to maintain a balance of $500.00.
Choosing�a Broker
The growth of the Internet and the global nature of the forex market has allowed for a large number of forex brokers, each offering slightly different service levels, and many operating under different laws and differing levels of regulatory scrutiny. The variety might be confusing, but it is important to select a broker with careful consideration. The following are some of the main points to consider when choosing a forex broker.
Trading Platform and Charting
Your forex broker will provide a trading platform-either in the form of a downloaded computer application, or in the form of an online service that must be accessed through your web browser. It is the trading platform from which you will monitor the markets and execute trades. This will be the main tool in your forex trading arsenal. Therefore, using a trading platform that is easy to use, and with which you are comfortable is important. This is a factor that should influence your choice of forex broker.
You should find the trading platform to be quick and responsive, and simple to use. Entering and exiting trades should be simple and direct, and the platform should allow you to easily watch your open trades, and quickly exit them. All trading platforms provide charting capability and some provide additional market information. However, the quality of such features can vary greatly from platform to platform; consideration of those features and other aspects of the trading platform should be included in your appraisal of the broker.
Execution Speed
The speed with which trades are processed by a forex broker is an important consideration closely aligned with the question of trading platform. In some platforms, speedy execution can reduce potential for loss, since quick execution can mean that the price at which the trade occurs has not changed between the time of placing the order, and the time that the trade is executed by the brokerage. However, for many trading platforms, the trade price is fixed at the time the order is placed, and does not change regardless of trade execution speed. Either way, this is an important aspect broker selection.
Regulation
Many countries, such as the United States have regulatory bodies which oversee forex trading, and all forex brokers must be registered with those authorities and comply with their regulations. However, the level of regulation and the protection offered by law can vary dramatically from country to country. Therefore, the regulations under which a broker operates must be carefully examined and considered, especially when choosing a broker from outside your own country.
Minimum Account Size
For many forex traders, another important factor in the selection of a broker is the account size offered. Brokers offer accounts with varying minimum or initial account sizes. Account size is affected by the margin requirements. As forex allows trading on the margin, a smaller account balance means less investment for the profit potential, but can come with increased implied risk of account loss, if the account balance is insufficient to handle short-term unfavorable changes in currency price.
Leverage and Margin
Leverage determines are the amount of funds required to be on deposit (in the trader's trading account) in order to trade a certain amount. For example, if the leverage allowed by the broker is 100:1, then trading of a currency pair valued at $10,000 would require a margin of at least $100.00 be maintained in the trader's account.
Selecting a broker that offers higher leverage allows the trader to trade larger amounts of forex with less margin (and therefore, with a lower trading account balance).
Spreads
The spread is the difference between the purchase and selling price of the currency, in other words, the difference between the Bid and Ask prices. Brokers earn revenue by retaining a portion of the spread. Spreads offered by brokers are usually fixed for each currency pair, and can vary substantially from broker to broker. Ensure that the broker you choose offers narrow (small) spreads leaving more profit for you.
Customer Service
This point should be well-known with description. However do remember that, the level of customer service you receive from the brokerage can affect your trading experience and your profits/losses. Ensure that the level of customer service provided by a broker is responsive and effective.
Fundamental and Technical Analysis
Analysis of the market is not merely a part of trading; it is the essence of forex trading. Market analysis generally takes one of two approaches, or a merging of the two approaches. The first approach, fundamental analysis, considers factors and events, opinions and policies that might impact the future value of a currency. The second approach, called Technical Analysis, involves the study of historic and current currency values and trading volume. Whatever the approach, the objective of analysis-technical, fundamental, or blended-is to attempt to project currency price direction and identify trading opportunities.
Fundamental Analysis
Fundamental analysis for forex traders focuses on factors that might influence currency values, including interest rates, the overall state of affected economies, central bank and government monetary and fiscal policies, Gross National Product, etc. Some of the factors that should be considered in fundamental analysis are described below:
The Economy
While the worldwide recession of 2008 was a factor for all countries, it affected different countries to different extents, and different nations responded to the challenge using varying strategies. Those differences resulted in changes in the relative value of world currencies. In addition to global events and responses, more localized changes in localized economic conditions affect the value of individual currencies. Events that have a detrimental effect on economies tend to decrease the relative values of economies, while those events that have a positive effect tend to increase the value of related currencies. For example, a sustained drought in Australia might result in downward pressure on the Australian Dollar, while an increase in oil prices can result in a jump in the Canadian Dollar.
Political (In)Stability
All major currencies are issued by politically stable countries. However political stability changes over time-sometimes abruptly. Dramatic changes in political stability can affect currency values dramatically by affecting confidence in the currency, and by reducing economic activity. Fundamental analysis of currency trading should include keeping close watch on changes in political stability in related regions, starting with base knowledge of regional political stability. A good source of basic political information on countries is the Central Intelligence Agency of the United States. Their website has a World Factbook and is a good place to start a general analysis of the baseline politics and stability of a country
Government Policy
Government policies - particularly monetary and fiscal policy can have substantial impact on the value of the nation's currency. Nations often use interest rate as an important tool in monetary policy - increasing interest rates to cool economic growth and curb inflation, and decreasing rates to stimulate economies. Fiscal policy also impacts currency values; higher taxation can slow economic growth, while low taxation and spending can stimulate economies. Of course, these factors will affect currency values
Observing Other Participants
Another fundamental aspect of forex trading is the understanding other market participants and the effect they may have on currency values. Governments and Central Banks, private banks and other financial institutions, hedge funds and other speculators may all play a role. Central banks or hedge funds can buy the currency, and raise the price in one day. Large private banks can also affect the market with their activity, but usually only over a long term period. The actions of private speculators can also impact currency prices.
Events and Reports
Agencies of many world governments track statistical data that reveals aspects of the economy. Often, the agency will release the results of their data collection and analysis at regular scheduled intervals. Such reports often relate directly to regional economic conditions, like inflation rates, gross national product, employment rates, trade balance and inflation. Those reports can have a dramatic impact on currency values. The forex trader should be aware of the timing of such reports, and adjust trading strategy appropriately - sometimes simply exiting all related trades (being flat) because of the uncertainty that precedes such reports. Fortunately, the timing of such events is known in advance, and reported widely on online economic calendars.
Other events can also impact currency values dramatically. Such events include meetings of central bank committees or release of national budgets.
Economic Theories and Models
Forex trading is a recent development, but stocks and equities have been studied for a long time, and economic theories and models abound on the best way to analyze information.
These models look at various aspects, such as the activities of business in the economy, and even the most basic psychological attributes such as belief that the country is moving in the right direction. Business activity is a long term indicator of strength in the economy. A widespread belief that a country's fundamental economic indicators are accurate will sustain a currency's value, even if the short term economic outlook may be bleak.
The theories available to the investor include those on currency parity and national balance of payments, and models on interest rates, the role of money, and the types of assets purchased in a country. The data used by these instruments include economic and employment statistics, interest and inflation rates, and sales information such as gross domestic product, trade and capital flows and retail sales. By using this information, the trader can evaluate the fundamentals of a nation's economy, and ensure the basic research is sound
Technical Analysis and Charting
Often, forex markets are studied through the use of charts that show market prices over a period of time. Traditionally, financial charts were drawn by hand. Fortunately, today such charts are available through forex trading platforms, and are available online on websites such as this one http://forex.tradingcharts.com/chart/
Charts are used extensively by traders, to study past patterns of price movement, identify ongoing trends, and to try forecasting future price movement. Technical indicators are often used in conjunction with charts. Simple technical indicators include moving averages. Many complex indicators are available, which involve complex mathematical analysis of price data. Fortunately, online charts do all the calculations automatically, and display the results as overlays on the chart.
Forex charts are usually presented in one of several formats, including line, bar chart and candlestick.
Bar Charts
Perhaps the most popular type of forex chart is known as the bar chart. Bar charts plot price (in the vertical dimension) over a period of time (in the horizontal dimension). Each bar on the chart represents a fixed time period, which can often be selected by the viewer if the chart is being viewed online or through a forex trading platform. Each single bar (or 'tick') on a bar chart illustrates 4 distinct prices for the period of time represented by the chart. Those prices are: open - currency price at the start of the period; high - the highest price during the period; low - the lowest price during the period; and close - the price of the currency at the end of the period.
With experience at reading charts, a trader can visualize market action quickly from a bar chart or can study the chart in depth to identify trends, levels of price support and resistance, indications of potential trend reversal, repeating cycles, and much more. The same capabilities exist in another popular form of chart, which displays the same information, but in a different format.
Candlestick Charts
Like bar charts, candlestick charts plot forex price levels over time. Candlesticks display the same information as bar charts for each "tick": open, high, low and close. However, the presentation of those four prices is dramatically different than in a bar chart.
In a candlestick chart, each individual time period (or tick) is shown as a small graphical image called a candlestick. High and low prices for the period are shown as thin vertical lines at the top and bottom, extending beyond the thicker "main body" of each candlestick. The top and bottom of the main body of each candlestick represent the opening and closing prices for the period, and the color of the candlestick main body signifies which was higher: the closing price or the opening price. Often, a higher close is signified by a white, hollow, green or lightly colored main body, and a lower close is indicated by a solid black or reddish main body.
Traders trained and experienced in the use of candlestick charts look for visual patterns, and specific candlestick formations that signal potential trend changes or other market activity.
Technical Analysis
Technical Analysis goes hand-in-hand with forex charting. Technical analysis attempts to forecast future price movement through the mathematical analysis of past price action. For many traders, technical analysis is the most important tool for examining the market. Technical analysis involves the study of past and forex prices-often though the use of charts-with the objective of predicting future prices movements and trends, and identifying opportunities for profitable forex trading.
Many traders advocate technical analysis as the most (or only!) reasonable method to attempt to predict prices. That opinion is based on the idea (and cliche) that the "market action discounts everything". That statement means that all factors that can be known that can impact currency prices are already reflected in the currency price. (Of course, few technical traders would dare ignore pending events, such as the release of economic reports discussed in the section above.).
In addition to the belief that the "market action discounts everything, fundamental analysis is based on two additional ideas:
Prices move in trends: this truism is apparent by observing a forex chart. Currency prices tend to move in the same direction for periods of time.
Market history repeats itself: Again, some examples of repetitive cycles can be observed on almost any forex chart. However, this premise proposes an idea more subtle: that for a set of general setup conditions in currency price history, currency prices are likely to respond in direction and manner similar to their response to the same initial conditions in the past.
Various simple tools can be used in technical analysis, such as moving averages, trend lines and support levels, or the advanced trader might choose from a wide range of advanced analyses and theories including relative strength index, Fibonacci studies, cycles, and many more.
Some popular fundamental analyses include Elliott Wave Theory, Fibonacci Studies, and Pivot Points.
The Elliott Wave Theory holds that markets are affected by the psychology of the population, and move in response to this psychology in a predictable pattern. The theory was developed in the 1920's for stock markets and is now being used in forex trading.
Fibonacci Studies look at the relationship of numbers and apply the same sequence analysis to the forex market, to project the direction the market will move.
Pivot Points refers to the point at which the currency changes direction and increases or decreases over the day. Information from the previous day is examined to see where the pivot point will be for the current trading day.
All of these tools provide the trader with the perspective needed to ensure trades are accurate and profit is maximized.
Many books have been written about fundamental analysis, and there is much much more to learn on the topic.
Fundamental Analysis
Fundamental analysis for forex traders focuses on factors that might influence currency values, including interest rates, the overall state of affected economies, central bank and government monetary and fiscal policies, Gross National Product, etc. Some of the factors that should be considered in fundamental analysis are described below:
The Economy
While the worldwide recession of 2008 was a factor for all countries, it affected different countries to different extents, and different nations responded to the challenge using varying strategies. Those differences resulted in changes in the relative value of world currencies. In addition to global events and responses, more localized changes in localized economic conditions affect the value of individual currencies. Events that have a detrimental effect on economies tend to decrease the relative values of economies, while those events that have a positive effect tend to increase the value of related currencies. For example, a sustained drought in Australia might result in downward pressure on the Australian Dollar, while an increase in oil prices can result in a jump in the Canadian Dollar.
Political (In)Stability
All major currencies are issued by politically stable countries. However political stability changes over time-sometimes abruptly. Dramatic changes in political stability can affect currency values dramatically by affecting confidence in the currency, and by reducing economic activity. Fundamental analysis of currency trading should include keeping close watch on changes in political stability in related regions, starting with base knowledge of regional political stability. A good source of basic political information on countries is the Central Intelligence Agency of the United States. Their website has a World Factbook and is a good place to start a general analysis of the baseline politics and stability of a country
Government Policy
Government policies - particularly monetary and fiscal policy can have substantial impact on the value of the nation's currency. Nations often use interest rate as an important tool in monetary policy - increasing interest rates to cool economic growth and curb inflation, and decreasing rates to stimulate economies. Fiscal policy also impacts currency values; higher taxation can slow economic growth, while low taxation and spending can stimulate economies. Of course, these factors will affect currency values
Observing Other Participants
Another fundamental aspect of forex trading is the understanding other market participants and the effect they may have on currency values. Governments and Central Banks, private banks and other financial institutions, hedge funds and other speculators may all play a role. Central banks or hedge funds can buy the currency, and raise the price in one day. Large private banks can also affect the market with their activity, but usually only over a long term period. The actions of private speculators can also impact currency prices.
Events and Reports
Agencies of many world governments track statistical data that reveals aspects of the economy. Often, the agency will release the results of their data collection and analysis at regular scheduled intervals. Such reports often relate directly to regional economic conditions, like inflation rates, gross national product, employment rates, trade balance and inflation. Those reports can have a dramatic impact on currency values. The forex trader should be aware of the timing of such reports, and adjust trading strategy appropriately - sometimes simply exiting all related trades (being flat) because of the uncertainty that precedes such reports. Fortunately, the timing of such events is known in advance, and reported widely on online economic calendars.
Other events can also impact currency values dramatically. Such events include meetings of central bank committees or release of national budgets.
Economic Theories and Models
Forex trading is a recent development, but stocks and equities have been studied for a long time, and economic theories and models abound on the best way to analyze information.
These models look at various aspects, such as the activities of business in the economy, and even the most basic psychological attributes such as belief that the country is moving in the right direction. Business activity is a long term indicator of strength in the economy. A widespread belief that a country's fundamental economic indicators are accurate will sustain a currency's value, even if the short term economic outlook may be bleak.
The theories available to the investor include those on currency parity and national balance of payments, and models on interest rates, the role of money, and the types of assets purchased in a country. The data used by these instruments include economic and employment statistics, interest and inflation rates, and sales information such as gross domestic product, trade and capital flows and retail sales. By using this information, the trader can evaluate the fundamentals of a nation's economy, and ensure the basic research is sound
Technical Analysis and Charting
Often, forex markets are studied through the use of charts that show market prices over a period of time. Traditionally, financial charts were drawn by hand. Fortunately, today such charts are available through forex trading platforms, and are available online on websites such as this one http://forex.tradingcharts.com/chart/
Charts are used extensively by traders, to study past patterns of price movement, identify ongoing trends, and to try forecasting future price movement. Technical indicators are often used in conjunction with charts. Simple technical indicators include moving averages. Many complex indicators are available, which involve complex mathematical analysis of price data. Fortunately, online charts do all the calculations automatically, and display the results as overlays on the chart.
Forex charts are usually presented in one of several formats, including line, bar chart and candlestick.
Bar Charts
Perhaps the most popular type of forex chart is known as the bar chart. Bar charts plot price (in the vertical dimension) over a period of time (in the horizontal dimension). Each bar on the chart represents a fixed time period, which can often be selected by the viewer if the chart is being viewed online or through a forex trading platform. Each single bar (or 'tick') on a bar chart illustrates 4 distinct prices for the period of time represented by the chart. Those prices are: open - currency price at the start of the period; high - the highest price during the period; low - the lowest price during the period; and close - the price of the currency at the end of the period.
With experience at reading charts, a trader can visualize market action quickly from a bar chart or can study the chart in depth to identify trends, levels of price support and resistance, indications of potential trend reversal, repeating cycles, and much more. The same capabilities exist in another popular form of chart, which displays the same information, but in a different format.
Candlestick Charts
Like bar charts, candlestick charts plot forex price levels over time. Candlesticks display the same information as bar charts for each "tick": open, high, low and close. However, the presentation of those four prices is dramatically different than in a bar chart.
In a candlestick chart, each individual time period (or tick) is shown as a small graphical image called a candlestick. High and low prices for the period are shown as thin vertical lines at the top and bottom, extending beyond the thicker "main body" of each candlestick. The top and bottom of the main body of each candlestick represent the opening and closing prices for the period, and the color of the candlestick main body signifies which was higher: the closing price or the opening price. Often, a higher close is signified by a white, hollow, green or lightly colored main body, and a lower close is indicated by a solid black or reddish main body.
Traders trained and experienced in the use of candlestick charts look for visual patterns, and specific candlestick formations that signal potential trend changes or other market activity.
Technical Analysis
Technical Analysis goes hand-in-hand with forex charting. Technical analysis attempts to forecast future price movement through the mathematical analysis of past price action. For many traders, technical analysis is the most important tool for examining the market. Technical analysis involves the study of past and forex prices-often though the use of charts-with the objective of predicting future prices movements and trends, and identifying opportunities for profitable forex trading.
Many traders advocate technical analysis as the most (or only!) reasonable method to attempt to predict prices. That opinion is based on the idea (and cliche) that the "market action discounts everything". That statement means that all factors that can be known that can impact currency prices are already reflected in the currency price. (Of course, few technical traders would dare ignore pending events, such as the release of economic reports discussed in the section above.).
In addition to the belief that the "market action discounts everything, fundamental analysis is based on two additional ideas:
Prices move in trends: this truism is apparent by observing a forex chart. Currency prices tend to move in the same direction for periods of time.
Market history repeats itself: Again, some examples of repetitive cycles can be observed on almost any forex chart. However, this premise proposes an idea more subtle: that for a set of general setup conditions in currency price history, currency prices are likely to respond in direction and manner similar to their response to the same initial conditions in the past.
Various simple tools can be used in technical analysis, such as moving averages, trend lines and support levels, or the advanced trader might choose from a wide range of advanced analyses and theories including relative strength index, Fibonacci studies, cycles, and many more.
Some popular fundamental analyses include Elliott Wave Theory, Fibonacci Studies, and Pivot Points.
The Elliott Wave Theory holds that markets are affected by the psychology of the population, and move in response to this psychology in a predictable pattern. The theory was developed in the 1920's for stock markets and is now being used in forex trading.
Fibonacci Studies look at the relationship of numbers and apply the same sequence analysis to the forex market, to project the direction the market will move.
Pivot Points refers to the point at which the currency changes direction and increases or decreases over the day. Information from the previous day is examined to see where the pivot point will be for the current trading day.
All of these tools provide the trader with the perspective needed to ensure trades are accurate and profit is maximized.
Many books have been written about fundamental analysis, and there is much much more to learn on the topic.
Mechanics of Forex Trading
Placing an Order
Orders to buy or sell currencies can be placed any time the market is open. With most trading platforms, placing a forex order is as easy as a click of the mouse.
If a trader wishes to buy a currency pair, he is said to be taking a long position on that pair. The trader who is long will profit when the currency pair increases in value. A trader who sells a currency pair is said to be going short. That trader will profit if the currency pair decreases in value.
It is an important principle to understand that the forex trader can place an order to sell a currency pair that he does not "own". To exit that "short trade", the trader simply places an order to buy the currency pair in the future. See below for more information on exiting trades.
More about long and short in forex trading
The concepts of buying, selling, long and short can be confusing in currency trading, since in every forex trade one currency is exchanged for another - essentially there is a buy/long and a sell/short in every trade. For simplicity, it might be easiest to think of a currency pair as being an abstract financial instrument to which a price is assigned by the forex market.
At the same time, it is important to maintain perspective and remember that the abstract-appearing instrument, in a very real way represents the actual relative value of two very real currencies. When a currency pair is purchased, the trader is purchasing the base currency and selling the quote currency. When a currency pair is sold, the opposite is true: the trader is buying the quote currency and selling the base currency.
Order Types
Orders are the instructions that traders give brokers to buy or sell currencies. Those orders are usually issued directly to the forex broker through the trading platform.
Various types of orders are used in forex trading. The forex order types will be familiar to traders experienced in equities or futures trading. Three common types of orders are the Market Order, the Limit Order, and the Stop Order.
The Market Order instructs the broker to buy at the current market rate, and in the electronic age, is carried out with the click of the mouse. In the forex market, this order type is usually executed immediately, at the price displayed in the trading platform at the time the order is placed (at the instant of the mouse click). That ability to place orders instantly is in marked contrast to many other markets, when the actual price at which a market order is executed might differ greatly from the price at the time the order is placed.
The Limit Order instructs the forex broker to execute a trade to enter a forex trade at a specific price. The trade could be either to buy currency when (if) it reaches a specific price below the present market price, or to sell the currency pair when (if) it reaches a specific price above the present market price.
For example, consider a trader who wants to buy USD/CAD, thinking that it is likely to increase in value. However, the trader believes that the pair will decrease in value slightly below the present market price before climbing. Since the trader wants to take buy at the lowest possible price, he therefore wishes to wait until the pair reaches the lower price before entering into the trade.
Without a limit order, the trader would need to patiently watch the trading platform, waiting for the price to dip to his target entry price, and then placing a market order.
The limit order automates the process. The limit order can be placed, and the trading platform will wait for the price to drop to target price entered by the trader.
A drawback to using a limit order is that it is only effective at the specific price, and not one pip away. However it does mean that a trader does not have to continually monitor the market waiting prices to meet his entry price.
The Stop Order is similar, but opposite to the Limit order. This order type is normally used to exit an existing forex trade by liquidating a position when the market price changes against the expectations (and position) of the trader. The Stop Order is an order to buy above the present market price, or sell below the present market price. This order is normally used to limit losses if the currency pair price changes unfavorably in a forex position. For that reason, it is also known as a stop-loss order.
Exiting a Position
A trader exits a position, that is, completes the trade, or leaves the market, when he executes the opposite trade by which he started. If he bought USD/CAD he then sells USD/CAD. Note that the trader could also have sold USD/CAD initially, and then bought USD/CAD later to exit the trade and close the position.
Calculating Profit or Loss
Once a trade is completed, profit or loss can be calculated-this is usually done automatically by the trading platform (and most platforms calculate profit and loss continuously throughout a trade. Profit/Loss is the difference between the value of the currency when the trade was entered, and when it was completed (or exited). It is important to understand how profit and loss is calculated, in order to better understand forex trading.
Just as in an auction, a transaction in the foreign exchange market uses the terms Bid and Ask to describe the value of the currency. The Bid is the price at which the currency pair can be sold by a trader, while the Ask is the price at which the currency pair can be bought. In a long trade on a currency pair, profit loss is the difference between the Ask price when the trade is entered, and the Bid price when the trade is exited. Conversely, in a short trade profit/loss is calculated as the difference between the Bid price at the time of entry, and the Ask at the time the trade is exited. An example will help to clarify.
Assume that a trader believes that the Euro will increase in value as compared with the US Dollar. The trader places a market order to buy EUR/USD, and the trade is executed at the (then) current price of 1.3490/93. Since the trader must buy at the Ask price (and this is a Full Size account), the purchase is for 100,000 Euros at the price of $134930 US Dollars.
As the trader hoped, the value of the Euro does in fact, increase relative to the US Dollar. The trader closes the trade by selling EUR/USD, at the market price of 1.3505/08. Since the trader must sell at the Bid price, he sells the EUR/USD for $135050 US Dollars.
The profit on this trade is $80 US Dollars ($135050-1354930)
However, if the trade did not work out as well as the trader hoped, and the trade was exited below the entry price, the profit/loss would look much different.
Let's assume that the trade was closed by selling the EUR/USD position when the price was at 1.3484/87. At that price, the 100,000 Euros are sold for $134,840. The trade results in a loss of $90 US Dollars ($134,840-$134,930)
Account Balance, Leverage and Margin
A quick review of leverage and margin might be helpful.
Every trader is required to maintain funds in their trading account with the brokerage. (This deposit is normally held in a segregated fund, in trust - often as regulated by the legal authority under which the brokerage operates, but be sure to check, since requirements vary from authority to authority, and possibly from brokerage to brokerage).
The minimum amount of this account is often set by the brokerage terms. In addition to the established minimum, the account also has a very practical use for margin. In order to enter and maintain a trade, the trader must commit some of the trading account; this amount is called 'margin', and the trading account itself is sometimes referred to as a margin account. The amount of margin committed by the trader for any specific trade is a percentage of the trade value, in a ratio usually called leverage.
Leverage ratios are commonly in the range of 100:1 to 10:1. If the ratio is 100:1, the trader must reserve 1% of the trade value as margin.
For example, consider the trader who enters a full size trade for USD/JPY. That trade has a value of $100,000 US Dollars. If the leverage offered by the broker is 50:1, the trader must maintain and commit 2% of the trade value in his margin account, or $2000. If the USD/JPY trade gains in value, the trader's account balance will increase by the amount of the profit (thus providing additional funds that the trader might use to enter additional trades).
However, if the trade loses funds, even temporarily, the trader must commit additional margin funds to the trade, thus reducing the amount in the margin account that would otherwise be available to commit to other trades. If losses in the trade exceed the balance available in the trader's account the trading platform usually exits the position automatically.
Orders to buy or sell currencies can be placed any time the market is open. With most trading platforms, placing a forex order is as easy as a click of the mouse.
If a trader wishes to buy a currency pair, he is said to be taking a long position on that pair. The trader who is long will profit when the currency pair increases in value. A trader who sells a currency pair is said to be going short. That trader will profit if the currency pair decreases in value.
It is an important principle to understand that the forex trader can place an order to sell a currency pair that he does not "own". To exit that "short trade", the trader simply places an order to buy the currency pair in the future. See below for more information on exiting trades.
More about long and short in forex trading
The concepts of buying, selling, long and short can be confusing in currency trading, since in every forex trade one currency is exchanged for another - essentially there is a buy/long and a sell/short in every trade. For simplicity, it might be easiest to think of a currency pair as being an abstract financial instrument to which a price is assigned by the forex market.
At the same time, it is important to maintain perspective and remember that the abstract-appearing instrument, in a very real way represents the actual relative value of two very real currencies. When a currency pair is purchased, the trader is purchasing the base currency and selling the quote currency. When a currency pair is sold, the opposite is true: the trader is buying the quote currency and selling the base currency.
Order Types
Orders are the instructions that traders give brokers to buy or sell currencies. Those orders are usually issued directly to the forex broker through the trading platform.
Various types of orders are used in forex trading. The forex order types will be familiar to traders experienced in equities or futures trading. Three common types of orders are the Market Order, the Limit Order, and the Stop Order.
The Market Order instructs the broker to buy at the current market rate, and in the electronic age, is carried out with the click of the mouse. In the forex market, this order type is usually executed immediately, at the price displayed in the trading platform at the time the order is placed (at the instant of the mouse click). That ability to place orders instantly is in marked contrast to many other markets, when the actual price at which a market order is executed might differ greatly from the price at the time the order is placed.
The Limit Order instructs the forex broker to execute a trade to enter a forex trade at a specific price. The trade could be either to buy currency when (if) it reaches a specific price below the present market price, or to sell the currency pair when (if) it reaches a specific price above the present market price.
For example, consider a trader who wants to buy USD/CAD, thinking that it is likely to increase in value. However, the trader believes that the pair will decrease in value slightly below the present market price before climbing. Since the trader wants to take buy at the lowest possible price, he therefore wishes to wait until the pair reaches the lower price before entering into the trade.
Without a limit order, the trader would need to patiently watch the trading platform, waiting for the price to dip to his target entry price, and then placing a market order.
The limit order automates the process. The limit order can be placed, and the trading platform will wait for the price to drop to target price entered by the trader.
A drawback to using a limit order is that it is only effective at the specific price, and not one pip away. However it does mean that a trader does not have to continually monitor the market waiting prices to meet his entry price.
The Stop Order is similar, but opposite to the Limit order. This order type is normally used to exit an existing forex trade by liquidating a position when the market price changes against the expectations (and position) of the trader. The Stop Order is an order to buy above the present market price, or sell below the present market price. This order is normally used to limit losses if the currency pair price changes unfavorably in a forex position. For that reason, it is also known as a stop-loss order.
Exiting a Position
A trader exits a position, that is, completes the trade, or leaves the market, when he executes the opposite trade by which he started. If he bought USD/CAD he then sells USD/CAD. Note that the trader could also have sold USD/CAD initially, and then bought USD/CAD later to exit the trade and close the position.
Calculating Profit or Loss
Once a trade is completed, profit or loss can be calculated-this is usually done automatically by the trading platform (and most platforms calculate profit and loss continuously throughout a trade. Profit/Loss is the difference between the value of the currency when the trade was entered, and when it was completed (or exited). It is important to understand how profit and loss is calculated, in order to better understand forex trading.
Just as in an auction, a transaction in the foreign exchange market uses the terms Bid and Ask to describe the value of the currency. The Bid is the price at which the currency pair can be sold by a trader, while the Ask is the price at which the currency pair can be bought. In a long trade on a currency pair, profit loss is the difference between the Ask price when the trade is entered, and the Bid price when the trade is exited. Conversely, in a short trade profit/loss is calculated as the difference between the Bid price at the time of entry, and the Ask at the time the trade is exited. An example will help to clarify.
Assume that a trader believes that the Euro will increase in value as compared with the US Dollar. The trader places a market order to buy EUR/USD, and the trade is executed at the (then) current price of 1.3490/93. Since the trader must buy at the Ask price (and this is a Full Size account), the purchase is for 100,000 Euros at the price of $134930 US Dollars.
As the trader hoped, the value of the Euro does in fact, increase relative to the US Dollar. The trader closes the trade by selling EUR/USD, at the market price of 1.3505/08. Since the trader must sell at the Bid price, he sells the EUR/USD for $135050 US Dollars.
The profit on this trade is $80 US Dollars ($135050-1354930)
However, if the trade did not work out as well as the trader hoped, and the trade was exited below the entry price, the profit/loss would look much different.
Let's assume that the trade was closed by selling the EUR/USD position when the price was at 1.3484/87. At that price, the 100,000 Euros are sold for $134,840. The trade results in a loss of $90 US Dollars ($134,840-$134,930)
Account Balance, Leverage and Margin
A quick review of leverage and margin might be helpful.
Every trader is required to maintain funds in their trading account with the brokerage. (This deposit is normally held in a segregated fund, in trust - often as regulated by the legal authority under which the brokerage operates, but be sure to check, since requirements vary from authority to authority, and possibly from brokerage to brokerage).
The minimum amount of this account is often set by the brokerage terms. In addition to the established minimum, the account also has a very practical use for margin. In order to enter and maintain a trade, the trader must commit some of the trading account; this amount is called 'margin', and the trading account itself is sometimes referred to as a margin account. The amount of margin committed by the trader for any specific trade is a percentage of the trade value, in a ratio usually called leverage.
Leverage ratios are commonly in the range of 100:1 to 10:1. If the ratio is 100:1, the trader must reserve 1% of the trade value as margin.
For example, consider the trader who enters a full size trade for USD/JPY. That trade has a value of $100,000 US Dollars. If the leverage offered by the broker is 50:1, the trader must maintain and commit 2% of the trade value in his margin account, or $2000. If the USD/JPY trade gains in value, the trader's account balance will increase by the amount of the profit (thus providing additional funds that the trader might use to enter additional trades).
However, if the trade loses funds, even temporarily, the trader must commit additional margin funds to the trade, thus reducing the amount in the margin account that would otherwise be available to commit to other trades. If losses in the trade exceed the balance available in the trader's account the trading platform usually exits the position automatically.
Charts and Quotes
Why Charts and Quotes?
Charts and quotes are the language of forex prices. Expertise in reading charts and understanding quotes is a valuable--even essential--weapon in the successful forex trader's arsenal. Effectively reading charts and quotes requires being familiar with numbers and decimal places and basic math principles like addition and subtraction, multiplication and division. To being exploration of charts and quotes, let's review some basic information covered in previous sections.
Currency Pairs, Base currency & Quote currency
In forex trading, a trader buys one currency at the same time he sells another, or vice versa. The two currencies are commonly called a currency pair. Both currencies are listed together so the trader can know exactly what value is placed on the currency bought and the currency sold. For example as USD/CAD quote might be displayed as 1.0438/41. In this example the first currency, the United States dollar, is called the base currency and the second, the Canadian Dollar is the quote currency.
For many currency pairs, the U.S. Dollar is used as the base currency, reflecting in this case the value of the CAD (the quote currency) in relation to 1 USD. This example indicates that 1 USD can buy 1.0438 Canadian Dollars, or that it takes $1.0438 Canadian Dollars to purchase 1 US Dollar.
Not all currency pairs use the USD as the base currency. For example, when the Euro was introduced in 1999, the government of the European Union decreed that all foreign exchange quotes using the Euro would place the value of the Euro first. Therefore, quotes involving the Euro would read as follows: EUR/USD 1.4545, meaning that one Euro will buy 1.4545 USD. Two other notable currencies are listed as the base currency in all quotes, even against the USD; the Great Britain Pound (GBP), and the Australian Dollar (AUD). In some cases, neither the USD nor the EUR are found in the base currency or quote currency. Such currency pairs are called cross rates. An example of a cross rate is CAD/JPY (Canadian Dollar/Japanese Yen). (Note that definitions of the term cross rate vary. Some rely upon the context of the county in which the term is used - seemingly an arbitrary definition in a global marketplace.)
Bid/Offer and Ask, Spreads
In any forex transaction, one currency is sold at the same time another is bought. Just as in an auction, the foreign exchange market uses the terms Bid and Ask to describe the value of the currency. The difference between the Bid and the Ask, also known as the spread, is used to calculate the amount of profit or loss on the trade.
Forex rates are often stated with both Bid and Ask included together, separated by a slash:
For example the term USD/CAD 1.0438/41 indicates that the bid price for USD/CAD is 1.0438, the ask price is 1.0441, and the spread is therefore 0.0003, or of 3 pips.
Remember: the Ask is the price at which a Trader might purchase the currency pair, while the Bid is the price at which a Trade might sell the same pair. The Bid is almost always lower than the Ask price, except in unusual conditions seldom (if ever) experienced by the speculator
As an example of how the quote prices relate to trading, consider the following:
Assume that the current price of United States Dollars when compared to Canadian Dollars is USD/CAD 1.1000/03 (the Bid is 1.1000 and the Ask is 1.1003, and the spread is 0.0003, or 3 pips. At those rates, a trader wanting to buy one USD would pay 1.1003 CAD, while he could sell one USD for 1.1000 CAD. To put this in practical forex-trading terms, a trader wanting to buy 100,000 USD would require $110,030 CAD, while 100,000 USD could be sold for $110,000 CAD.
If the trader purchases USD/CAD at those rates, and then trader waits until the forex price quote rises to USD/CAD 1.1006/09, he could sell his USD/CAD position for $110,060 CAD earning a profit of $60.00 CAD.
However, if the price for the USD/CAD does not change in the time the trader holds the position, and the traders sells the USD at the same price 1.1000/03, the position would be sold for $110,000.00 CAD, creating a loss of $30.00 (the amount of the spread).
What is a pip? What is it worth?
Profits, losses and spreads in forex trading are often expressed as pips. A pip is the smallest unit of price for any currency. It is short for "Percentage in Point". In forex trading, currency values are usually stated very precisely, to the fourth decimal point. A pip is the smallest change in the fourth decimal place, or 0.0001. For example, for USD, a pip is 1/100th of a cent. The Japanese Yen is the only currency expressed to the second decimal place, making a pip 0.01 in this case.
Forex Charts and Technical Analysis
Often, forex markets are studied through the use of charts that show market prices over a period of time. Traditionally, financial charts were drawn by hand. Fortunately, today such charts arehttp://forex.tradingcharts.com/chart/ available through forex trading platforms, and are available online on websites such as this one .
Charts are used extensively by traders, to study past patterns of price movement, identify ongoing trends, and to try to forecast future price movement. Technical indicators are often used in conjunction with charts. Simple technical indicators include moving averages. Many complex indicators are available, which involve complex mathematical analysis of price data. Fortunately, online charts do all the calculations automatically, and display the results as overlays on the chart.
Forex charts are usually presented in one of several formats, including line, bar chart and candlestick.
Technical Analysis
Technical Analysis goes hand-in-hand with forex charting. Technical analysis attempts to forecast future price movement through the mathematical analysis of past price action. Various simple tools can be used in technical analysis, such as moving averages, trend lines and support levels, or the advanced trader might choose from a wide range of advanced analyses and theories including relative strength index, Fibonacci studies, cycles, and more.
Charts and quotes are the language of forex prices. Expertise in reading charts and understanding quotes is a valuable--even essential--weapon in the successful forex trader's arsenal. Effectively reading charts and quotes requires being familiar with numbers and decimal places and basic math principles like addition and subtraction, multiplication and division. To being exploration of charts and quotes, let's review some basic information covered in previous sections.
Currency Pairs, Base currency & Quote currency
In forex trading, a trader buys one currency at the same time he sells another, or vice versa. The two currencies are commonly called a currency pair. Both currencies are listed together so the trader can know exactly what value is placed on the currency bought and the currency sold. For example as USD/CAD quote might be displayed as 1.0438/41. In this example the first currency, the United States dollar, is called the base currency and the second, the Canadian Dollar is the quote currency.
For many currency pairs, the U.S. Dollar is used as the base currency, reflecting in this case the value of the CAD (the quote currency) in relation to 1 USD. This example indicates that 1 USD can buy 1.0438 Canadian Dollars, or that it takes $1.0438 Canadian Dollars to purchase 1 US Dollar.
Not all currency pairs use the USD as the base currency. For example, when the Euro was introduced in 1999, the government of the European Union decreed that all foreign exchange quotes using the Euro would place the value of the Euro first. Therefore, quotes involving the Euro would read as follows: EUR/USD 1.4545, meaning that one Euro will buy 1.4545 USD. Two other notable currencies are listed as the base currency in all quotes, even against the USD; the Great Britain Pound (GBP), and the Australian Dollar (AUD). In some cases, neither the USD nor the EUR are found in the base currency or quote currency. Such currency pairs are called cross rates. An example of a cross rate is CAD/JPY (Canadian Dollar/Japanese Yen). (Note that definitions of the term cross rate vary. Some rely upon the context of the county in which the term is used - seemingly an arbitrary definition in a global marketplace.)
Bid/Offer and Ask, Spreads
In any forex transaction, one currency is sold at the same time another is bought. Just as in an auction, the foreign exchange market uses the terms Bid and Ask to describe the value of the currency. The difference between the Bid and the Ask, also known as the spread, is used to calculate the amount of profit or loss on the trade.
Forex rates are often stated with both Bid and Ask included together, separated by a slash:
For example the term USD/CAD 1.0438/41 indicates that the bid price for USD/CAD is 1.0438, the ask price is 1.0441, and the spread is therefore 0.0003, or of 3 pips.
Remember: the Ask is the price at which a Trader might purchase the currency pair, while the Bid is the price at which a Trade might sell the same pair. The Bid is almost always lower than the Ask price, except in unusual conditions seldom (if ever) experienced by the speculator
As an example of how the quote prices relate to trading, consider the following:
Assume that the current price of United States Dollars when compared to Canadian Dollars is USD/CAD 1.1000/03 (the Bid is 1.1000 and the Ask is 1.1003, and the spread is 0.0003, or 3 pips. At those rates, a trader wanting to buy one USD would pay 1.1003 CAD, while he could sell one USD for 1.1000 CAD. To put this in practical forex-trading terms, a trader wanting to buy 100,000 USD would require $110,030 CAD, while 100,000 USD could be sold for $110,000 CAD.
If the trader purchases USD/CAD at those rates, and then trader waits until the forex price quote rises to USD/CAD 1.1006/09, he could sell his USD/CAD position for $110,060 CAD earning a profit of $60.00 CAD.
However, if the price for the USD/CAD does not change in the time the trader holds the position, and the traders sells the USD at the same price 1.1000/03, the position would be sold for $110,000.00 CAD, creating a loss of $30.00 (the amount of the spread).
What is a pip? What is it worth?
Profits, losses and spreads in forex trading are often expressed as pips. A pip is the smallest unit of price for any currency. It is short for "Percentage in Point". In forex trading, currency values are usually stated very precisely, to the fourth decimal point. A pip is the smallest change in the fourth decimal place, or 0.0001. For example, for USD, a pip is 1/100th of a cent. The Japanese Yen is the only currency expressed to the second decimal place, making a pip 0.01 in this case.
Forex Charts and Technical Analysis
Often, forex markets are studied through the use of charts that show market prices over a period of time. Traditionally, financial charts were drawn by hand. Fortunately, today such charts arehttp://forex.tradingcharts.com/chart/ available through forex trading platforms, and are available online on websites such as this one .
Charts are used extensively by traders, to study past patterns of price movement, identify ongoing trends, and to try to forecast future price movement. Technical indicators are often used in conjunction with charts. Simple technical indicators include moving averages. Many complex indicators are available, which involve complex mathematical analysis of price data. Fortunately, online charts do all the calculations automatically, and display the results as overlays on the chart.
Forex charts are usually presented in one of several formats, including line, bar chart and candlestick.
Technical Analysis
Technical Analysis goes hand-in-hand with forex charting. Technical analysis attempts to forecast future price movement through the mathematical analysis of past price action. Various simple tools can be used in technical analysis, such as moving averages, trend lines and support levels, or the advanced trader might choose from a wide range of advanced analyses and theories including relative strength index, Fibonacci studies, cycles, and more.
