The Foreign Exchange market, also referred to as the "FOREX" is the biggest and largest financial market in the world. It has a daily average turnover of US$1.9 trillion- just imagine that amount of money! Don't you want to join this trillion-dollar industry?
FOREX is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY). So basically, FOREX is trading.
There are two reasons to buy and sell currencies. 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 trading for profit, or what you call speculation. Investors frequently trade on information they believe to be superior and relevant, when in fact it is not and is fully discounted by the market.
On one side of each speculative stock trade is a participant who believes he has superior information and on the other side is another participant who believes his information is superior.
For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid- meaning its in cash or convertible to cash) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors.
A true 24-hour market, FOREX trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - real time- day or night.
The FOREX market is considered an Over The Counter (OTC) or 'interbank' market. This is because the transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange compared to stocks and futures markets.
Thursday, November 20, 2008
how does forex quotes work?
Reading a FOREX quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.
The US dollar is the centerpiece of the FOREX market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.
When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.
The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.
In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.
Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.
When trading FOREX you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).
The US dollar is the centerpiece of the FOREX market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.
When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.
The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.
In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.
Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.
When trading FOREX you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).
what is a Pip?
In the Forex market, prices are quoted in pips. Pip stands for "percentage in point" and is the fourth decimal point, which is 1/100th of 1%.
In EUR/USD, a 3 pip spread is quoted as 1.2500/1.2503
Among the major currencies, the only exception to that rule is the Japanese yen. In USD/JPY, the quotation is only taken out to two decimal points (i.e. to 1/100 th of yen, as opposed to 1/1000th with other major currencies).
In USD/JPY, a 3 pip spread is quoted as 114.05/114.08
The smallest price increment in a currency, so instead of a point like in stocks, in the forex market it is called a pip.
In EUR/USD, a 3 pip spread is quoted as 1.2500/1.2503
Among the major currencies, the only exception to that rule is the Japanese yen. In USD/JPY, the quotation is only taken out to two decimal points (i.e. to 1/100 th of yen, as opposed to 1/1000th with other major currencies).
In USD/JPY, a 3 pip spread is quoted as 114.05/114.08
The smallest price increment in a currency, so instead of a point like in stocks, in the forex market it is called a pip.
what is margin trading?
Marginal trading is simply the term used for trading with borrowed capital. It is appealing because of the fact that in FOREX investments can be made without a real money supply. This allows investors to invest much more money with fewer money transfer costs, and open bigger positions with a much smaller amount of actual capital. Thus, one can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital. Marginal trading in an exchange market is quantified in lots. The term "lot" refers to approximately $100,000, an amount which can be obtained by putting up as little as 0.5% or $500.
EXAMPLE: You believe that signals in the market are indicating that the British Pound will go up against the US Dollar. You open 1 lot for buying the Pound with a 1% margin at the price of 1.49889 and wait for the exchange rate to climb. At some point in the future, your predictions come true and you decide to sell. You close the position at 1.5050 and earn 61 pips or about $405. Thus, on an initial capital investment of $1,000, you have made over 40% in profits. (Just as an example of how exchange rates change in the course of a day, an average daily change of the Euro (in Dollars) is about 70 to 100 pips.)
When you decide to close a position, the deposit sum that you originally made is returned to you and a calculation of your profits or losses is done. This profit or loss is then credited to your account.
EXAMPLE: You believe that signals in the market are indicating that the British Pound will go up against the US Dollar. You open 1 lot for buying the Pound with a 1% margin at the price of 1.49889 and wait for the exchange rate to climb. At some point in the future, your predictions come true and you decide to sell. You close the position at 1.5050 and earn 61 pips or about $405. Thus, on an initial capital investment of $1,000, you have made over 40% in profits. (Just as an example of how exchange rates change in the course of a day, an average daily change of the Euro (in Dollars) is about 70 to 100 pips.)
When you decide to close a position, the deposit sum that you originally made is returned to you and a calculation of your profits or losses is done. This profit or loss is then credited to your account.
whats is leverage?
Leverage is the ability to trade more funds than you actually have and if you use it correctly, you can make huge gains and build wealth quickly.
For example, if you deposit $5,000 with a FOREX broker they will allow you to trade with a leverage of at least 100:1. This gives you the ability to trade $1 million and considerably enhances your profit potential.
Leverage of course can work for or against you.
If however you can keep losses small and run profits then you can build wealth quickly
A PROVEN Forex trading system with good money management, combined with leverage, is the secret of making long term capital gains.
For example, if you deposit $5,000 with a FOREX broker they will allow you to trade with a leverage of at least 100:1. This gives you the ability to trade $1 million and considerably enhances your profit potential.
Leverage of course can work for or against you.
If however you can keep losses small and run profits then you can build wealth quickly
A PROVEN Forex trading system with good money management, combined with leverage, is the secret of making long term capital gains.
currency pairs
1. Trading in Forex means trading in currency pairs and takes place by exchanging one element of the pair for another. For this reason, currencies are quoted in pairs. For example, the pair of U.S. Dollar and Japanese Yen can be quoted as USD/JPY equals 105.53, which means that 1 USD can buy 105.53 JPY.
2. The first currency listed in a currency pair is called the base currency. The base currency is usually the U.S. Dollar. Traders generally trade the U.S. Dollar against another currency, which is called the counter currency.
3. When the quote increases, it implies that the base currency has risen in value and the counter currency has weakened in value. For example, if the USD/JPY quote used to be equal to 100.33 but is now equal to 105.53, then this means that the dollar has strengthened because 1 USD can now buy 105.53 JPY as opposed to the mere 100.33 JPY it could buy beforehand.
2. The first currency listed in a currency pair is called the base currency. The base currency is usually the U.S. Dollar. Traders generally trade the U.S. Dollar against another currency, which is called the counter currency.
3. When the quote increases, it implies that the base currency has risen in value and the counter currency has weakened in value. For example, if the USD/JPY quote used to be equal to 100.33 but is now equal to 105.53, then this means that the dollar has strengthened because 1 USD can now buy 105.53 JPY as opposed to the mere 100.33 JPY it could buy beforehand.
how prices move-1
Most novice traders fail to understand how and why prices really move.
Here we will give you an introduction to how and why prices move and how you can take advantage of these movements for profit. Let’s look at some key points in relation to how and why prices move.
Markets Do Not Move To a Scientific Formula
Firstly, let’s get rid of this myth.
Many traders believe this and numerous vendors on the net perpetrate the myth of markets moving to a scientific law which appeals to the greed and naivety of traders.
Common sense tells us that markets don’t move scientifically:
If markets moved scientifically, there’d be no market as we’d all know the price in advance!
A forex market by its nature, involves uncertainty - that’s what makes a market move - the fact that human nature is un-predictable.
Here we will give you an introduction to how and why prices move and how you can take advantage of these movements for profit. Let’s look at some key points in relation to how and why prices move.
Markets Do Not Move To a Scientific Formula
Firstly, let’s get rid of this myth.
Many traders believe this and numerous vendors on the net perpetrate the myth of markets moving to a scientific law which appeals to the greed and naivety of traders.
Common sense tells us that markets don’t move scientifically:
If markets moved scientifically, there’d be no market as we’d all know the price in advance!
A forex market by its nature, involves uncertainty - that’s what makes a market move - the fact that human nature is un-predictable.
how prices move-2
Trading the Odds for Profit
While you are not trading certainties but that doesn’t mean you can’t make a lot of money, you can - by trading the odds.
With a sound trading method that runs profits and cuts losses quickly you can build significant long term wealth.
It is no coincidence that many of the world’s top traders started out as either blackjack or poker players. The reason for this is - any good card player knows he won’t win every hand but if they bet when the odds are in their favor and fold when there not, they will make a lot of money longer term.
Trading is simply an odds game.
If you know how to calculate the odds correctly, you can win and build significant long term wealth. Let’s look at how to get the odds in your favor.
Price Movement – The fundamentals
Many traders like to trade off news stories and watch the fundamentals, it’s popular but will trading news stories make traders money? Let’s find out.
A currency trader, who makes trades based upon fundamental analysis, will look at the supply and demand situation relevant to the particular currency studied, and try and predict the impact of such factors as:
* The health of the economy
* Economic policy
* Interest rates
* Balance of payments
* Employment
* Trade deficit
* Political factors
And many more.
On the face of it fundamental analysis provides a logical and rational basis for investment decisions however there are problems in applying it and traders who try and trade off the news generally lose.
The main problems are:
1. Markets Discounts
We live in a world of instant communications where traders can and do get the news in a split second - the fundamentals are instantly discounted and the market is looking to the future.
By the time you have seen, studied and acted on the news - it’s already been discounted.
2. Investor Psychology
Another major problem is that the fundamentals are there for all to see but individual traders all reach different conclusions based upon what they have seen furthermore, humans are not logical beings!
Prices reflect the fundamentals but they also reflect the emotions of the participants and investor psychology is THE major influence on price.
The equation for market movement is simple:
Fundamentals (supply and demand facts) + Human Perception (investor psychology) = Market Price
While you are not trading certainties but that doesn’t mean you can’t make a lot of money, you can - by trading the odds.
With a sound trading method that runs profits and cuts losses quickly you can build significant long term wealth.
It is no coincidence that many of the world’s top traders started out as either blackjack or poker players. The reason for this is - any good card player knows he won’t win every hand but if they bet when the odds are in their favor and fold when there not, they will make a lot of money longer term.
Trading is simply an odds game.
If you know how to calculate the odds correctly, you can win and build significant long term wealth. Let’s look at how to get the odds in your favor.
Price Movement – The fundamentals
Many traders like to trade off news stories and watch the fundamentals, it’s popular but will trading news stories make traders money? Let’s find out.
A currency trader, who makes trades based upon fundamental analysis, will look at the supply and demand situation relevant to the particular currency studied, and try and predict the impact of such factors as:
* The health of the economy
* Economic policy
* Interest rates
* Balance of payments
* Employment
* Trade deficit
* Political factors
And many more.
On the face of it fundamental analysis provides a logical and rational basis for investment decisions however there are problems in applying it and traders who try and trade off the news generally lose.
The main problems are:
1. Markets Discounts
We live in a world of instant communications where traders can and do get the news in a split second - the fundamentals are instantly discounted and the market is looking to the future.
By the time you have seen, studied and acted on the news - it’s already been discounted.
2. Investor Psychology
Another major problem is that the fundamentals are there for all to see but individual traders all reach different conclusions based upon what they have seen furthermore, humans are not logical beings!
Prices reflect the fundamentals but they also reflect the emotions of the participants and investor psychology is THE major influence on price.
The equation for market movement is simple:
Fundamentals (supply and demand facts) + Human Perception (investor psychology) = Market Price
should always be in the Market
1. You should always be in the Market
Many traders love excitement, and their view is, if they are in the market they will catch the big move. Well they may - but chances are they won’t.
The really big trends only come a few times a year in each currency - and you should stay out the market until they come, otherwise you will take losses, as you will be trading low odds trades, with little chance of success.
You don’t earn a reward in currency trading for effort or how often you trade – you earn your reward from being right.
Be selective in your trading and you will see your profits soar.
Many traders love excitement, and their view is, if they are in the market they will catch the big move. Well they may - but chances are they won’t.
The really big trends only come a few times a year in each currency - and you should stay out the market until they come, otherwise you will take losses, as you will be trading low odds trades, with little chance of success.
You don’t earn a reward in currency trading for effort or how often you trade – you earn your reward from being right.
Be selective in your trading and you will see your profits soar.
Diversification Reduces Risk
Diversification simply dilutes your profit potential if you have a small currency account.
You catch a big move, and your other trades lose, or give you only marginal profits, reducing your overall profitability.
You need to have confidence to go for the big moves, when they occur, and hit them hard with as much as you can afford.
Currency trading success is all about taking calculated risks when the odds are in your favor.
If the trade looks good, then you need to have the courage and conviction to go for it and risk as much as you can afford.
You catch a big move, and your other trades lose, or give you only marginal profits, reducing your overall profitability.
You need to have confidence to go for the big moves, when they occur, and hit them hard with as much as you can afford.
Currency trading success is all about taking calculated risks when the odds are in your favor.
If the trade looks good, then you need to have the courage and conviction to go for it and risk as much as you can afford.
Day Trading Makes Money
This is perhaps the biggest myth in currency trading – Forex day traders DON’T make money!
Many vendors spread this myth, as it makes a good story.
It’s a good story and they make their money from course sales NOT trading.
All short-term volatility is random – prices can and do move anywhere in a day and support and resistance levels are meaningless.
In forex day trading you 100% guaranteed to lose over time as you cant get the odds in your favor – PERIOD.
Many vendors spread this myth, as it makes a good story.
It’s a good story and they make their money from course sales NOT trading.
All short-term volatility is random – prices can and do move anywhere in a day and support and resistance levels are meaningless.
In forex day trading you 100% guaranteed to lose over time as you cant get the odds in your favor – PERIOD.
Predicting is the Correct Way to Make Profits
Trying to PREDICT where prices are going to top and bottom will see you lose.
Why?
Because, you are relying on hope and guessing and that’s not a good way to make money in any venture, especially currency trading.
The only way to trade is to wait for the market to CONFIRM a trend is under way, and then execute your trading signal.
You will not buy the bottom or sell the high, but you can’t do that anyway, so there is no point in trying.
By trading with price momentum on your side, you have the odds in your favor.
Why?
Because, you are relying on hope and guessing and that’s not a good way to make money in any venture, especially currency trading.
The only way to trade is to wait for the market to CONFIRM a trend is under way, and then execute your trading signal.
You will not buy the bottom or sell the high, but you can’t do that anyway, so there is no point in trying.
By trading with price momentum on your side, you have the odds in your favor.
Buy Low sell high Is The Best Way To Make Money
This point is related to the above. You cannot do it as you are involved in prediction. Always keep this point in mind:
Most big trends start from new market HIGHS NOT market lows.
So if you fail to trade these moves you will miss a lot of the best moves waiting for pullbacks that never come.
Most big trends start from new market HIGHS NOT market lows.
So if you fail to trade these moves you will miss a lot of the best moves waiting for pullbacks that never come.
Markets Move Scientifically
Again this is related to the myth of predicting currency moves.
You will see many vendors saying they can trade market tops and bottoms with scientific accuracy – RUBBISH!
If markets moved to a scientific theory, we would all know the price in advance and there would be no market!
It’s the difference of opinion and unpredictability of price direction that makes a market – this is common sense.
Despite the above, many Forex traders still believe in scientific theories such as - Elliot Wave and The Fibonacci Number Sequence.
These theories don’t work and never will.
Elliot made no money from his theory and neither will you.
As for the Fibonacci number sequence – This was devised in the 12th century, to solve a problem to do with the copulation of rabbits and has nothing to do with finance.
Leave the above theories to the dreamers and traders who believe it’s easy to make money.
When you trade you are involved in trading odds NOT certainties, don’t believe anyone who tells you otherwise.
You will see many vendors saying they can trade market tops and bottoms with scientific accuracy – RUBBISH!
If markets moved to a scientific theory, we would all know the price in advance and there would be no market!
It’s the difference of opinion and unpredictability of price direction that makes a market – this is common sense.
Despite the above, many Forex traders still believe in scientific theories such as - Elliot Wave and The Fibonacci Number Sequence.
These theories don’t work and never will.
Elliot made no money from his theory and neither will you.
As for the Fibonacci number sequence – This was devised in the 12th century, to solve a problem to do with the copulation of rabbits and has nothing to do with finance.
Leave the above theories to the dreamers and traders who believe it’s easy to make money.
When you trade you are involved in trading odds NOT certainties, don’t believe anyone who tells you otherwise.
Markets are the Same Today as they Were Hundreds o
No there not!
Trends now are much more volatile than they were even 50 years ago.
Why?
Today, with the Internet, price information and news reaches traders in a split second.
This increases volatility as everyone has the same information at once - and everyone tries to enter and exit the market at the same time.
This was not so even 20 years ago - the trends are still there, but volatility is much higher - traders get the direction of the trend right, but they find themselves stopped out by the volatility of the market and watch as the trade they were stopped out goes on to pile up huge profits.
How often has this happened to you?
It happens to all Forex traders.
Dealing with volatility, is one of the major challenges of any trader wanting to develop a successful Forex trading strategy.
Trends now are much more volatile than they were even 50 years ago.
Why?
Today, with the Internet, price information and news reaches traders in a split second.
This increases volatility as everyone has the same information at once - and everyone tries to enter and exit the market at the same time.
This was not so even 20 years ago - the trends are still there, but volatility is much higher - traders get the direction of the trend right, but they find themselves stopped out by the volatility of the market and watch as the trade they were stopped out goes on to pile up huge profits.
How often has this happened to you?
It happens to all Forex traders.
Dealing with volatility, is one of the major challenges of any trader wanting to develop a successful Forex trading strategy.
You cannot buy success from someone else.
You cannot buy success from someone else.
Some vendors can help you but success comes from within.
Even if you follow someone’s advice, always make sure you know the logic it’s based upon.
You need to do this to have the confidence and discipline to stick with your trading plan when you hit a losing period
In conclusion, someone can help you achieve currency trading success but you need to know how and why their methods and not follow them blindly.
The above myths are commonly accepted - avoid them or you will join the majority of traders that lose in currency trading.
Some vendors can help you but success comes from within.
Even if you follow someone’s advice, always make sure you know the logic it’s based upon.
You need to do this to have the confidence and discipline to stick with your trading plan when you hit a losing period
In conclusion, someone can help you achieve currency trading success but you need to know how and why their methods and not follow them blindly.
The above myths are commonly accepted - avoid them or you will join the majority of traders that lose in currency trading.
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