What is Forex ?

Forex (FOReign EXchange market) is an inter-bank market that took shape in

1971 when global trade shifted from fixed exchange rates to floating ones.
This is a set of transactions among forex market agents involving exchange
of specified sums of money in a currency unit of any given nation for
currency of another nation at an agreed rate as of any specified date. During
exchange, the exchange rate of one currency to another currency is
determined simply: by supply and demand ± exchange to which both parties
agree.

The scope of transactions in the global currency market is constantly

growing, which is due to development of international trade and abolition of
currency restrictions in many nations. Global daily conversion transactions
came to $1,982 billion in mid-1998 (the London market accounted for some
32% of daily turnover; the New York market exchanged approx. 18%, and
the German market, 10%). Not only the scope of transactions but also the
rates that mark the market development are impressive: in 1977, the daily
turnover stood at five billion U.S. dollars; it grew to 600 billion U.S. dollars
over ten years ± to one trillion in 1992. Speculative transactions intended to
derive profit from jobbing on the exchange rate differences make up nearly
80% of total transactions. Jobbing attracts numerous participants ± both
financial institutions and individual investors.
With the highest rates of information technology development in the last two
decades, the market itself changed beyond recognition. Once surrounded with
a halo of caste mystique, the foreign exchange dealer¶s profession became
almost grasroots. Forex transactions that used to be the privilege of the
biggest monopolist banks not so long ago are now publicly accessible thanks
to e-commerce systems. And the foremost banks themselves also often prefer
trade in electronic systems over individual bilateral transactions. E-brokers
now account for 11% of the forex market turnover. The daily scope of
transactions of the biggest banks (Deutsche Bank, Barclays Bank, Union
Bank of Switzerland, Citibank, Chase Manhattan Bank, Standard Chartered
Bank) reaches billions of dollars.

The FOREX market as a place where to apply one¶s personal financial,

intellectual and psychic power is not designed for attempts at catching a
bluebird there. Sometimes someone manages to do so but for a short time
only. The key advantage of a forex market is that one can succeed there just
by the strength of one¶s intelligence.

Another essential feature of the FOREX market, no matter how strange it

might seem, is its stability. Everybody knows that sudden falls are very
typical of the financial market. However, unlike the stock market, the
FOREX market never falls. If shares devalue it means a collapse. But if the
dollar slumps, that only means that another currency gets stronger. For
instance, the yen strengthened by a quarter against the dollar late in 1998. On
some days dollar fell by dozens percentage points. However, the market did
not collapse anywhere; trading continued in the usual manner. It is here that
the market and the related business stability lie - currency is an absolutely
liquid commodity and will be always traded in.

The FOREX market is a 24-hour market that does not depend on certain
business hours of foreign exchanges; trade takes place among banks located
in different corners of the globe. Exchange rates àre so flexible that
significant changes happen quite frequently, which enables to make several
transactions every day. If we have an elaborate and reliable trade technology
we can make a business, which no other business can match by efficiency. It
is not without reason that the pivotal banks buy expensive electronic
equipment and maintain the staffs of hundreds of traders operating in
different sectors of the FOREX market.

The starting costs of joining this business are very low now. Actually, it costs
several thousands of dollars to take a course of initial training, to buy a
computer, to purchase an information service and to create a deposit; no real
business can be established with this money. With excessive offers of
services, finding a reliable broker is also quite a real thing. The rest depends
on the trader himself or herself. Everything depends on you personally, as in
no other area of business now.
The main thing the market will require for successful operations is not the
quantity of money you will enter it with ± the main thing is the ability to
constantly focus on studying the market, understanding its mechanisms and
participants¶ interests; this is constant improvement of one¶s trade approaches
and their disciplined implementation. Nobody has achieved success in that
market by forcing one¶s way with one¶s capital atilt. The market is stronger
than anything else; it is even stronger than central banks with their huge
foreign exchange reserves. George Soros, a national hero of the FOREX
market, did not win the Bank of England at all, as many of us believe ± he
made the right guess that, with existing contradictions inherent in the
European financial system, there were plenty of problems and interests that
would not allow to hold the pound. That¶s exactly what happened. The Bank
of England, having spent nearly $20 billion to maintain the pound rate,
jacked it up, by giving it in to the market. The market settled this problem,
and Soros got his billion.
The global monetary system has gone a long way during thousands of years
of the human history, but it is surely experiencing the most exciting and
earlier unthinkable changes. The two main changes determine a new image of
the global monetary system:

the money is fully separated from any tangible media;

powerful information and telecommunications technologies made it possible
to consolidate monetary systems of different nations into the single global
financial system that has no boundaries.

Typical attractive features of the market:

liquidity: the market operates the enormous money supply and gives absolute
freedom in opening or closing a position in the current market quotation.
High liquidity is a powerful magnet for any investor, because it gives him or
her the freedom to open or to close a position of any size whatever.

promptness: with a 24-hour work schedule, participants in the FOREX

market need not wait to respond to any given event, as is the case in many
markets.

availability: a possibility to trade round-the-clock; a market participant need

not wait to respond to any given event;
flexible regulation of the trade arrangement system: a position may be opened
for a pre-determined period of time in the FOREX market, at the investor¶s
discretion, which enables to plan the timing of one¶s future activity in
advance;

value: the Forex market has traditionally incurred no service charges, except
for the natural bid/ask market spread between the supply and the demand
price;

one-valued quotations: with high market liquidity, most sales may be carried
out at the uniform market price, thus enabling to avoid the instability problem
existing with futures and other forex investments where limited quantities of
currency only can be sold concurrently and at a specified price;

market trend: currency moves in a quite specific direction that can be tracked
for rather a long period of time. Each particular currency demonstrates its
own typical temporary changes, which presents investment managers with
the opportunities to manipulate in the FOREX market;

margin: the credit ³leverage´ (margin) in the FOREX market is only

determined by an agreement between a customer and the bank or the
brokerage house that pushes it to the market and is normally equal to 1:100.
That means that, upon making a $1,000 pledge, a customer can enter into
transactions for an amount equivalent to $100,000. It is such extensive credit
³leverages´, in conjunction with highly variable currency quotations, which
makes this market highly profitable but also highly risky.
Margin Trading System

A typical transaction amounts to $10 million in inter-bank trade. However, it

is quite clear that such transaction values are not affordable for a private
investor ± well, at least to the overwhelming majority of them.

Involvement of small and medium investors in the Forex market was

facilitated by intermediacy of dealing or brokerage companies. Medium and
small investors have access to the global forex market in many nations, using
the sums of money starting from $2,000 in their transactions. A dealing
company provides its customers with a credit line ± a so-called dealing
leverage, or a credit leverage, that is several times as big as the deposit.
Brokers providing margin trading services require that a pledge deposit
should be contributed, and provide a customer with an opportunity of
entering into forex sales and purchase transactions for amounts that are 50,
100 and sometimes even 200 times as large as the deposit made. The risk of
losses is borne by the customer; the deposit serves as security hedging a
broker. The system of operations through a dealing (brokerage) house, with a
credit leverage, was called margin trading.

To put it simply, the essence of margin trading can be reduced to the

following: by placing pledged capital, an investor becomes able to manage
target loans provided against this pledge and to guarantee indemnification
against any potential losses on open forex positions with the deposit.

As mentioned above, unlike with forex transactions with actual delivery or

actual currency exchange, FOREX participants, especially those with little
funds, make use of trading with an insurance deposit - margin trade, or
leverage trade. In case of marginal trade, each transaction must consist of the
two stages ± purchase/sales of foreign exchange at one price, and then its
compulsory sales/purchase at another (or at the same) price. The first action
is called the opening of a position; the second is the closing of a position.
Opening of a position is not accompanied with actual delivery of foreign
exchange, and a participant that opened the position contributes an insurance
deposit that serves as guarantee of indemnification against any possible
losses. Upon closing of a position, the insurance deposit is returned, and
profit or losses are calculated.

Any margin trading transaction must comprise two parts: opening of a

position and closing of a position. For instance, when forecasting the euro
goes up (looks up) vs the dollar, we want to buy a cheaper euro with dollars
now and to sell it back when it rises in price. In this case, the transaction will
look as follows: opening of a position ± euro purchase; closing of a position ±
its sale. All the time until the position has been closed we have an ³open euro
position.´ Just the same, when we believe that the euro will cheapen (look
down) vs the dollar, our transaction will consist of the following steps:
opening a position ± sales of a more expensive euro; closing a position ±
purchase of a cheapened euro. Therefore, we are able to generate profit
whether the exchange rate goes up or down.

You can enter FOREX through an intermediary only. A dealing center may
act as such intermediary. This agency provides you with a (computer or
telephone) communications channel with a broker who makes available forex
quotations to you and through whom you can enter into transactions. You can
also operate directly from your home PC through the Internet. The last option
has been becoming increasingly more common recently. The prices you can
see on your computer¶s screen are prices of actual transactions at FOREX.
A customer concludes a contract with the company whereby the latter
undertakes, at the customer¶s order and in its own name, to enter into
transactions. In this case, the company runs the risk of losses from entering
into such transactions, so the customer deposits a certain sum of money with
the bank as pledge. The amount of this deposit is determined based on the
amount of transactions entered into by the bank and on the credit lever
provided to the customer. If a dealing company makes losses from a
concluded transaction, the investor becomes liable to it in the amount of this
loss, and these liabilities are covered from the pledge deposit; if the company
generates profit from a concluded transaction, it becomes liable to the
investor in the amount of this profit. Generated profit is remitted to the
customer¶s pledge deposit. The customer¶s order to the company to close an
open position is a must; yet the company jobs with its own money. Otherwise
the bank may close a long position with a short one, and the customer may
sustain losses. The situations when cross rates change by more than two
percentage points hardly ever happen in the global market, and losing his or
her pledge is next to impossible if a customer jobs reasonably. If the bank¶s
dealer understands that potential losses, if the rate changes for the worse,
might exceed the pledge deposit amount, the dealer can close a position
independently, without waiting for the customer¶s instructions, with losses
not exceeding the pledge amount.

Margin trading appeals by its affordability. Investing funds into securities of

the most developed foreign countries to generate any fixed income would
hardly be interesting for our compatriots. U.S. Treasury bonds are surely the
most reliable and stable, but, being very expensive, they have low yield
(approx. 6% p.a.) and are the object of long-term investments. Shares
generate higher yield; however, dividend amount is directly dependent on
successful operations of any particular enterprise and its shareholders¶
preferences. Share purchase for bull transactions seems more attractive but
requires greater investments. Margin trading is free from the said limitations
± you can sell and buy depending on your expectations, and 1%-3% of a
transaction value will do to enter into the transaction.
The rates are usually expressed as five-digit numbers. For example, USDJPY
= 121.44 means that 1 US dollar is valued at 121.44 Japanese yens (i.e. they
are willing to pay you that many yens for one US dollar while you are buying
or selling). At the same time, GBPUSD = 1.6262 means that 1 British pound
is valued at 1.6262 US dollars. Generally, if the rate XXXYYY = Z, it means
that one unit of XXX is worth Z units of YYY.

When the rate has changed, for example USDJPY = 121.44 to USDJPY =
121.45 or GBPUSD = 1.6262 to 1.6263, they say that the rate has moved 1
point. As it follows from the information above, yen in this example has
DEPRECIATED by 1 point, but the pound has APPRECIATED, also by 1
point.

While watching the charts, you should keep in mind that only euro
(EURUSD), British pound (GBPUSD) and Australian dollar (AUDUSD)
charts reflect real movements of the rates of these currencies (that is, chart
going up, means increasing price), as growth (that is, charts moving up) mean
decreasing rates (prices) for the other currencies.

Sometimes quotes are given as a pair, for example 121.44/49. It is a

BID/ASK pair: the first number is BID, then the two last figures of ASK.
Knowing that ASK is always higher than BID and that the spread is under
100 points, the full ASK real prices can always be defined. In this example
ASK = 121.49.
Appreciation - A currency is said to 'appreciate ' when it strengthens in price
in response to market demand.
Arbitrage - The purchase or sale of an instrument and simultaneous taking of
an equal and opposite position in a related market, in order to take advantage
of small price differentials between markets. Around - Dealer jargon used in
quoting when the forward premium/discount is near parity. For example,
"two-two around" would translate into 2 points to either side of the present
spot. Ask Rate - The rate at which a financial instrument if offered for sale
(as in bid/ask spread).
Asset Allocation - Investment practice that divides funds among different
markets to achieve diversification for risk management purposes and/or
expected returns consistent with an investor's objectives. Back Office - The
departments and processes related to the settlement of financial transactions.

Balance of Trade - The value of a country's exports minus its imports.

Base Currency - In general terms, the base currency is the currency in which
an investor or issuer maintains its book of accounts. In the FX markets, the
US Dollar is normally considered the 'base' currency for quotes, meaning that
quotes are expressed as a unit of $1 USD per the other currency quoted in the
pair. The primary exceptions to this rule are the British Pound, the Euro and
the Australian Dollar.
Bear Market - A market distinguished by declining prices.
Bid Rate - The rate at which a trader is willing to buy a currency.
Bid/Ask Spread - The difference between the bid and offer price, and the
most widely used measure of market liquidity.
Big Figure - Dealer expression referring to the first few digits of an exchange
rate. These digits rarely change in normal market fluctuations, and therefore
are omitted in dealer quotes, especially in times of high market activity. For
example, a USD/Yen rate might be 107.30/107.35, but would be quoted
verbally without the first three digits i.e. "30/35".
Book - In a professional trading environment, a 'book' is the summary of a
trader's or desk's total positions.
Broker - An individual or firm that acts as an intermediary, putting together
buyers and sellers for a fee or commission. In contrast, a 'dealer' commits
capital and takes one side of a position, hoping to earn a spread (profit) by
closing out the position in a subsequent trade with another party.
Bretton Woods Agreement of 1944 - An agreement that established fixed
foreign exchange rates for major currencies, provided for central bank
intervention in the currency markets, and pegged the price of gold at US $35
per ounce. The agreement lasted until 1971, when President Nixon
overturned the Bretton Woods agreement and established a floating exchange
rate for the major currencies.
Bull Market - A market distinguished by rising prices.
Bundesbank - Germany's Central Bank.
Cable - Trader jargon referring to the Sterling/US Dollar exchange rate. So
called because the rate was originally transmitted via a transatlantic cable
beginning in the mid 1800's.
Candlestick Chart - A chart that indicates the trading range for the day as
well as the opening and closing price. If the open price is higher than the
close price, the rectangle between the open and close price is shaded. If the
close price is higher than the open price, that area of the chart is not shaded.
Central Bank - A government or quasi-governmental organization that
manages a country's monetary policy. For example, the US central bank is the
Federal Reserve, and the German central bank is the Bundesbank.
Chartist - An individual who uses charts and graphs and interprets historical
data to find trends and predict future movements. Also referred to as
Technical Trader.
Choice Market - A market with no spread. All trades buys and sells occur at
that one price
Clearing - The process of settling a trade.
Contagion - The tendency of an economic crisis to spread from one market to
another. In 1997, political instability in Indonesia caused high volatility in
their domestic currency, the Rupiah. From there, the contagion spread to
other Asian emerging currencies, and then to Latin America, and is now
referred to as the 'Asian Contagion'.
Collateral - Something given to secure a loan or as a guarantee of
performance.
Commission - A transaction fee charged by a broker.
Confirmation - A document exchanged by counterparts to a transaction that
states the terms of said transaction.
Contract - The standard unit of trading.
Counterparty - One of the participants in a financial transaction.
Country Risk - Risk associated with a cross-border transaction, including but
not limited to legal and political conditions.
Cross Rate - The exchange rate between any two currencies that are
considered non-standard in the country where the currency pair is quoted. For
example, in the US, a GBP/JPY quote would be considered a cross rate,
whereas in UK or Japan it would be one of the primary currency pairs traded.
Currency - Any form of money issued by a government or central bank and
used as legal tender and a basis for trade.
Currency Risk - the probability of an adverse change in exchange rates.
Day Trading - Refers to positions which are opened and closed on the same
trading day.
Dealer - An individual who acts as a principal or counterpart to a transaction.
Principals take one side of a position, hoping to earn a spread (profit) by
closing out the position in a subsequent trade with another party. In contrast,
a broker is an individual or firm that acts as an intermediary, putting together
buyers and sellers for a fee or commission.
Deficit - A negative balance of trade or payments.
Delivery - An FX trade where both sides make and take actual delivery of the
currencies traded.
Depreciation - A fall in the value of a currency due to market forces.
Derivative - A contract that changes in value in relation to the price
movements of a related or underlying security, future or other physical
instrument. An Option is the most common derivative instrument.
Devaluation - The deliberate downward adjustment of a currency's price,
normally by official announcement.
Economic Indicator - A government issued statistic that indicates current
economic growth and stability. Common indicators include employment
rates, Gross Domestic Product (GDP), inflation, retail sales, etc.
End Of Day Order (EOD) - An order to buy or sell at a specified price. This
order remains open until the end of the trading day which is typically 5PM
ET. European Monetary Union (EMU) - The principal goal of the EMU is to
establish a single European currency called the Euro, which will officially
replace the national currencies of the member EU countries in 2002. On
Janaury1, 1999 the transitional phase to introduce the Euro began. The Euro
now exists as a banking currency and paper financial transactions and foreign
exchange are made in Euros. This transition period will last for three years, at
which time Euro notes an coins will enter circulation. On July 1,2002, only
Euros will be legal tender for EMU participants, the national currencies of the
member countries will cease to exist. The current members of the EMU are
Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the
Netherlands, italy, Spain and Portugal. EURO - the currency of the European
Monetary Union (EMU). A replacement for the European Currency Unit
(ECU).
European Central Bank (ECB) - the Central Bank for the new European
Monetary Union.
Federal Deposit Insurance Corporation (FDIC) - The regulatory agency
responsible for administering bank depository insurance in the US.
Federal Reserve (Fed) - The Central Bank for the United States.
Flat/square - Dealer jargon used to describe a position that has been
completely reversed, e.g. you bought $500,000 then sold $500,000, thereby
creating a neutral (flat) position.
Foreign Exchange - (Forex, FX) - the simultaneous buying of one currency
and selling of another.
Forward - The pre-specified exchange rate for a foreign exchange contract
settling at some agreed future date, based upon the interest rate differential
between the two currencies involved.
Forward points - The pips added to or subtracted from the current exchange
rate to calculate a forward price.
Fundamental analysis - Analysis of economic and political information with
the objective of determining future movements in a financial market.
Futures Contract - An obligation to exchange a good or instrument at a set
price on a future date. The primary difference between a Future and a
Forward is that Futures are typically traded over an exchange (Exchange-
Traded Contacts - ETC), versus forwards, which are considered Over The
Counter (OTC) contracts. An OTC is any contract NOT traded on an
exchange.
Good 'Til Cancelled Order (GTC) - An order to buy or sell at a specified
price. This order remains open until filled or until the client cancels.
Hedge - A position or combination of positions that reduces the risk of your
primary position.
Inflation - An economic condition whereby prices for consumer goods rise,
eroding purchasing power.
Initial margin - The initial deposit of collateral required to enter into a
position as a guarantee on future performance.
Interbank rates - The Foreign Exchange rates at which large international
banks quote other large international banks.
Leading Indicators - Statistics that are considered to predict future economic
activity.
LIBOR - The London Inter-Bank Offered Rate. Banks use LIBOR when
borrowing from another bank.
Limit order - An order with restrictions on the maximum price to be paid or
the minimum price to be received. As an example, if the current price of
USD/YEN is 102.00/05, then a limit order to buy USD would be at a price
below 102. (ie 101.50)
Liquidity - The ability of a market to accept large transaction with minimal to
no impact on price stability.
Liquidation - The closing of an existing position through the execution of an
offsetting transaction.
Long position - A position that appreciates in value if market prices increase.
Margin - The required equity that an investor must deposit to collateralize a
position.
Margin call - A request from a broker or dealer for additional funds or other
collateral to guarantee performance on a position that has moved against the
customer.
Market Maker - A dealer who regularly quotes both bid and ask prices and is
ready to make a two-sided market for any financial instrument.
Market Risk - Exposure to changes in market prices.
Mark-to-Market - Process of re-evaluating all open positions with the current
market prices. These new values then determine margin requirements.
Maturity - The date for settlement or expiry of a financial instrument.
Offer - The rate at which a dealer is willing to sell a currency.
Offsetting transaction - A trade with which serves to cancel or offset some or
all of the market risk of an open position.
One Cancels the Other Order (OCO) - A designation for two orders whereby
one part of the two orders is executed the other is automatically cancelled.
Open order - An order that will be executed when a market moves to its
designated price. Normally associated with Good 'til Cancelled Orders.
Open position - A deal not yet reversed or settled with a physical payment.
Over the Counter (OTC) - Used to describe any transaction that is not
conducted over an exchange.
Overnight - A trade that remains open until the next business day.
Pips - Digits added to or subtracted from the fourth decimal place, i.e.
0.0001. Also called Points.
Political Risk - Exposure to changes in governmental policy which will have
an adverse effect on an investor's position.
Position - The netted total holdings of a given currency.
Premium - In the currency markets, describes the amount by which the
forward or futures price exceed the spot price.
Price Transparency - Describes quotes to which every market participant has
equal access.
Quote - An indicative market price, normally used for information purposes
only.
Rate - The price of one currency in terms of another, typically used for
dealing purposes.
Resistance - A term used in technical analysis indicating a specific price level
at which analysis concludes people will sell.
Revaluation - An increase in the exchange rate for a currency as a result of
central bank intervention. Opposite of Devaluation.
Risk - Exposure to uncertain change, most often used with a negative
connotation of adverse change.
Risk Management - The employment of financial analysis and trading
techniques to reduce and/or control exposure to various types of risk.
Roll-Over - Process whereby the settlement of a deal is rolled forward to
another value date. The cost of this process is based on the interest rate
differential of the two currencies.
Settlement - The process by which a trade is entered into the books and
records of the counterparts to a transaction. The settlement of currency trades
may or may not involve the actual physical exchange of one currency for
another.
Short Position - An investment position that benefits from a decline in market
price.
Spot Price - The current market price. Settlement of spot transactions usually
occurs within two business days.
Spread - The difference between the bid and offer prices.
Sterling - slang for British Pound.
Stop Loss Order - Order type whereby an open position is automatically
liquidated at a specific price. Often used to minimize exposure to losses if the
market moves against an investor's position. As an example, if an investor is
long USD at 156.27, they might wish to put in a stop loss order for 155.49,
which would limit losses should the dollar depreciate, possibly below 155.49.
Support Levels - A technique used in technical analysis that indicates a
specific price ceiling and floor at which a given exchange rate will
automatically correct itself. Opposite of resistance.
Swap - A currency swap is the simultaneous sale and purchase of the same
amount of a given currency at a forward exchange rate.
Technical Analysis - An effort to forecast prices by analyzing market data,
i.e. historical price trends and averages, volumes, open interest, etc.
Tomorrow Next (Tom/Next) - Simultaneous buying and selling of a currency
for delivery the following day.
Transaction Cost - the cost of buying or selling a financial instrument.
Transaction Date - The date on which a trade occurs.
Turnover - The total money value of all executed transactions in a given time
period; volume.
Two-Way Price - When both a bid and offer rate is quoted for a FX
transaction.
Uptick - a new price quote at a price higher than the preceding quote.
Uptick Rule - In the U.S., a regulation whereby a security may not be sold
short unless the last trade prior to the short sale was at a price lower than the
price at which the short sale is executed.
US Prime Rate - The interest rate at which US banks will lend to their prime
corporate customers
Value Date - The date on which counterparts to a financial transaction agree
to settle their respective obligations, i.e., exchanging payments. For spot
currency transactions, the value date is normally two business days forward.
Also known as maturity date.
Variation Margin - Funds a broker must request from the client to have the
required margin deposited. The term usually refers to additional funds that
must be deposited as a result of unfavorable price movements.
Volatility (Vol) - A statistical measure of a market's price movements over
time.
Whipsaw - slang for a condition of a highly volatile market where a sharp
price movement is quickly followed by a sharp reversal.
Yard - Slang for a billion.
Currency Trading Rules
1. PLAN YOUR TRADE AND TRADE YOUR PLAN. You must have a
trading plan to succeed. A trading plan should consist of a position, why you
enter, stop loss point, profit taking level, plus a sound money management
strategy. A good plan will remove all the emotions from your trades.
2. THE TREND IS YOUR FRIEND. Do not buck the trend. When the
market is bullish, go long. On the reverse, if the market is bearish, you short.
Never go against the trend.

3. FOCUS ON CAPITAL PRESERVATION. The most important step that

you must take when you deal with your trading capital. You main goal is to
preserve the capital. Do not trade more than 10% of your deposit in a single
trade. For example, if your total deposit is $10,000, every trade should limit
to $1000. If you don't do this, you'll be out of the market very soon.

4. KNOW WHEN TO CUT LOSS. If a trade goes against you, sell it and let
go. Do not hold on to a bad trade hoping that the price will go up. Most
likely, you end up losing more money. Before you enter a trade, decide your
stop loss price, a price where you must sell when the trade turns sour. It
depends on your risk profile as of how much you should set for the stop loss.

5. TAKE PROFIT WHEN THE TRADE IS GOOD. Before entering a trade,

decide how much profit you are willing to take. When a trade turns out to be
good, take the profit. You can take profit all at one go, or take profit in
stages. When you've recovered your trading cost, you have nothing to lose.
Sit tight and watch the profit run.
6. BE EMOTIONLESS. Two biggest emotions in trading: greed and fear. Do
not let greed and fear influence your trade. Trading is a mechanical process
and it's not for the emotional ones. As Dr. Alexander Elder said in his book
Trading For A Living, if you sit in front of a successful trader and observe
how he trades, you might not be able to tell whether he is making or losing
money. That's how emotionally stable a successful trader is.

7. DO NOT TRADE BASED ON A TIP FROM A FRIEND OR BROKER.

Trade only when you have done your own research and analysis. Be an
informed trader.

8. KEEP A TRADING JOURNAL. When you buy a currency or stock, write

down the reasons why you buy, and your feelings at that time. You do the
same when you sell. Analyze and write down the mistakes you've made, as
well as things that you've done right. By referring to your trading journal, you
learn from your past mistakes. Improve on your mistakes, keep learning and
keep improving.

9. WHEN IN DOUBT, STAY OUT. When you have doubt and not sure
where the market or stock is going, stay on the sideline. Sometimes, doing
nothing is the best thing to do.

10. DO NOT OVERTRADE. Ideally you should have 3-5 positions at a time.
No more than that. If you have too many positions, you tend to be out of
control and make emotional decisions when there is a change in market. Do
not trade for the sake of trading
WHAT IS FOREIGN EXCHANGE
Foreign Exchange (FX or Forex) is one of the largest and most liquid
financial markets in the world. According to the authoritative Triennial
Central Bank Survey from Bank for International Settlements, Basel, average
daily turnover in April 2007 exceeded US $3.2 trillion, and evidence suggests
that the market is still expanding. The spot market accounts for around a third
of activity in the FX market.

FX is simple to understand once it is realized that a currency is effectively a

commodity whose value can change against other currencies, as well as other
assets, such as gold and oil.

WHAT IS FX TRADING
In an FX transaction, one currency is sold in exchange for another one. The
rate expresses the relative value between the two currencies. Currencies are
normally identified by a three-digit µSwift¶ code. For instance, EUR = the
euro, USD = the US dollar, CHF = the Swiss franc and so on. A full list of
codes can be found here. A EUR/USD rate of 1.5000 means that ¼1 is worth
$1.5.

Sometimes, EUR/USD is referred to as a currency pair. The rate can be

inverted. So a EUR/USD rate of 1.5000 is the same as a USD/EUR rate of
0.6666. In other words, $1 is worth ¼0.6666. The market convention is that
most currencies tend to be quoted against the dollar, but there are notable
exceptions, such as with the EUR/USD already mentioned, GBP/USD (UK
sterling) and AUD/USD (the Australian dollar). This is not as confusing as it
may sound.
FOREIGN EXCHANGE RATE SYSTEMS
There are basically two types of exchange rate systems:

Flexible Exchange Rate System

In a flexible exchange rate system, a currency is µfree¶ to float and its value is
determined by market forces.

Fixed Exchange Rate System:

In a fixed exchange rate system, a currency is not allowed to fluctuate freely.
Instead, its value is fixed either against a single currency, such as the USD, at
a specific rate, or a basket of currencies. In a fixed system, the local central
bank will use its currency reserves to prevent rate movements.

MAJOR INFLUENCES ON FX PRICES

There are numerous factors that determine a free floating currency¶s worth in
the market, from international trade flow, economic and political conditions,
the level of interest rates to simple short-term supply and demand. Unlike
many other assets, FX is a pure market and rates move freely both up and
down.

OVER-THE-COUNTER MARKET
The Forex market is an 'over the counter market' (OTC), which means that
there is no physical location and no central exchange and clearing hours
where orders are matched. Instead, it operates 24-hours a day via an
electronic network of banks, corporations and individuals trading one
currency for another.
FX traders constantly negotiate prices between one another and the resulting
market bid/ask prices are then fed into computers and displayed on official
quote screens. Forex exchange rates quoted between banks are referred to as
Inter-bank Rates.

FX MARKET PARTICIPANTS
There are numerous different types of participants in the FX market and
frequently they are looking for very different outcomes when they trade. This
is why that although FX is often described as a µzero-sum¶ game ± what one
investor makes is equal in theory to what another has lost ± there are
numerous opportunities to make money. FX can be thought of as a pie from
which everyone can have a decent meal.

Traditionally, banks have been the main participants in the FX market. They
still remain the largest players in terms of market share, but transparency has
made the FX market far more democratic. Now virtually everyone has access
to the same, extremely narrow prices that are quoted in the interbank market.

Banks remain the main players in the FX market, but a new breed of market
makers, such as hedge funds and commodity trading advisors, has emerged
over the past decade.

Central Banks can also play an important role in the FX market, while
international corporations have a natural interest to trade on account of their
exposure to FX risk.
Retail FX has expanded rapidly over the past decade and while precise
figures are hard to come by, this sector is believed to represent as much as
20% of the FX market.

SPOT FX VERSUS CURRENCY FUTURES

While most FX trading takes place OTC, there is also a quite vibrant and
successful futures market. Turnover on the CME, based in Chicagois around
US $85 billion a day. Several other exchanges also offer currency futures.

Typically, spot FX prices are for T+2 settlement. That means trades which
are not closed out are settled in 2-working days. Futures tend to have a
maturity of 3-months and so are settled quarterly, normally in March, June,
September and December. This is why futures prices often look different
from spot. In reality, they are almost 100% correlated. The FX market is too
efficient not to arbitrage out any price discrepancies. The futures price
includes the forward rates of currency pairs.

Generally, futures prices are quoted as the US dollar versus the currency ± in
other words, a futures price is the inversion of the spot rate, plus the swap
price to the maturity date. Again, this is not as complicated as it sounds.

Where to trade is a matter of choice and both the OTC and the futures
markets have their merits. But the OTC market does offer more flexibility
and it is generally cheaper to trade in.

ADVANTAGE OF FX TRADING
24 Hour Market
FX is a global market that never sleeps. It is active 24-hours a day for almost
7-days a week. Most activity takes place between the time the New Zealand
market opens on Monday, which is Sunday evening in Europe, until the US
market closes on Friday evening.

Liquidity
The FX market is huge and it is still expanding. Daily average volume now
exceeds US$ 3.2 trillion. Technology has made this market accessible to
almost anyone and retail traders have flocked to FX.

Leverage
FX margin ratios tend to be higher than those available in equity because it is
more liquid ± there is nearly always a price in FX -± and it tends to be less
volatile.

Narrow Spreads
Spreads, the difference between the bid and offer price, in FX are miniscule.
Just compare a 2-pip price in EUR/USD with a price in even the most active
and liquid equity issue. Furthermore, FX prices are typically µgood¶ for far
larger amounts than in equity. The spread is the hidden, µintrinsic¶ cost of
dealing and in FX it is minimal. Technology has made these tight prices
available to almost everyone.

No Commission or Transaction Costs

The majority of OTC FX business is commission free and with such narrow
spreads, the intrinsic cost of trading is far lower than in other assets, such as
equity.

Profit potential regardless of market direction

FX is a pure market. Prices can just as easily go up as down. If a trader
believes a currency is about to depreciate, there are seldom restrictions on
selling it although if the position is held for more than one day, there is a cost
of carry to consider. Profit potential exists in FX regardless of whether a
trader is buying or selling and regardless of whether the market is moving up
or down.

Equal Access to Market Information

Despite the introduction of best execution regulations in Europe and the US,
few would disagree that professional traders and analysts in the equity market
have a huge competitive advantage in comparison to individual traders. In
FX, perhaps the only advantage the big banks have is flow information. But
FX is a democratic market where virtually all participants have access to the
same market moving information as everyone else
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USDJPY 100000 USD 1000 JPY / Price USDJPY - approx 11.97 USD
AUDUSD 100000 AUD 10 USD
GBPUSD 100000 GBP 10 USD
USDCHF 100000 USD 10 CHF / Price USDCHF - approx 10.87 USD
USDCAD 100000 USD 10 CAD / Price USDCAD - approx 10.32 USD
 NZDUSD 100000 NZD 10 USD
EURGBP 100000 EUR 10 GBP * Price GBPUSD - approx 16.05 USD
EURCHF 100000 EUR 10 CHF * Price GBPUSD - approx 16.05 USD
EURJPY 100000 EUR 1000 JPY / Price USDJPY - approx 11.97 USD
CADJPY 100000 CAD 1000 JPY / Price USDJPY - approx 11.97 USD
CHFJPY 100000 CHF 1000 JPY / Price USDJPY - approx 11.97 USD
AUDJPY 100000 AUD 1000 JPY / Price USDJPY - approx 11.97 USD
GBPCHF 100000 GBP 10 CHF / Price USDCHF - approx 10.87 USD
NZDJPY 100000 NZD 1000 JPY / Price USDJPY - approx 11.97 USD
EURAUD 100000 EUR 10 AUD * Price AUDUSD - approx 10.34 USD
EURCAD 100000 EUR 10 CAD / Price USDCAD - approx 10.32 USD
NZDCAD 100000 NZD 10 CAD / Price USDCAD - approx 10.32 USD
AUDCAD 100000 AUD 10 CAD / Price USDCAD - approx 10.32 USD
GBPJPY 100000 GBP 1000 JPY / Price USDJPY - approx 11.97 USD
EURNZD 100000 EUR 10 NZD * Price NZDUSD - approx 7.63 USD
AUDNZD 100000 AUD 10 NZD * Price NZDUSD - approx 7.63 USD
EURTRY 100000 EUR 10 TRY / Price USDTRY - approx 6.48 USD
USDTRY 100000 USD 10 TRY / Price USDTRY - approx 6.48 USD
TRYJPY 100000 TRY 1000 JPY / Price USDJPY - approx 11.97 USD
GBPNZD 100000 GBP 10 NZD * Price NZDUSD - approx 7.63 USD
GBPTRY 100000 GBP 10 TRY / Price USDTRY - approx 6.48 USD

     

  

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WHAT IS IT?
Fundamental analysis is the application of micro- and macro-economic
theory to markets to predict future trends. Major fundamental forces are
frequently one of the key drivers of FX rates.

The following are a list of key US economic indicators:

BALANCE OF TRADE
The trade balance reflects the difference between a nation's exports and
imports of goods. A positive trade balance, or a surplus, occurs when a
country's exports exceed imports. A negative trade balance, or a deficit,
occurs when more goods are imported than exported.
Trade balances are closely followed by players in Forex, because of the
influence they can have. It is often used as an assessment of the overall
economic activity in a country¶s or region¶s economy. Export activities not
only reflect the competitive position of the country in question, but also the
strength of economic activity abroad. Trends in the import activity reflect the
strength of domestic economic activity.

A country that runs a significant trade balance deficit tends to generally have
a weak currency. However, this can be offset by substantial financial
investment inflows.

CURRENT ACCOUNT
The current account is an important part of international trade data as it is the
broadest measure of sales and purchased goods, services, interest payments
and unilateral transfers. The trade balance is contained in the current account.
In general, a Current Account deficit can weaken the currency.

CONSUMER PRICE INDEX

The Consumer Price Index (CPI) is a measure of inflation. It takes the
average level of prices of a fixed basket of goods and services purchased by
the consumers.

CPI is a primary inflation indicator because consumer spending accounts for

nearly two-thirds of economic activity. A rising CPI is often followed by
higher short-term interest rates, which can be supportive for a currency in the
short term. However, if inflation becomes a long-term problem, confidence in
the currency will eventually be undermined and it will weaken.
DURABLE GOODS INDEX
Durable goods orders are a measure of the new orders placed with domestic
manufacturers for immediate and future delivery of factory hard goods.
Monthly percent changes reflect the rate of change of these orders.

The durable goods orders index is a major indicator of manufacturing sector

trends. Rising durable goods orders are normally associated with stronger
economic activity and can lead to higher short-term interest rates, which is
usually supportive for a currency.

GROSS DOMESTIC PRODUCT

Gross domestic product (GDP) is the broadest measure of aggregate
economic activity available. It is an indicator of the market value of all goods
and services produced within a country. GDP is reported quarterly and it is
followed very closely as it is the primary indicator of the strength of
economic activity.

The GDP report has three releases: 1) advance release (first); 2) preliminary
release (1st revision); and 3) final release (2nd and last revision). These
revisions usually have a substantial impact on the markets.

A high GDP figure is usually followed by expectations of higher interest

rates, which is mostly positive for the currency concerned at least in the short
term, unless there are also inflationary pressures.
In addition to the GDP figures, there are the GDP deflators, which measure
the change in prices in total GDP as well as for each component. The GDP
deflators are another key inflation measure beside the CPI. In contrast to the
CPI, the GDP deflators have the advantage of not being a fixed basket of
goods and services, which means that changes in consumption patterns or the
introduction of new goods and services will be reflected in the deflators.

HOUSING STARTS
Housing Starts measure initial construction of residential units (single-family
and multi-family) each month. Housing Starts are closely watched as it gives
an indicator of the general sentiment in the economy. High construction
activity is usually associated with increased economic activity and confidence
and can be predictive of higher short-term interest rates.

PAYROLL EMPLOYMENT
The Payroll employment (also known as the Labor Report) is currently
regarded as the most important among all US economic indicators. It is
usually released on the first Friday of the month. The report provides a
comprehensive look of the economy and it is a measure of the number of
people being paid as employees by non-farm business establishments and
units of government. Monthly changes in payroll employment reflect the net
number of new jobs created or lost during the month and it is widely
followed as an important indicator of economic activity.

Large increases in the payroll employment are considered signs of strong

economic activity that could eventually lead to higher interest rates, which is
generally supportive of the currency at least in the short term. If, however, it
is estimated that an inflationary pressure is building up, this may undermine
the longer term confidence in the currency.

PRODUCER PRICE INDEX

The Producer Price Index measures the monthly change in wholesale prices
and is broken down by commodity, industry, and stage of production.

The PPI gives an important inflation indication as it measures price changes

in the manufacturing sector ± and inflation at the producer level often gets
passed straight through to consumers.
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What Is Forex?
History
Forex, or FX, is a shortened term that describes the Foreign Exchange
Market, a marketplace where the world's various currencies are traded. It is
an interbank market which was created in 1971 when international trade
transitioned from fixed to floating exchange rates. As a result of its incredible
volume and fluidity, the FX market has become the largest and most
significant financial market in the world.

Here are some unique characteristics that are the source of its success:

Forex markets operate 24 hours a day

Superior liquidity: the daily turnover of the FX market ± over 4 Trillion
Dollars ± makes it easy to trade most currencies instantaneously
You can profit from rising or falling markets
You can benefit from leveraged trading with low margin requirements
There are standard instruments available to help you control risk exposure
Excellent Transparency: the Forex Market is transparent« you just need to
keep yourself informed
The Exchange Rate
Forex plays the indispensable role of determining global exchange rates. The
exchange rate is the number of units of one nation¶s currency that must be
exchanged in order to acquire one unit of another nation¶s currency. A market
exchange rate between two currencies is determined by the interaction of the
official and private participants in the foreign exchange rate market.

Market Participants
The main participants in the Forex market are: central banks, commercial
banks, financial institutions, hedge funds, commercial companies and
individual investors. The main reasons they participate in the Forex market
are:

Profit from fluctuations in currency pairs (speculating)

Protection from fluctuating currency pairs which is derived from trading
goods and services (Hedging)
With technological development, the World Wide Web has become a great
trading facilitator, as it can provide individual investors and traders with
access to all the latest Forex news, technology and tools.

Forex Market Players

Forex Market
The Forex market is an international over-the-counter market (OTC). It
means that it is a decentralized, self-regulated market with no central
exchange or clearing house, unlike stocks and futures markets. This structure
eliminates fees for exchange and clearing, thereby reducing transaction costs.

The Forex OTC market is formed by different participants ± with varying

needs and interests ± that trade directly with each other. These participants
can be divided in two groups: the interbank market and the retail market.

The Interbank Market

The interbank market designates Forex transactions that occur between
central banks, commercial banks and financial institutions.

Central Banks - National central banks (such as the US Fed and the BCE)
play an important role in the Forex market. As principal monetary authority,
their role consists in achieving price stability and economic growth. To do so,
they regulate the entire money supply in the economy by setting interest rates
and reserve requirements. They also manage the country's foreign exchange
reserves that they can use in order to influence market conditions and
exchange rates.

Commercial Banks - Commercial banks (such as Deutsche Bank and

Barclays) provide liquidity to the Forex market due to the trading volume
they handle every day. Some of this trading represents foreign currency
conversions on behalf of customers' needs while some is carried out by the
banks' proprietary trading desk for speculative purpose.
Financial Institutions - Financial institutions such as money managers,
investment funds, pension funds and brokerage companies trade foreign
currencies as part of their obligations to seek the best investment
opportunities for their clients. For example, a manager of an international
equity portfolio will have to engage in currency trading in order to buy and
sell foreign stocks.

The Retail Market

The retail market designates transactions made by smaller speculators and
investors. These transactions are executed through Forex brokers who act as a
mediator between the retail market and the interbank market. The participants
of the retail market are hedge funds, corporations and individuals.

Hedge Funds - Hedge funds are private investment funds that speculate in
various assets classes using leverage. Macro Hedge Funds pursue trading
opportunities in the Forex Market. They design and execute trades after
conducting a macroeconomic analysis that reviews the challenges affecting a
country and its currency. Due to their large amounts of liquidity and their
aggressive strategies, they are a major contributor to the dynamic of Forex
Market.

Corporations - They represent the companies that are engaged in

import/export activities with foreign counterparts. Their primary business
requires them to purchase and sell foreign currencies in exchange for goods,
exposing them to currency risks. Through the Forex market, they convert
currencies and hedge themselves against future fluctuations.
Individuals - Individual traders or investors trade Forex on their own capital
in order to profit from speculation on future exchange rates. They mainly
operate through Forex platforms that offer tight spreads, immediate execution
and highly leveraged margin accounts.

Forex Trading Examples

Compiled below are Forex trading examples. Please note that these are just
examples; be aware that trading Forex is speculative and involves significant
risk.

USD/CHF Trading Example

An investor deposit $10,000 in a Markets.com Trading Account.

The account is set to 0.5% margin or 200:1 Leverage. This means that for
every $ 5,000 lot opened, the investor must maintain at least $25 in Margin
(= $5,000 x 0.5%).

The investor expects the US dollar to rise against the Swiss franc and
therefore decides to buy $ 100,000 of the USD/CHF pair.

Day 1 ± USD/CHF Quotes = 1.0147-1.0150

The market quotes USDCHF 1.0147-1.0150. The investor buys USD at
1.0150 against CHF.
By doing this, he commits in the simultaneous buying of USD 100,000 (20
lots at $5,000) and the selling of CHF 101,500 (= $100,000 x 1.0150) by
using $500 as a Margin (= $100,000 x 0.5%) and borrowing USD 99,500
from Markets.com (= $100,000-$500)

Transaction Flows Report - Day 1

Account Name Credit/Debit Day 1 Comment
USD Account C USD +100,000 $100,000 Investment
CHF Account D CHF -101,500 # lots (20) x lot value ($5,000) x
USDCHF Quote (1.0150)
Client Account Report ± Day 1
Balance (USD) Equity (USD) Lots Open # Used Margin (USD)
Usable Margin (USD)
$10,000 $10,000 20 $500 $9,500
(1) (2) (3) (4) (5)
(1) Balance = Deposit ($10,000) + Sum of Realized Profit & Loss ($0) =
$10,000

(2) Equity = Balance ($10,000) + Sum of Unrealized Profit & Loss ($0) =
$10,000

(3) # Lots open = Investment ($100,000) / Value of one lot ($5,000) = 20

lots
(4) Used Margin = # Lots open (20) x Value of one lot ($5,000) x Margin
(0.5%) = $500

(5) Usable Margin = Equity ($10,000) ± Used Margin ($500) = $9,500

Day 2-USD/CHF Quotes = 1.0300-1.0303

The US dollar has risen and the USD/CHF quotes 1.0300-1.0303.

The investor decides to take his profit and enters a sell market order in the
Market trading platform. The order is executed instantaneously and the
investor sells 20 lots of USDCHF at 1.0300.

By doing this, he commits in the simultaneous selling of USD 100,000 (20

lots at $5,000) and the buying of CHF 103,000 (= $100,000 x 1.0300).

Transaction Flows Report - Day 2

Account Name Credit/Debit Day 1 Day 2 Comment
USD Account D USD +100,000 USD -100,000 Sell # lots (20) x
lot value ($5,000)
CHF Account C CHF -101,500 CHF +103,000 Buy # lots (20) x
lot value ($5,000) x USDCHF Quote (1.0300)
The dollar side of the transaction involves a credit and a debit of USD
100,000, the investor's USD account will show no change.
The CHF account will show a debit of CHF 101,500 and a credit of CHF
103,000. This results in a profit of CHF 1,500 = approx. USD 1,456 (= CHF
1,500 / 1.0303) which represents a 14.56% profit on the deposit of USD
10,000.

Client Account Report± Day 2 (AFTER TRADE EXECUTION)

Balance (USD) Equity (USD) Lots Open # Used Margin (USD)
Usable Margin (USD)
$11,456 $11,456 0 $0 $11,456
(1) (2) (3) (4) (5)
(1) Balance = Deposit ($10,000) + Sum of Realized Profit & Loss ($
1,456)= $11,456

(2) Equity = Balance ($11,456) + Sum of Unrealized Profit & Loss ($0) =
$11,456

(3) All positions are closed, therefore # Lots open = 0

(4) Used Margin = # Lots open (0) x Value of one lot ($5,000) x Margin
(0.5%) = $0

(5) Usable Margin = Equity ($11,456) ± Used Margin ($0) = $11,456

Note: For simplicity's sake, we have disregarded the effect of difference in
interest rate between USD and CHF over the 2-day period which would have
marginally altered the profit calculation