Posts Tagged ‘Currency Pairs’

What Is Currency Trading?

November 2nd, 2010 29 Comments

Currency trading is the largest market on the planet. It is estimated that in excess of US$2 trillion is traded every day. Compare this to the New York Stock Exchange’s daily transactions of approximately US$50 billion, and you can see that the magnitude of the currency trading market exceeds all other equity markets in the world combined. The practice of currency trading is also commonly referred to as foreign exchange, Forex, or FX, for short.

All currency has a value relative to other currencies on the planet. Currency trading uses the purchase and sale of large quantities of currency to leverage the shifts in relative value into profit.

What is the FX market?

The FX market is different from other markets in some other key ways that are sure to raise eyebrows. Think that the EUR/USD is going to spiral downward? Feel free to short the pair at will. There is no uptick rule in FX as there is in stocks. There are also no limits on the size of your position (as there are in futures); so, in theory, you could sell $100 billion worth of currency if you had the capital to do it. If your biggest Japanese client, who also happens to golf with Toshihiko Fukui, the Governor of the Bank of Japan, told you on the golf course that BOJ is planning to raise rates at its next meeting, you could go right ahead and buy as much yen as you like. No one will ever prosecute you for insider trading should your bet pay off. There is no such thing as insider trading in FX; in fact, European economic data, such as German employment figures, are often leaked days before they are officially released.

Which currencies are Traded?

Although some retail dealers trade exotic currencies such as the Thai baht or the Czech koruna, the majority trade the seven most liquid currency pairs in the world, which are the four majors:

EUR/USD (euro/dollar)
USD/JPY (dollar/Japanese yen)
GBP/USD (British pound/dollar)
USD/CHF (dollar/Swiss franc)

and the three commodity pairs:

AUD/USD (Australian dollar/dollar)
USD/CAD (dollar/Canadian dollar)
NZD/USD (New Zealand dollar/dollar)

These currency pairs, along with their various combinations (such as EUR/JPY, GBP/JPY and EUR/GBP) account for more than 95% of all speculative trading in FX. Given the small number of trading instruments – only 18 pairs and crosses are actively traded – the FX market is far more concentrated than the stock market.

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Which Forex Trading System To Choose?

October 3rd, 2010 No Comments

What Are Forex Trading Systems?

A Forex trading system is a set of rules which are aimed to ensure that you are trading in a way that is free of bias and the influence of emotion. Most beginner traders will look to learn a forex trading system whereas more experienced traders will eventually move to build a trading system of their own.

A good Forex trading system should look to encompass and cover for all possible eventualities which the markets may through up. In that respect, they should comprise of rules which govern, amongst other things the following:

1. Which currency pairs to trade.

2. When exactly to enter and exit a trade.

3. Where to place Stop Losses and Take Profit rates.

Forex trading systems must always be tested against historical data (known as back-testing). Beginner traders, when looking to purchase a forex trading system, should always ensure that the system was properly backtested and that the results are genuine. There are certain software packages available now which back-test trading systems automatically.

Which Forex Trading System To Choose?

This will depend upon your trading style. Some traders are swing traders and will look to keep positions for days, weeks or even months. Others prefer a day trading style and will be in and out of a trade within the same day. A typical swing trading system will look to take larger moves ranging from 100-300 pips over a period of a few days or weeks. On the other hand, an intraday forex system looks for smaller opportunities ranging from 25-50 pips.

Forex scalping systems have become popular of late as well. Scalping is a trading style which looks to take profits on very small price changes, usually soon after a trade has been entered into and becomes profitable. It is a strategy that does not look to capture 50+ pip moves; rather it is more about watching the price and getting in and out of trades for quick 5 pip moves which little by little add up.

While this might sound risky, it can be quite a low risk strategy if performed correctly. As with all trading systems, the most important parameter which has to be addressed here is money management. Having a strict exit strategy and rules on how much of your equity to risk per trade must be clearly outlined.

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What Is Forex Trading? Is It Right For Me?

September 22nd, 2010 No Comments

What Is Forex Trading? Is It Right For Me?

Foreign Currency Exchange (FOREX) Trading is an exhilarating way to trade foreign currency in a market that runs 24 hours a day, five days a week. The Forex market is also the most volatile financial market in the world. It doesnt have a physical location, trading floor or central exchange like the NYSE or futures market does, but instead it functions and operates amid a global network of banks with trades taking place over an electronic network or by phone. With its nearly nonstop currency market where Forex brokers trade in the currencies of the world, profits are made or lost depending on how various nations currencies increase or decrease relative to each other. Current, real time events can influence currency prices and thus Forex trading brokers typically keep track of worldwide events on a minute by minute, hour by hour basis each day.

Even though Forex trading is volatile, there are many things to like about it. Since the Forex Trading System is open 24 hours a day, the majority of each week, it allows for ample time and numerous trading opportunities around the clock. This means Forex Brokers are not under as much pressure to initiate a trade as quickly as if they were playing the stock market. Also, since world government currencies are very liquid, they are much easier to trade than other securities. As with the stock and option markets, profits can be made either way, whether in a rising or falling market. And since Foreign Currency Trading is volatile by nature, it can afford even more profit opportunities than other markets.

Of course a persons Forex Trading Strategy should be to profit from the movement in currency values. As with any financial market, the more times a person gets it right, the more money they will make. In Forex or FX Trading, currency pairs are always used. FX Traders will try to determine, for instance, if the U.S. Dollar will rise in value over the British Pound, or vice versa. This is called a Currency Pair. Another trader may have some Forex information that informs them that the Euro will increase in value against the Dollar. They would then pay X amount of Dollars for X amount of Euros. As time went on and the Euro did strengthen against the Dollar then they could sell the Euros for even more Dollars than they had invested originally. Foreign Currency Exchange is essentially the simultaneous buying of one currency and the selling of another.

There is no doubt that the Forex Currency Trading System is unique. It has its own set of rules and opportunities. It can be as fast moving or slow as a trader would like. A big advantage is the number of hours in a week that a trader can place and execute trades. It can be volatile just as with any market. If a person studies their options and does their homework, a great deal of profit making opportunities exists in Foreign Currency Trading. As with any financial markets, a good Forex Trading Strategy will go a long way in determining what kind of profits you will make.

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Forex Trading: Calculating Profit And Loss In Foreign Currency Trading

July 21st, 2010 1 Comment

Forex Trading: Calculating Profit And Loss In Foreign Currency Trading

The foreign exchange market, or Forex market, is an around-the-clock cash market where the currencies of nations are bought and sold. Forex trading is always done in currency pairs. For example, you buy Euros, paying with U.S. Dollars, or you sell Canadian Dollars for Japanese Yen. The value of your Forex investment increases or decreases because of changes in the currency exchange rate or Forex rate. These changes can occur at any time, and often result from economic and political events. Using a hypothetical Forex investment, this article shows you how to calculate profit and loss in Forex trading.

To understand how the exchange rate can affect the value of your Forex investment, you need to learn how to read a Forex quote. Forex quotes are always expressed in pairs. In the following example, your pair of currencies are the U.S. Dollar (USD) and the Canadian Dollar (CAD). The Forex quote, USD/CAD = 170.50, means that one U.S. Dollar is equal to 170.50 Canadian Dollars. The currency to the left of the “/” (USD in this example) is referred to as base currency and its value is always 1. The currency to the right of the “/” (CAD in this example) is referred to as the counter currency. In this example, one USD can buy 170.50 CAD, because it is the stronger of the two currencies. The U.S. Dollar is regarded as the central currency of the Forex market, and it is always treated as the base currency in any Forex quote where it is one of the pairs.

Let’s go now to our hypothetical Forex investment to show how you can profit or come up short in Forex trading. In this example, your pair of currencies are the U.S. Dollar and the Euro. The Forex rate of EUR/USD on August 26, 2003 was 1.0857, which means that one U.S. Dollar was equal to 1.0857 Euros, and was the weaker of the two currencies. If you had bought 1,000 Euros on that date, you would have paid $1,085.70.

One year later, the Forex rate of EUR/USD was 1.2083, which means that the value of the Euro increased in relation to the USD. If you had sold the 1,000 Euros one year later, you would have received $1,208.30, which is $122.60 more than what you had started with one year earlier.

Conversely, if the Forex rate one year later had been EUR/USD = 1.0576, the value of the Euro would have weakened in relation to the U.S. Dollar. If you had sold the 1,000 Euros at this Forex rate, you would have received $1,057.60, which is $28.10 less than what you had started out with one year earlier.

As with stocks and mutual funds, there is risk in Forex trading. The risk results from fluctuations in the currency exchange market. Investments with a low level of risk (for example, long-term government bonds) often have a low return. Investments with a higher level of risk (for example, Forex trading) can have a higher return. To achieve your short-term and long-term financial goals, you need to balance security and risk to the comfort level that works best for you.

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Make Profit By Applying A Forex Trading Strategy

July 11th, 2010 No Comments

Successful trading is not an easy job and in a market like foreign exchange one miscalculation can lead to huge amount of losses. But then there are traders and speculators who make a fortune and profits in the same forex market. So what is it that they are doing different? They have a forex trading strategy, which they implement to get ahead of everyone else. Even you can create your own Forex strategy but for that you will need to understand certain key components of forex trading.

The foreign exchange market is comprised of traders, money managers, investors and speculators and all striving towards one goal, how to maximize their profit on investment. So whether you are a trader, investor or speculator, you need to get maximum knowledge about forex trading, about the strong currency pairs, the various market conditions, and the entire process. Once your research is complete, you will be in a better position to formulate the right trading strategy. Here are some of the key areas that will make your strategy strong and help you in making a profit.

Trading Amount

The forex trading market is volatile and can change suddenly. These changes however exciting and positive can also incur losses if you are not careful. The first part of our forex trading strategy should be to start with a small investment. Risk is necessary but losing your hard-earned money is not.

Identify market conditions

Your forex strategy should encompass the existing market conditions and the future conditions too. You should look at the current trend, compare it with similar trends from last year or the year before and based on that judge how it will perform in the future. A clear picture is extremely necessary for successful trading.

Time Frame

There are many traders who enter the market without enough knowledge and with a mission to just make money. Of course profit is the most important thing but over and above that as a trader or speculator you need to extrapolate. Extrapolation includes price evolution in a particular period and exit price. Your strategy should include what will be your exit price at any given point of time and also define whether you will be scalping long-term or short-term. If you are trading multiple times in a day, then you dont require the daily analysis or data, you will require hourly analysis.

Limiting Risk

A good forex trading strategy should always have a method of limiting risk and at the same time should be able to help you capitalize on the movement of the market. You can limit the risk only if you have knowledge of the market, the currency and fair bit of insight into the future. You cant expect to make a profit with every trade. It is like a game of chess and you need to know what the next move should be and how it will affect trading.

Last but not the least, when in doubt, dont trade!

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Learning Some Good Forex Trading Stragegies

July 5th, 2010 No Comments

If youre a potential investment player whod like to make it big in the business and financial world, then you go for forex trading. The FOREX, also known as the foreign exchange market is one of the largest financial markets in the world with and estimate of $1.5 trillion turn-overs every day. Here are a few strategies on how to make it big in the forex market.

Strategy One: Know your market. The best way to get advantage, earn profit and minimize losses is to familiarize yourself with the market and how the whole system works. In the forex market, the players are usually commercial banks, central banks and firms involved in foreign trade, investment funds, broker companies and other private individuals with large capital. With the speed and high liquidity of asset, most companies engage in this business than in any other trading venture. Transactions are done in a jiffy; there are no membership fees and there is always the allure and promise of big, big profit.

Trading is done in pairs. The most commonly traded currencies are usually the US Dollar, Japanese Yen, Euro, British Pound, Canadian Dollar, Australian Dollar and the Swiss Franc. The more commonly traded currency pairs are the US Dollar and the Japanese Yen, the Euro and the US Dollar, the Swiss Franc and the US Dollar. In Forex trading, everything is speculative and virtual. There is no actual product being sold or bought. The activity mostly consists of computed entries made on the value of one currency against another. Say for example, you can buy Euros with US Dollar, hoping that the Euro will increase it value. Once its value rises, you can sell the Euro again, thus earning you profit.

Strategy Two: Learn the language. There are three concepts you need to know in the currency market. Pips refer to the increase of one hundredth of a percent of the value of the currency pair you are trading. Usually each pip has a value of $10 or $1. Volume is the quantity or amount of money being traded at one particular time in the market. Buying is the acquisition of a particular currency. A trader buys with the hopes that the price of the currency will increase. Selling is putting a currency up for grabs in the market because of a potential or possibility of a decrease in its value. There are also two techniques of analysis usually used in this business the fundamental and the technical analysis. Technical analysis is usually used by small and medium players. Here, the primary point of analysis revolves on the price.

Fundamental analysis, on the other hand, is used by bigger companies and players with higher capital as it involves looking at the other factors affecting the value of a particular currency. In this type of analysis, the player also looks at the situation of the country, particularly issues like political stability, inflation rate, unemployment rate, and tax policies as these are seen to have an effect on the currencys value.

Strategy Three: Develop a sound trading strategy. Your trading strategy would depend on what kind of trader you are. The basic thing with developing a trading strategy is to identify what kind of forex trader you are. A good trading strategy should lessen, if not, eliminate losses.

Plan also the size of your transactions. It is better to conduct many different trades than one huge transaction. Not only does it develop discipline, but it also lessens any possible loss as only a fraction of the capital is affected. Part of a trading strategy is developing the values of discipline and proper money management.

Strategy Four: Practice. Try paper trading, a great way to practice your skills, see how the market works and get acquainted with the software and tools being used. There are online brokers who allow free paper trades, which allows practice and experience before doing it with real money.

Strategy Five: Choose the right forex dealer. Make sure that they are regulated by the law. Take not of dealers with investment schemes that give out too-good-to-be-true-just-false-hopes promises. Look at investment offers before getting started.

Forex trading may seem easy and manageable. But the emotional stress, the demands and challenges of being a forex trader requires more than just the knowledge of the market. It requires more than just a keen and sensible head for business. Its all about a gameplan, a strategy.

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Learn Forex Trading – How To Create An Income By

June 27th, 2010 No Comments

Learn Forex Trading – How To Create An Income By Forex Trading Part Time From Home.

Can you really make a living trading forex as a business from the comfort of your own home? Can you really create a replacement income as a part time trader and then retire young?

Of course, the answer depends on how much is your current income or the desired amount of income you wish to obtain from forex trading before you wish to quit the rat race and be a professional trader, either part time or full time.

But there are many traders who are quietly making 5 figure incomes monthly trading from the comfort of their homes, and some of these are part time traders.

So before you embark into forex trading as a part time trader, here are some guidelines you ought to consider:

1. Your devotion of time – how much time are you going to devote to trading forex? Contrary to popular opinion, you do not need to be glued to your trading monitor to watch the prices of forex or currency pairs all the time. The larger part of your time is spent on finding those trading setups based on your trading system and the execution is fast, and you can also pre-set your stops and profits or give instructions to your broker.

In fact, it is the learning process that will take time. So budget sufficient time to learn how to trade, and that time allocation is actually required before you even place a live trade.

2. Your allocation of capital - again, if you trade the mini forex the amount of capital is not large. Contrary to popular opinion, you can start a mini forex account with around $500 and can start to trade. With a mini forex account you can leverage off the system and be profitable.

3. Your Risk Profile and Trading Discipline - you need to consider your risk profile. Are you aggressive in trading, so that you will prefer day trading the forex and thereby assume more risks? Or are you happy enough swing trading the forex over a few days? This will determine the methodology and trading system you will want to follow.

4. Advancing as a Forex Trader - to advance further as a forex trader, you will need to constantly improve your trading skills and see increase profits in your trading. Good traders always keep a trading log and review whatever trades they have executed and consider the outcomes. In this way, they learn from their errors and know whether they have obediently followed their trading strategies and had kept and maintain discipline in their trading.

In making the transition into a forex trader, the learning process is the most important. Many forex traders have muddled along the way by a self learning process without guidance, with the end result that while they may be profitable, they are not consistently profitable. Many of them are seeking ways to unlearn some of their bad trading habits. You can avoid such a situation by understanding your own risk profile, and seeking out a professional trader who can become your mentor and to pass on his trading skills to you.

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Impress Your Date with Forex Trading Lingo

June 13th, 2010 No Comments

Major and Minor Currencies
The seven most frequently traded currencies (USD, EUR, JPY, GBP, CHF, CAD, and AUD) are called the major currencies. All other currencies are referred to as minor currencies. Do not worry about the minor currencies, they are for professionals only. Actually, on this site we will only be covering what we call the Fab Five (USD, EUR, JPY, GBP, and CHF). These pairs are the most liquid and are the only currencies we actually trade.

Cross Currency
A cross currency is any pair in which neither currency is the U.S. dollar. These pairs exhibit erratic price behavior since the trader has, in effect, initiated two USD trades. For example, initiating a long (buy) EUR/GBP is equivalent to buying a EUR/USD currency pair and selling a GBP/USD. Cross currency pairs frequently carry a higher transaction cost. The three most frequently traded cross rates are EUR/JPY, GBP/EUR, and GBP/JPY.

Base Currency
The base currency is the first currency in any currency pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF rate equals 1.6350, then one USD is worth CHF 1.6350. In the Forex markets, the U.S. 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.

Quote Currency
The quote currency is the second currency in any currency pair. This is frequently called the pip currency and any unrealized profit or loss is expressed in this currency.

Bid Price
The bid is the price at which the market is prepared to buy a specific currency pair in the Forex market. At this price, the trader can sell the base currency. It is shown on the left side of the quotation.

For example, in the quote EUR/USD 1.2812/15, the bid price is 1.2812. This means you can sell on U.S. dollar for 1.2812 Euros.

Ask Price
The ask is the price at which the market is prepared to sell a specific currency pair in the Forex market. At this price, you can buy the base currency. It is shown on the right side of the quotation.

For example, in the quote EUR/USD 1.2812/15, the ask price is 1.2815. This means you can buy one U.S. dollar for 1.2815 Euros. The ask price is also called the offer price.

Bid/Ask Spread
The spread is the difference between the bid and ask price. The big figure quote is the dealer expression referring to the first few digits of an exchange rate. These digits are often omitted in dealer quotes. For example, the USD/JPY rate might be 118.30/118.34, but would be quoted verbally without the first three digits as 30/34.

Quote Convention
Exchange rates in the Forex market are expressed using the following format:

Base currency / Quote currency Bid / Ask

Transaction Cost
The critical characteristic of the bid/ask spread is that it is also the transaction cost for a round-turn trade. Round-turn means both a buy (or sell) trade and offsetting sell (or buy) trade of the same size in the same currency pair. In the case of the EUR/USD rate of 1.2812/15, the transaction cost is three pips.

The formula for calculating the transaction cost is:

Transaction cost = Ask Price Bid Price

Pip
A pip is the smallest unit of price for any currency. Nearly all currency pairs consist of five significant digits and most pairs have the decimal point immediately after the first digit, that is, EUR/USD equals 1.2538. In this instance, a single pip equals the smallest change in the fourth decimal place, that is, 0.0001. Therefore, if the quote currency in any pair is USD, then one pip always equal 1/100 of a cent.

One notable exception is the USD/JPY pair where a pip equals $0.01.

Margin
When you open a new margin account with a Forex broker, you must deposit a minimum amount with that broker. This minimum varies from broker to broker and can be as low as $100 to as high as $100,000.

Each time you execute a new trade, a certain percentage of the account balance in the margin account will be earmarked as the initial margin requirement for the new trade based upon the underlying currency pair, its current price, and the number of units traded (called a lot). The lot size always refer to the base currency.

For example, let’s say you open a mini-account which provides a 200:1 margin or .5% margin. Mini-accounts usually trade mini-lots which are $10,000. So if you were to open one mini-lot, instead of having to provide the full $10,000, you would only need $50 ($10,000 x .5 = $50).

Leverage
Leverage is the ratio of the amount used in a transaction to the required security deposit (margin). It is the ability to control large dollar amounts of a security with a relatively small amount of capital. Leveraging varies dramatically with different brokers, ranging from 10:1 to 400:1.

Margin + Leverage = Possible Deadly Combination
Trading currencies on margin lets you increase your buying power. If you have $5,000 cash in a margin account that allows 100:1 leverage, you could purchase up to $500,000 worth of currency because you only have to post one percent of the purchase price as collateral. Another way of saying this is that you have $500,000 in buying power.

With more buying power, you can increase your total return on investment with less cash outlay. But be careful, trading on margin magnifies your profits AND losses.

Margin Call
All traders fear the dreaded margin call. This occurs when your broker notifies you that your margin deposits have fallen below the required minimum level because an open position has moved against you.

Trading on margin can be a profitable investment strategy, but it is important that you take the time to understand the risks. You should make sure you fully understand how your margin account works. Be sure to read the margin agreement between you and your broker. Talk to your broker if you have any questions.

The positions in your account could be partially or totally liquidated should the available margin in your account fall below a predetermined threshold. You may not receive a margin call before your positions are liquidated (the ultimate unexpected birthday gift).

Margin calls can be effectively avoided by monitoring your account balance on a very regular basis and by utilizing stop-loss orders (discussed later) on every open position to limit risk. For ease of use, most online trading platforms automatically calculate the profit and loss your open positions.

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