FX Lesson One

Forex Trading

If you want to trade forex you simply have to know somewhat certain terminologies like margin requirement, how margin call occurs and what does it affect. You also need to know why your forex broker will charge you interest or premium. While you chat with traders they will often use slang to express their thoughts in a shorter form: "what is going on with kiwi this morning? Meaning how is the Swiss dollar doing, if you have followed the glossary of terms that was on the concluding part of chapter 1.

The basic fundamental in FX is the currency pairs, which are usually what, are being traded always on this market.

Currency pairs that are usually traded include:

EUR/USD: Euro / US Dollar is often called Euro;

USD/JPY: US Dollar / Japanese Yen is often called Dollar Yen;

GBP/USD: British Pound / US Dollar is often called Cable;

USD/CHF: US Dollar / Swiss Franc is often called Dollar Swiss, or Swissy;

AUD/USD: Australian Dollar / US Dollar is often called Aussie Dollar;

EUR/GBP: Euro / British Pound is often called Euro Sterling;

EUR/JPY: Euro / Japanese Yen is often called Euro Yen;

EUR/CHF: Euro / Swiss Franc is often called Euro Swiss;

GBP/CHF: British Pound / Swiss Franc is often called Sterling Swiss;

GBP/JPY: British Pound / Japanese Yen is often called Sterling Yen;

CHF/JPY: Swiss Franc / Japanese Yen is often called Swiss Yen;

NZD/USD: New Zealand Dollar / US Dollar is often called New Zealand Dollar or Kiwi;

The first currency in the pair is referred to as the base currency, and the second currency is the counter or quote currency. The U.S Dollar is usually the base currency for quotes, and includes USD/JPY, USD/CHF, and USD/CAD. The exceptions are the Euro (EUR), Great Britain Pound (GBP), and Australian Dollar (AUD). As with all financial products, forex quotes include a "bid" and "ask", which is more often called "offer" in the forex market. The bid is the price at which a forex market maker is willing to buy (and you can sell) the base currency in exchange for the counter currency. The offer is the price at which a forex market maker will sell (and you can buy) the base currency in exchange for the counter currency. The difference between the bid and the offer price is referred to as the spread.

 

Criteria for a Competent Forex Broker & the Problem of Choice

They are lots to look at when settling down and trying to get a competent partner when it comes to online fx (forex) biz, but we will take you on a safe ride on knowing this. First and foremost, after Identifying a particular forex brokers, one has to go through their information on their website, these is probably your first contact with your partners.

Before trading Forex you need to set up an account with a Forex broker. What exactly is a broker? In simplest terms, a broker is an individual or a company that buys and sells orders according to the trader's decisions. Brokers earn money by charging a commission or a fee for their services.

You may feel overwhelmed by the number of brokers who offer their services online. Settling on one broker requires a little bit of research on your part, but the time spent will give you insight into the services that are available and fees charged by various brokers. When selecting a prospective Forex broker, find out with which regulatory agencies each dealer is registered. The Forex market is label as an “unregulated” market, and it basically is. Regulation is typically reactive, meaning only after you’ve been bamboozled out of your entire savings will something be done.

In the United States a broker should be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) and a NFA member. The CFTC and NFA is here to protect the public against fraud, manipulations, and abusive trade practices.

You can verify Commodity Futures Trading Commission (CFTC) registration and NFA membership status of a particular firm or individual and check their disciplinary history by phoning NFA at (800) 621-3570 or by checking the broker/firm information section (BASIC) of NFA's Web site at www.nfa.futures.org/basicnet/.

Among the registered firms, look for those with clean regulatory records and solid financials. Stay away from non-regulated firms! Forex is a 24-hour market, so 24-hour support is a must! Can you contact the firm by phone, email, chat, etc. Do the reps seem knowledgeable? The quality of support can vary drastically from broker to broker, so be sure to check it out before opening an account.

Here’s a good tip: choose several online brokers and contact their help desks. Seeing how quickly they respond to your questions can be key in gauging how they will respond to your needs. If you don't get a speedy reply and a satisfactory answer to your question you certainly wouldn't want to trust them with your business. Just be aware that as in other types of businesses, pre-sales service might be better than post-sales service. Most, if not all, Forex brokers allow you to trade over the Internet relatively easy. The backbone of any trading platform is, of course, the order entry and exit process. Trading software is very important. Get a feel for the options that are available by trying out a demo account at a few online brokers.

Closely examine the dealer’s screen layout. It should include the ability to view real-time currency quotes, an account summary showing your current account balance with realized and unrealized profit and loss, margin available, and any margin locked in open positions.

Most trading platforms are either Web-based, in Java, or a client-based program you can install on your computer. Which version you choose is your personal preference,

Web based software is housed on your brokers web site. You won’t have to install any software on your own computer and you’ll be able to log in from any computer that has an Internet connection.

A client-based software program or one that you download and install into your own computer will limit you to transactions only to that computer.

Usually, the "download and install" program runs faster, but most programs are operating system specific. For example, most brokers only offer their trading platform application to run on Microsoft Windows. If you are a Mac user, you won’t be able to install the application and will either have to use your dealer’s Web-based or Java-based trading platform. These two (the Web or Java-based) will run on any computer since they run through your browser.

Java-based software programs are preferred by most brokers who think they are more safe and reliable. Java-based software tends to be less vulnerable to attack from viruses and hackers during transmissions than "download and install" software.

Be sure to open a demo account or virtual accounts, which are of course accounts that offer you money to trade with, but you can’t withdraw them, they are use to test your trading capabilities hence the name virtual or demo and also test out the broker's platform before opening a real account, which will offer you the ability of withdrawing your monies after profit and at your convenience. The Forex market is a fast moving market and you will need up-to-the minute information to make informed transactions. Make sure you have a high speed Internet connection. If you don’t, you might as not even bother trading. Dial-up will absolutely not work for Forex! If you plan to trade online you will need a modern computer and high speed Internet connection. I can’t stress this enough! Any Forex broker worth his salt should offer you real-time quotes and allow you to quickly enter and exit the market. These are minimal requirements of any trading software. Upgraded software packages are usually offered at an extra monthly fee by brokers.

Most dealers now offer integrated charting and technical analysis packages with their trading platforms. These are definitely worth exploring if the charts or technical tools offered are of value to your method of trading. The level of integration with the trading platforms varies and is worth understanding carefully. Most dealers offer very small “mini-accounts” for as little as $300. Mini-accounts are a great way to get started and test your trading skills and gain experience.

Broker Policies

Before selecting an online Forex broker, you should closely examine their features and policies. These include:

• Available Currency Pairs
  you should confirm that the prospective broker offers the minimum of seven major currencies (AUD, CAD, CHF, EUR, GBP, JPY, and USD).
• Transaction Costs
  Transaction costs are calculated in pips. The lower the number of pips required per trade by the broker, the greater the profit that the trader makes. Comparing pip spreads of half dozen brokers will reveal different transaction costs. For example, the bid/ask spread for EUR/USD is usually 3 pips, but if you can find 2 pips, that’s even better.
• Margin Requirement
  The lower the margin requirement (meaning the higher the leverage), the greater the potential for higher profits and losses. Margin percentages vary from .25 and up.
  Low margin requirements are great when your trades are good, but not so great when you are wrong. Be realistic about margins and remember that they swing both ways.

· Minimum Trading Size Requirement
The size of one lot may differ from broker to broker, spanning 1,000, 10,000, and 100,000 units. These brokers usually offer a mini-lot, which is one-tenth of a lot. Some brokers even offer fractional unit sizes (called odd lots) which allow you create your own unit size.

• Rollover Charges
  Rollover charges are determined by the difference between the U.S. interest rates and the interest rates of the other country. The greater the interest rate differential between the two currencies in the currency pair, the greater the rollover charge will be. For example, if the British pound has the greater interest differential with the U.S. dollar, then the rollover charge for holding British pound positions would be the most expensive. On the other hand, if the Swiss Franc were to have the smallest interest differential to the U.S. dollar, then overnight charges for USD/CHF would be the least expensive of the currency pairs.
• Margin Account Interest Rate
  Most brokers pay interest on a trader’s margin account. The interest rates normally fluctuate with the prevailing national rates. If you decide to take an extended break from trading, the money in your margin account will be accruing interest
• Trading Hours
  Nearly all brokers align their hours of operation to coincide with the hours of operation of the global Forex market: 5:00 PM EST Sunday through 4:00 PM EST Friday.

Other Policies

Be sure to scrutinize a prospective broker’s “fine print” section to be fully aware of all the nuances that a specific broker may impose on a new trader.

Finding the right broker/dealer is a critical part of the process. It’s not easy and requires some real work on your part. Don’t pick the first one that looks good to you. Keep looking.

Summary

What to look for in an online Forex broker/dealer:

1. Low Spreads.
In Forex trading the ‘spread’ is the difference between the buy and sell price of any given currency pair. Lower spreads save you money.

2. Low minimum account openings.
For those that are new to Forex trading and for those that don’t have thousands of dollars in risk capital to trade, being able to open a mini trading account with only $300 is a great feature for new traders.

3. Instant automatic execution of your orders.
This is very important when choosing a Forex broker. You want what we call a WYSIWYG (wizeewig) broker! This means you want instant execution of your orders and the price you see and "click" is the price that you should get...What You See Is What You Get!
Don’t settle with a firm that re-quotes you when you click on a price or a firm that allows for price ‘slippage’. This is very important when trading for small profits.

4. Free charting and technical analysis
Choose a broker that gives you access to the best charting and technical analysis available to active traders. Look for a broker that provides free professional charting services and allows traders to trade directly on the charts.

5. Leverage
You don't want too much leverage. Firms offering excessively high leverage aren't looking out for the best interest of their customers. A good rule of thumb is to not use more than 100:1 leverage for Standard (100k) accounts and 200:1 for Mini (10k) accounts.

Types of Trading and Charts

By now you’ve learned some history about the Forex, how it works, what affects the prices, blah blah blah.  We know what you’re thinking…BORING!  SHOW ME HOW TO MAKE MONEY! Well, say no more my friend; here is where your journey as a forex trader begins…

This is your last chance to turn back.  Take the red pill, and we take you back to where you were and you will forget all about this.  You can go back to living your average life in your 9-5 job and work for someone else for the rest of your life.  

OR

You can take the green pill (green for money! yeah!) and learn how you can make money for yourself in the most active market in the world, simply by using a little brain power.  Just remember, your education will never stop.  Even after you graduate from our training you must constantly pursue as much knowledge as you can so that you can become a true FOREX MASTER!

Two Types of Trading

There are 2 types of analysis you can take when approaching the forex:  Fundamental analysis and Technical analysis.  There has always been a constant debate as to which analysis is better, but to tell you the truth, you need to know a little bit of both.  So let’s break each one down and then come back and put them together.

Ø Fundamental Analysis

Fundamental analysis is a way of looking at the market through economic, social and political forces that affect supply and demand.  (Yada yada yada.)  In other words, you look at whose economy is doing well, and whose economy sucks.  The idea behind this type of analysis is that whoever’s economy is doing well; their currency will also be doing well.  This is because the better a country’s economy is, the more trust other countries have in that currency.  For example, the U.S. dollar has been gaining strength because the U.S. economy is gaining strength.  As the U.S. interest rates keep increasing, the value of the dollar continues to increase.  And that is what we call fundamental analysis.  Later on in the course you will learn which specific news events drive currency prices the most.  For now, just know that the fundamental analysis of the forex is a way of analyzing a currency through the strength of that country’s economy. 

Ø Technical Analysis

Technical analysis is the study of price movement.  In one word, technical analysis=charts.  The idea is that a person can look at historical price movements, and based on the price action, can determine on some level where the price will go.  By looking at charts, you can identify trends and patterns which can help you find good trading opportunities. The most IMPORTANT thing you will ever learn in technical analysis is the trend!  Many people have a saying that goes, “The trend is your friend”.  The reason is that you are much more likely to make money when you can find a trend and trade in the same direction.  Technical analysis can help you identify these trends in its earliest stages and therefore (did I just say therefore?) provide you with very profitable trading opportunities. 

Now I know you’re thinking to yourself, “Geez, these guys are smart.  They use big words like “therefore”. Technical Analysis is probably the most common and successful method of making trading decisions and analyzing forex and commodities markets.

Technical analysis differs from fundamental analysis in that technical analysis is applied only to the price action of the market, ignoring fundamental factors. As fundamental data can often provide only a long-term or "delayed" forecast of exchange rate movements, technical analysis has become the primary tool with which to successfully trade shorter-term price movements, and to set stop loss and profit targets.

Technical analysis consists primarily of a variety of technical studies, each of which can be interpreted to generate buy and sell decisions or to predict market direction.

Ø Support and Resistance Levels

One use of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past.

Ø Popular Technical Analysis Tools

Moving Averages (MA): Indicators used to smooth price fluctuations and identify trends. The most basic type of moving average, the simple moving average, is the average of the past x bars ending with the current bar;

Moving Average Convergence Divergence (MACD): Indicator that utilizes moving averages to identify possible trends and an oscillator to determine when a trend is overbought or oversold;

Bollinger Bands: Bands that are placed x moving average standard deviations above and below a simple MA line;

Fibonacci Retracement Levels: Indicator used to identify potential levels of support and resistance;

Directional Movement Index (DMI): A positive line (+DI) measuring buying and a negative line (-DI) measuring selling pressure;

Relative Strength Index (RSI): Momentum oscillator that is plotted on a vertical scale from 0 to 100;

Stochastic: Momentum oscillator that measure momentum by comparing the recent close to the absolute price range (high of the range minus the low of the range) over a period of x bars;

Trend lines: Straight line on a chart that connects consecutive tops or consecutive bottoms of prices and is utilized to identify levels of support and resistance;

I can never learn this stuff.”  Never fear my friend; you too will be just as hush…smart as us.  By the way, do you feel that green pill kicking in yet?  Bark like a dog!

So you're probably wondering which type is better.

Ø So which type of analysis is better?

I’m glad you asked that question.  The answer is neither.  You need both types of analysis to become a successful trader.  Here’s an example of how focusing only on one type of analysis can turn into a disaster. 

Let’s say that you’re looking at your charts and you find a good trading opportunity.  You get all excited thinking about the money that’s going to be raining down from the sky.  You say to yourself, “Man, I’ve never seen a more perfect trading opportunity.  I love my charts.” 

You then proceed to enter your trade with a big fat smile on your face (the kind where all your teeth are showing).  But wait!  All of a sudden the trade makes a 30 pip move in the OTHER DIRECTION!  Little did you know that there was an interest rate decrease for your currency and now everyone is trading in the opposite direction? 

Your big fat smile turns into mush and you start getting angry at your charts.  You throw your computer on the ground and begin to pulverize it.  You just lost a bunch of money, and now your computer is broken.  And it’s all because you completely ignored fundamental analysis. 

Ok, so the story was a little over dramatic, but you get the point. Just remember to incorporate both types of analysis before you trade. Or else.

Summary:

• There are 2 types of analysis: Fundamental and Technical
• Fundamental analysis is the analysis of a market through the strength of its economy.  (i.e. the dollar gets stronger because the US economy is getting stronger)
• Technical analysis is the analysis of price movements.  Technical analysis = charts.
• Technical analysis also helps us identify trends which can help us find profitable trading opportunities.
• To become a successful trader, you must always incorporate both types of analysis.

When the student is ready, the teacher will appear.

- Buddhist Proverb