Why Forex?? : A World Of Opportunities :Future Business
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-The Foreign Exchange(FOREX) market is the world’s largest financial market, but it wasn’t always accessible to any interested trader. Remember, forex trading is not conducted on a regulated exchange and as a result, there are additional risks associated with forex trading. In the past, access to foreign exchange of currencies was limited to banks, hedge funds, major currency dealers and the occasional high net-worth individual. But smaller financial institutions wanted to take advantage of the many benefits forex offered over other markets, including its tremendous liquidity, 24-hour access 5.5 days of the week and the strong trending nature of currency exchange rates.
-It was this entrepreneurial vision of the smaller financial institutions and the evolution of the Internet that made forex accessible at a retail level. Day transaction over USD3billion!! Its make everyone have a chance to get a profit.
INTRODUCTION TO FOREX
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Currency Pair
-Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.
The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 120.01 means that one U.S. dollar is equal to 120.01 Japanese yen.
When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 123.01, the dollar is stronger because it will now buy more yen than before.
The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.4366, meaning that one British pound equals 1.4366 U.S. dollars.
In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.
Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.
When trading forex you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).
Major Currencies :
The U.S. Dollar-USD
The Euro-EUR
The Japanese Yen-JPY
The British Pound-GBP
The Swiss Franc-CHF
What is a pip?
-In the Forex market, prices are quoted in pips. Pip stands for "percentage in point" and is the fourth decimal point, which is 1/100th of 1%.
In EUR/USD, a 3 pip spread is quoted as 1.2500/1.2503
Among the major currencies, the only exception to that rule is the Japanese yen. In USD/JPY, the quotation is only taken out to two decimal points (i.e. to 1/100 th of yen, as opposed to 1/1000th with other major currencies).
In USD/JPY, a 3 pip spread is quoted as 114.05/114.08
Leverage & Margin
-The leverage available in forex trading is one of main attractions of this market for many traders. Leveraged trading, or trading on margin, simply means that you are not required to put up the full value of the position.
Forex provides more leverage than stocks or futures. In forex trading, the amount of leverage available can be up to 200 times the value of your account.
There are several reasons for the higher leverage that is offered in the forex market. On a daily basis, the volatility of the major currencies is less than 1%. This is much lower than an active stock, which can easily have a 5-10% move in a single day. With leverage, you can capture higher returns on a smaller market movement. More importantly, leverage allows traders to increase their buying power and utilize less capital to trade. Of course, increasing leverage increases risk.
Long(Buy) and Short(Sell)
-Now there is two different ways you can trade on the forex market, and many beginner traders are surprised to learn that you can actually make just as much money when a currencies price moves down as you can when it moves up.
Let’s start with the most logical movement, when the price moves up.Most people are very familiar with the concept of buying something at a low price and selling it when the price increases. So the concept of buying the EUR/USD at 1.2150 and selling it at 1.2160 for a 10 pip gain should seem logical. This process is called going long.
However, you can also do this in reverse! If you think you know that a currencies price is going to go down rather than up, the you can go short. This is just the opposite of the above transaction, selling it first and buying it back later in the hope that the price will go down for you to make a profit.
This can be somewhat strange for those hearing this for the first time, but the concept remains the same either way, that being, that you always want to buy something at a low price, and sell it at a higher price than you bought it at. Which order you do it in doesn’t matter, just that for a transaction to complete you must both buy and sell, as long as you sell at a higher price than you buy then you make profit.
Spread
-The difference between the stock markets and the forex market brokers, is that in the forex market, broker commissions are either very low or zero. So how do the make money?, they make it from the "spread" or the difference between the actual price and the offered price through a broker.
To the right here you can see a typical board of currency pairs and their spreads. This one is taken from our feed this morning, and you can see for example the difference between the Offer (the price you can place a sell order) and the Bid (the price you can place a buy order) is 3 pips (the spread).
What does this mean to you though?, well, let’s look at the board, if you bought the EUR/USD at 1.2158 as it is offered under the Offer column, and immediately sold it again before the price moved, you would only get 1.2155 as is shown in the Bid column. So the net result is -3 pips, or a loss to you, and a profit to the broker. Remember to always take the spread into account when placing a trade, setting targets and stop losses.
Bearish vs Bullish
-You will constantly see the term "Bears" and "Bulls" in forex books and chat rooms. So why are we talking about animals when we are supposed to be trading? These are terms that describe the general mood of the market. A "bear" market, is when the general mood of the market is down, i.e. when there are more sellers than buyers in the marketplace. A "bull market" is the opposite, when there are more buyers than sellers and the general mood of the market is up.
Forex and any other marketplace, is just a struggle between the bulls and the bears, it if you can identify who is gaining the upper hand, then you can identify the direction of the price. Easier said than done of course.Well that about covers the basics, there are so many more areas to cover of course but I hope it helps those starting out in this exciting marketplace. If I have missed something you wanted to read about please leave a comment below and I will be sure to add it to the article if I can.
Chart patterns
-There are a variety of charts that show price action. The most common are bar charts. Each bar will represent one period of time and that period can be anything from one minute to one month to several years. These charts will show distinct price patterns that develop over time.
Candlestick patterns
-Like bar charts patterns, candlestick patterns can be used to forecast the market. Because of their colored bodies, candlesticks provide greater visual detail in their chart patterns than bar charts.
Point & figure patterns
-Point and figure patterns are essentially the same patterns found in bar charts but Xs and Os are used to market changes in price direction. In addition, point and figure charts make no use of time scales to indicate the particular day associated with certain price action.
Trend indicators
-Trend is a term used to describe the persistence of price movement in one direction over time. Trends move in three directions: up, down and sideways. Trend indicators smooth variable price data to create a composite of market direction.
(Example: Moving Averages, Trend lines)
Strength indicators
-Market strength describes the intensity of market opinion with reference to a price by examining the market positions taken by various market participants. Volume or open interest are the basic ingredients of this indicator. Their signals are coincident or leading the market. (Example: Volume)
Volatility indicators
-Volatility is a general term used to describe the magnitude, or size, of day-to-day price fluctuations independent of their direction. Generally, changes in volatility tend to lead changes in prices.
(Example: Bollinger Bands)
Cycle indicators
-A cycle is a term to indicate repeating patterns of market movement, specific to recurrent events, such as seasons, elections, etc. Many markets have a tendency to move in cyclical patterns. Cycle indicators determine the timing of a particular market patterns.
(Example: Elliott Wave)
Support/resistance indicators
-Support and resistance describes the price levels where markets repeatedly rise or fall and then reverse. This phenomenon is attributed to basic supply and demand.
(Example: Trend Lines)
Momentum indicators
-Momentum is a general term used to describe the speed at which prices move over a given time period. Momentum indicators determine the strength or weakness of a trend as it progresses over time. Momentum is highest at the beginning of a trend and lowest at trend turning points. Any divergence of directions in price and momentum is a warning of weakness; if price extremes occur with weak momentum, it signals an end of movement in that direction. If momentum is trending strongly and prices are flat, it signals a potential change in price direction.
(Example: Stochastic, MACD, RSI)
Technical analysis
- Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action. Technical analysis is concerned with what has actually happened in the market, rather than what should happen and takes into account the price of instruments and the volume of trading, and creates charts from that data to use as the primary tool. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments simultaneously.
Fundamental analysis
-Fundamental analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument. In practice, many market players use technical analysis in conjunction with fundamental analysis to determine their trading strategy. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments, whereas the fundamental analyst needs to know a particular market intimately. Fundamental analysis focuses on what ought to happen in a market. Factors involved in price analysis: Supply and demand, seasonal cycles, weather and government policy.
The fundamentalist studies the cause of market movement, while the technician studies the effect. Fundamental analysis is a macro or strategic assessment of where a currency should be trading based on any criteria but the movement of the currency's price itself. These criteria often include the economic condition of the country that the currency represents, monetary policy, and other "fundamental" elements.
Many profitable trades are made moments prior to or shortly after major economic announcements.
The examples of economic events :
Retail Sales
Balance of Trade
Business Inventories and Sales
Construction Spending
Consumer confidence
Consumer Price Index
Consumption Spending.
Durable goods orders.
Employment Cost Index
Unemployment Rate
Existing Home Sales
Factory Orders
Gross Domestic Product (GDP)
Gross National Product (GNP).
Industrial Production
Institute for Supply Management (ISM)
Producer Price Index (PPI)
Purchasing Managers’ Index (PMI)
Jobless Claims
Machine orders
Monetary Base
CALCULATING PROFIT AND LOSS!
-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.
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1 comment:
That is a great post. FOREX explained in such a lucid way. Although concepts of FOREX are tough to comprehend but explained in a way that it was fun reading.
But again, as you said FOREX trading is easier said then done.
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