FOREX Trading Glossary, Terms and Terminology

Here are some of the most common terms used in FOREX trading.
Ask Price – Sometimes called the Offer Price, this is the market price for traders to buy
currencies. Ask Prices are shown on the right side of a quote – e.g. EUR/USD 1.1965 /
68 – means that one euro can be bought for 1.1968 UD dollars.
Bar Chart – A type of chart used in Technical Analysis. Each time division on the chart is
displayed as a vertical bar which show the following information – the top of the bar is the
high price, the bottom of the bar is the low price, the horizontal line on the left of the bar
shows the opening price and the horizontal line on the right of bar shows the closing
price.
Base Currency – is the first currency in a currency pair. A quote shows how much the
base currency is worth in the quote (second) currency. For example, in the quote - USD/
JPY 112.13 – US dollars are the base currency, with 1 US dollar being worth 112.13 Japanese
yen.
Bid Price – is the price a trader can sell currencies. The Bid Price is shown on the left
side of a quote - e.g. EUR/USD 1.1965 / 68 – means that one euro can be sold for 1.1965
UD dollars.
Bid/Ask Spread – is the difference between the bid price and the ask price in any
currency quotation. The spread represents the broker's fee, and varies from broker to
broker.
Broker – the intermediary between buyer and seller. Most FOREX brokers are associated
with large financial institutions and earn money by setting a spread between bid and ask
prices.
Candlestick Chart - A type of chart used in Technical Analysis. Each time division on the
chart is displayed as a candlestick – a red or green vertical bar with extensions above
and below the candlestick body. The top of the extension shows the highest price for the
chart division and the bottom of the extension shows the lowest price. Red candlesticks
indicate a lower closing price than opening price, and green candlesticks indicate the
price is rising.
Cross Currency – A currency pair that does not include US dollars – e.g. EUR/GBP.
Currency Pair – Two currencies involved in a FOREX transaction – e.g. EUR/USD.
Economic Indicator – A statistical report issued by governments or academic institutions
indicating economic conditions within a country.
First In First Out (FIFO) – refers to the order open orders are liquidated. The first orders
to be liquidated are the first that were opened.
Foreign Exchange (FOREX, FX) – Simultaneously buying one currency and selling
another.
Fundamental Analysis – Analysis of political and economic conditions that can affect
currency prices.
Leverage or Margin – The ratio of the value of a transaction to the required deposit. A
common margin for FOREX trading is 100:1 – you can trade currency worth 100 times the
amount of your deposit.
Limit Order – An order to buy or sell when the price reaches a specified level.
Lot – The size of a FOREX transaction. Standard lots are worth about 100,000 US dollars.
Major Currency – The euro, German mark, Swiss franc, British pound, and the Japanese
yen are the major currencies.
Minor Currency – The Canadian dollar, the Australian dollar, and the New Zealand dollar
are the minor currencies.
One Cancels the Other (OCO) – Two orders placed simultaneously with instructions to
cancel the second order on execution of the first.
Open Position – An active trade that has not been closed.
Pips or Points – The smallest unit a currency can be traded in.
Quote Currency – The second currency in a currency pair. In the currency pair
USD/EUR the euro is the quote currency.
Rollover – Extending the settlement time of spot deals to the current delivery date. The
cost of rollover is calculated using swap points based on interest rate differentials.
Technical Analysis – Analysis of historical market data to predict future movements in the
market.
Tick – The minimum change in price.
Transaction Cost – The cost of a FOREX transaction – typically the spread between bid
and ask prices.
Volatility – A statistical measure indicating the tendency of sharp price movements within
a period of time.

Risks of FOREX Trading - Risk Management

Despite the claims you may see on some FOREX web sites, FOREX is not risk-free.
You are trading with substantial sums of money and there is always a possibility that
trades will go against you. There are several trading tools, however, that can minimize
your risk, and with caution, and above all education, the FOREX trader can learn how to
trade profitably and while minimizing losses.
Scams
FOREX scams were fairly common a few years ago. The industry has cleaned up
considerably since then, but you still need to exercise caution when signing up with a
FOREX broker. Do some background checking – reputable FOREX brokers will be
associated with large financial institutions like banks or insurance companies and they will
be registered with the proper government agencies. In the United States brokers should
be registered with the Commodities Futures Trading Commission (CFTC) or a member of
the National Futures Association (NFA). You can also check with your local Consumer
Protection Bureau and the Better Business Bureau.
Risks
Assuming you are dealing with a reputable broker, there are still risks to FOREX trading.
Transactions are subject to unexpected rate changes, volatile markets and political
events.
Exchange Rate Risk – refers to the fluctuations in currency prices over a trading period.
Prices can fall rapidly resulting in substantial losses unless stop loss orders are used
when trading FOREX. Stop loss orders specify that the open position should be closed if
currency prices pass a predetermined level. Stop loss orders can be used in conjunction
with limit orders to automate FOREX trading – limit orders specify an open position should
be closed at a specified profit target.
Interest Rate Risk – can result from discrepancies between the interest rates in the two
countries represented by the currency pair in a FOREX quote. This discrepancy can
result in variations from the expected profit or loss of a particular FOREX transaction.
Credit Risk – is the possibility that one party in a FOREX transaction may not honor their
debt when the deal is closed. This may happen when a bank or financial institution
declares insolvency. Credit risk is minimized by dealing on regulated exchanges which
require members to be monitored for credit worthiness.
Country Risk – is associated with governments that may become involved in foreign
exchange markets by limiting the flow of currency. There is more country risk associated
with 'exotic' currencies than with major currencies that allow the free trading of their
currency.
Limiting Risk
FOREX trading can be risky, but there are ways to limit risk and financial exposure.
Every FOREX trader should have a trading strategy – knowing when to enter and exit the
market and what kind of movements to expect. Developing strategies requires education
- the key to limiting FOREX risk. At all times follow the basic rule: Do not place money in
the FOREX that you cannot afford to lose.
Every FOREX trader needs to know at least the basics about technical analysis and how
to read financial charts. He should study chart movements and indicators and
understand how charts are interpreted. There is a vast amount of information on FOREX
trading available both on the Internet and in print. If you want to be successful at
FOREX, know what you are doing.
Even the most knowledgeable traders, however, can't predict with absolute certainty how
the market will behave. For this reason, every FOREX transaction should take advantage
of available tools designed to minimize loss. Stop-loss orders are the most common
ways of minimizing risk when placing an entry order. A stop-loss order contains
instructions to exit your position if the currency price reaches a certain point. If you take
a long position (expecting the price to rise) you would place a stop loss order below
current market price. If you take a short position (expecting the price to fall) you would
place a stop loss order above current market price.
As an example, if you take a short position on USD/CDN it means you expect the US
dollar to fall against the Canadian dollar. The quote is USD/CDN 1.2138/43 - you can sell
US$1 for 1.2138 CDN dollars or sell 1.2143 CDN dollars for US$1.
You place an order like this:
Sell USD: 1 standard lot USD/CDN @ 1.2138 = $121,380 CDN
Pip Value: 1 pip = $10
Stop-Loss: 1.2148
Margin: $1,000 (1%)
You are selling US$100,000 and buying CDN$121,380. Your stop loss order will be
executed if the dollar goes above 1.2148, in which case you will lose $100.
However, USD/CDN falls to 1.2118/23. You can now sell $1 US for 1.2118 CDN or sell 1.2123
CDN for $1 US.
Because you entered the transaction by selling US dollars (buying short), you must now
buy back US dollars and sell CDN dollars to realize your profit.
You buy back US$100,000 at the current USD/CDN rate of 1.2123 for a cost of 121,223 CDN.
Since you originally sold them for CDN$121,380 you made a profit of $157 Canadian dollars
or US$129.51 (157 divided by the current exchange rate of 1.2123).

Learn FOREX - Training, Education and Trading Courses

Knowledge is the key to successful FOREX trading. The knowledgeable trader has
greater awareness of how the market moves and more chances of making profitable
transactions. Without knowledge you are shooting in the dark. You may succeed on a
few deals but the odds are that you are going to lose in the long run.
Thankfully there's lots of information available about the FOREX and how to trade. You
can find hundreds of web sites with useful advice and there are just as many books about
all aspects of FOREX trading. If self-learning is not your style, there are training courses
available that guide you step-by-step through the intricacies of Foreign Exchange.
If you have the time and the inclination, you can find all the facts you need on the Internet
or in your public library. The problem with Internet sources, however, is that the
information is generally unstructured. You may find bits and pieces of useful data, but
finding a source that presents it in a step-by-step fashion is more difficult.
Study courses, on the other hand, present their material in a logical and structured
manner that aids in understanding FOREX trading. The investment involved in a FOREX
course may well worth the time saved in seeking out similar information on your own.
There are courses available for both beginners and intermediate traders.
The cost of a FOREX course varies from free to $1000 or more. As with most things, you
get what you pay for. Free Internet courses may give you the basics needed to begin
trading, but usually omit the in-depth training needed to analyze charts and plot trading
strategies.
There are two basic types of study courses. You can attend a class with a group of
people, or you can sign up for an online course that is taken over the Internet. Classes
are available in most major cities. You can attend a class to learn the basics or sign up
for more advanced courses if you are an experienced trader. The advantage of these
courses is that you get personalized attention – any questions you have can be answered
directly by the instructor. The disadvantage is that you must follow the class schedule – if
you miss one class it can't be made up at a later time.
Seminars are also a possibility for learning about FOREX. Seminars are usually aimed at
experienced traders, but if you know the basics you could benefit from a 1 or 2 day
seminar. These are available in most major cities, and you could expect to see seminars
offered every couple of months. They are usually conducted by well-known FOREX
professionals who can offer new insights and strategies in FOREX trading.
If you prefer to study at your own pace you should investigate online FOREX courses.
You can log on to a website any time of the day or night and go through the course
material as you see fit. If you have any questions, you can usually communicate with an
instructor by email. Responses could take anywhere from minutes to days.
A variation of online courses is CDROM courses. These are done on your computer, but
you order the study materials from a company and they arrive by mail. There may be
little after market service offered with CDROM learning materials. If you have questions
you may not be able to contact an instructor for answers. However, each company has
their own policy about this, so find out what their service provides before putting down
your money.
Other types of home training include video lessons. These can be watched in the comfort
of your living room and are similar to attending a FOREX training seminar.
The best kind of FOREX training can be with an individual trainer or mentor. This would
be someone with many years of FOREX experience who can offer insights and strategies
learned through the course of conducting thousands of transactions. FOREX mentors
usually charge a lot of money – thousands of dollars is not unheard of. Whether the cost
is worth it is up to the individual to decide. Working with a master trader can provide
valuable insight into the psychology of FOREX trading.

FOREX versus Stocks

Stocks have been a popular investment for hundreds of years. Companies issue stocks
to raise capital for expansion and new projects, and each share of the stock represents a
partial ownership in the company.
When the company does well and makes a profit, the value of the stocks rise. Stock
owners can sell their shares for a profit or hold on to the stock for even more gain in the
future. Sometimes companies will issue dividends – part of the profits that are distributed
to share holders.
Stocks are traded on stock exchanges. Most stocks are bought and sold through brokers
who charge a commission or fee for this service. American stock exchanges include the
New York Stock Exchange (NYSE) and the National Association of Securities Dealers
Automated Quotation System (NASDAQ). Most stocks are only listed on one exchange,
although large companies may have listings on several exchanges.
Stocks were traditionally seen as long term investments. So called 'blue chip' stocks -
those having proven value over many years - may form the backbone of an investment
portfolio. Short term trading is a relatively new phenomenon made possible with the
advent of Internet trading. Day traders attempt to take advantage of large daily
fluctuations in the market by buying and selling many times in one trading period. It is
relatively risky and any profits realized are reduced by broker commissions charged on
each transaction.
Stocks may sometimes be bought on margin, meaning that the investor borrows money
to buy the stocks. Margin rates are usually around 50% - the investor can borrow as much
as half the value of the stock.
FOREX
The Foreign Exchange Market (FOREX) is quite different from the stock exchange. In
contrast to the stock exchange, the FOREX is primarily a short term market. Most traders
enter and exit deals within a 24 hour period – sometimes within a few minutes. Many
FOREX trades can be made in one day without building up a large brokerage fee
because FOREX trades are commission free. Brokers earn money by setting a spread –
the difference between asking and selling prices.
The FOREX is the largest financial market in the world. It is handles transactions worth
$1.5 trillion every day. By comparison, all the American stock exchanges combined
handle daily transactions worth about $100 billion. The huge volume of FOREX means
that it is one of the most liquid markets in the world. There is always a buyer and seller
for any type of currency because the world economy relies on the movement of goods
from country to country. The stock market is less liquid because participants may choose
to hold their investments or move on to other markets.
The FOREX is not located in any one location. Trading markets are located world-wide
and because of difference in time-zones trades can be made 24 hours a day, 5 days a
week. Trading begins in Sydney, Australia on Monday morning (Sunday afternoon New
York time) and continues non-stop until Friday afternoon New York time.
Stock exchanges have more limited trading hours. While it is possible to trade on
exchanges world-wide, each exchange is independent and operates for just 7 hours a
day. There is no way to buy or sell a certain stock that is only traded on one stock
exchange when that exchange is closed.
Other advantages of FOREX? It is more predictable than stocks. It follows well
established trends; it allows high leverage – typically 100:1 instead of 2:1 on the stock
market; and it doesn't require a large investment – mini accounts as small as $250 can get
you started in FOREX.

FOREX versus Futures

The origins of today's futures market lies in the agriculture markets of the 19th century. At
that time, farmers began selling contracts to deliver agricultural products at a later date.
This was done to anticipate market needs and stabilize supply and demand during off
seasons.
The current futures market includes much more than agricultural products. It is a
worldwide market for all sorts of commodities including manufactured goods, agricultural
products, and financial instruments such as currencies and treasury bonds. A futures
contract states what price will be paid for a product at a specified delivery date.
When the futures market is played by speculators, the actual goods are not important and
there is no expectation of delivery. Rather, it is the futures contract itself that is traded as
the value of that contract changes daily according the market value of the commodity.
In every futures contract there is a buyer and a seller. The seller takes the short position
and the buyer takes the long position. The futures contract specifies a buying price, a
quantity and a delivery date. For example: A farmer agrees to deliver 1000 bushels of
wheat to a baker at a price of $5.00 a bushel. If the daily price of wheat futures falls to
$4.00 a bushel, the farmer's account is credited with $1000 ($5.00 - $4.00 X 1000 bushels)
and the baker's account is debited by the same amount. Futures accounts are settled
every day.
At the end of the contract period, the contract is settled. If the price of wheat futures is
still at $4.00 the farmer will have made $1000 on the futures contract and the baker will
have lost the same amount. However, the baker now buys wheat on the open market at
$4.00 a bushel - $1000 less than the original contract, so the amount he lost on the
futures contract is made up by the cheaper cost of wheat. Similarly, the farmer must sell
his wheat on the open market for $4.00 a bushel, less than what he anticipated when
entering the futures contract, but the profit generated by the futures contract makes up
the difference.
The baker, however, is still in effect buying the wheat at $5.00 a bushel, and if he hadn't
entered into a futures contract he would have been able to buy wheat at $4.00 a bushel.
He protected himself against rising prices but he loses if the market price drops.
Speculators hope to profit by the daily fluctuations in the futures market by buying long
(from the buyer) if they expect prices to rise or by buying short (from the seller) if they
expect prices to fall.
FOREX
The foreign exchange market (FOREX) has several advantages over the futures market.
FOREX is a more liquid market – as the largest financial market in the world it dwarfs the
futures market in daily exchanges. This means that stop orders can be executed more
easily and with less slippage in the FOREX.
24 The FOREX is open hours a day, 5 days a week. Most futures exchanges are open 7
hours a day. This makes FOREX more liquid and allows FOREX traders to take
advantage of trading opportunities as they arise rather than waiting for the market to
open.
FOREX transactions are commission-free. Brokers earn money by setting a spread – the
difference between what a currency can be bought at and what it can be sold at. In
contrast, traders must pay a commission or brokerage fee for each futures transaction
they enter into.
Because of the high volume of trading FOREX transactions are almost instantly executed.
This minimizes slippage and increases price certainty. Brokers in the futures market
often quote prices reflecting the last trade – not necessarily the price of your transaction.
The FOREX is less risky than the futures market because of built-in safeguards in the
trading system. Debits in futures are always a possiblility because of market gap and
slippage.

Introduction to Technical Analysis - 2

In this second article about FOREX technical analysis we will look at the various kinds of
charts and provide basic guidelines for reading charts.
Price Charts
Price Charts show information about FOREX prices at specified intervals of time.
Intervals can be from one minute up to several years and everything in between. Prices
can be plotted with simple line graphs or the price variation for each interval can be
shown by a bar or candlestick pattern.
Line charts are suitable for getting a broad overview of price movements. They show the
close price at the chosen intervals. Line charts are very clean to read and make it easy
to spot patterns, but they lack the detail of bar and candlestick charts.
Bar charts offer much more information than line charts. The length of each bar indicates
the price spread for the given period – a long bar indicates a large difference between
high and low prices. The left tab on the bar shows the opening price and the right tab
show the closing price. You can see at a glance whether the price fell or rose for that
particular period, and what the price variation was. Bar charts printed on paper
(especially for short periods) can be difficult to read, but software charts usually have a
zoom function that makes it easier to read closely spaced bars.
Candlestick charts were invented by the Japanese for analyzing rice contracts. They are
similar to bar charts in that they indicate open, close, high and low prices for a given
period. They are easier to read than bar charts, however, because of their color coding.
Green candlesticks show rising prices and red candlesticks show falling prices.
Candlestick shapes - when viewed in relationship to neighbouring candlesticks - provide
indicators of market movement that can aid in chart analysis. Various shapes of
candlesticks are formed according to price spread and the proximity of opening to closing
prices. Candlestick patterns have been given fanciful names like 'morning star' and 'dark
cloud cover' and once the shapes have been learned, they are easy to pick out on a chart
for identifying trends in the market.
Price charts are usually supplemented with technical indicators. There are many
Technical Indicators broadly divided into different categories. Trend indicators, strength
indicators, volatility indicators, and cycle indicators are just some of the analytical tools
used to anticipate movement and market volume.
Some of the most common technical indicators used in FOREX are:
Average Directional Movement Index (ADX) – is used to determine if a market is entering
a trend (either downward or upward) and how strong the trend is. Readings over 25
indicate a trend with higher values indicating stronger trends.
Moving Average Convergence/Divergence (MACD) – shows the momentum of the market
and the relationship between two moving averages. When the MACD line crosses the
signal line it indicates a strong market.
Stochastic Oscillator – indicates the strength or weakness of a market by comparing a
closing price to a price range over a period of time. When the stochastic is above 80 it
indicates the currency is overbought while a stochastic below 20 indicates the currency is
oversold.
Relative Strength Indicator (RSI) – is a scale of 100 indicating the highest and lowest
prices over a given period. When the price rises above 70 it is considered overbought
and when the price falls below 30 it is considered oversold.
Moving Average – is the average price for a given time interval when compared with other
prices during similar time periods. For example, the closing prices over a 3 day period
would have a moving average of the total of the 3 closing prices divided by 3.
Bollinger Bands – are bands which contain the majority of a currency's price. The bands
are three lines – the upper and lower lines following the price movement and the middle
line showing the average price. During times of high volatility the distance between the
upper and lower bands widen. If a bar or candlestick touches one of the bands it
indicates overbought or oversold conditions.

Introduction to Technical Analysis - 1

FOREX analysis is divided into two types: Fundamental and Technical. Fundamental
analysis attempts to predict movements in currencies by examining current political and
economic events. Technical analysis uses historical economic data to predict movements
in the FOREX. These two articles will examine the principles of technical analysis and
the tools involved.
Basic Principles
Technical analysis is based on three assumptions:
1 – Price movements are a result of all market forces combined. Things that can affect
currency prices include political events, economic conditions, supply and demand,
seasonal variations and weather conditions. The technical analyst, however, is not
concerned with the reasons for market movement, but rather, the movements
themselves.
2 – Currency prices follow trends. Many market patterns have been recognized as having
predictable consequences.
3 – Price movements follow historical trends. FOREX data has been collected for over
100 years and patterns have emerged over time. These patterns are based on human
psychology and the way people react to certain sets of circumstances.
Is Technical Analysis Necessary?
Most FOREX day traders rely heavily on technical analysis and may use fundamental
analysis to support their trading strategy. A major advantage of technical over
fundamental analysis is that it can be applied to many different markets and currencies at
the same time. Fundamental analysis requires in-depth knowledge of the political and
economic conditions of a certain country; therefore it is less likely that any one trader can
do proper fundamental analyses on more than a few countries.
The beginner trader may be put off by the seeming complexity of technical analysis and
wonder if it is necessary for FOREX trading. As with any investment, FOREX trading
requires a strategy. Although any strategy is possible, technical analysis is a proven
method for predicting movements in the FOREX. Does that mean it's a sure thing?
Nothing is 100% certain, and currency prices are affected by a variety of forces. This is
why many traders use a combination of technical and fundamental analysis to plot their
trading strategies.
Availability
Every FOREX online broker should provide access to a wide variety of charts for
technical analysis. Some charting software is available free of charge while in-depth
professional charts may carry a monthly fee. Charts can be viewed by various time
scales and provide detailed information about price movements as well analytical
overlays. Charts can be zoomed in to the tick level or zoomed out to see the broad
picture over a period of months or years. Charts are updated in real time.
FOREX charts may be available on your broker's web site or may be included as part of
their trading software.
Before beginning in FOREX trading it is a good idea to become accustomed to market
behaviour by following charts for a period of time and studying their movements and
learning about trends. Many brokers provide practice accounts that can be used by
beginners to place 'paper' bids – no real money is exchanged. These practice accounts
familiarize the beginning trader with FOREX charts and market movement while at the
same time allowing him to become acquainted with the trading software a particular
broker uses.

Introduction to Fundamental Analysis

FOREX traders almost always rely on analysis to make plan their trading strategies.
There are two basic types of FOREX analysis – technical and fundamental. This article
will look at fundamental analysis and how it used in FOREX trading.
Fundamental analysis refers to political and economic conditions that may affect currency
prices. FOREX traders using fundamental analysis rely on news reports to gather
information about unemployment rates, economic policies, inflation, and growth rates.
Fundamental analysis is often used to get an overview of currency movements and to
provide a broad picture of economic conditions affecting a specific currency. Most traders
rely on technical analysis for plotting entry and exit points into the market and supplement
their findings with fundamental analysis.
Currency prices on the FOREX are affected by the forces of supply and demand, which in
turn are affected by economic conditions. The two most important economic factors
affecting supply and demand are interest rates and the strength of the economy. The
strength of the economy is affected by the Gross Domestic Product (GDP), foreign
investment and trade balance.
Indicators
Various indicators are released by government and academic sources. They are reliable
measures of economic health and are followed by all sectors of the investment market.
Indicators are usually released on a monthly basis but some are released weekly.
Two of the most important fundamental indicators are interest rates and international
trade. Other indicators include the Consumer Price Index (CPI), Durable Goods Orders,
Producer Price Index (PPI), Purchasing Manager's Index (PMI), and retail sales.
Interest Rates - can have either a strengthening or weakening effect on a particular
currency. On the one hand, high interest rates attract foreign investment which will
strengthen the local currency. On the other hand, stock market investors often react to
interest rate increases by selling off their holdings in the belief that higher borrowing costs
will adversely affect many companies. Stock investors may sell off their holdings causing
a downturn in the stock market and the national economy.
Determining which of these two effects will predominate depends on many complex
factors, but there is usually a consensus amongst economic observers of how particular
interest rate changes will affect the economy and the price of a currency.
International Trade – Trade balance which shows a deficit (more imports than exports) is
usually an unfavourable indicator. Deficit trade balances means that money is flowing out
of the country to purchase foreign-made goods and this may have a devaluing effect on
the currency. Usually, however, market expectations dictate whether a deficit trade
balance is unfavourable or not. If a county habitually operates with a deficit trade balance
this has already been factored into the price of its currency. Trade deficits will only affect
currency prices when they are more than market expectations.
Other indicators include the CPI – a measurement of the cost of living, and the PPI – a
measurement of the cost of producing goods. The GDP measures the value of all goods
and services within a country, while the M2 Money Supply measures the total amount of
all currency.
There are 28 major indicators used in the United States. Indicators have strong effects on
financial markets so FOREX traders should be aware of them when preparing strategies.
Up-to-date information is available on many websites and many FOREX brokers supply
this information as part of their trading service.

FOREX Tools and Trading Systems

There are many tools available to the FOREX trader for analyzing the market as well as
for buying and selling currencies. Software tools are a necessary part of FOREX
because of its volume and volatility. Software can be used to automate some of the
trading procedures and safeguard against losses.
In order to make rational, successful trades, the FOREX trader needs information – lots of
information. Current exchange rates are the tip of the iceberg – the trader needs
historical data as well as current information about political and economic conditions that
could affect currency prices. All this information is provided by many FOREX brokers on
their web sites.
Successful FOREX trading relies on making accurate assessments of current political and
economic conditions. Being able to predict whether a currency will fall or rise against
another currency allows the FOREX trader to profit from currency movements.
There are two basic trading methods for buying and selling currencies. Reactive trading
means the trader responds to changes in the political or economic climate. Speculative
trading means the trader makes buying decisions based on predictions on how the
market will respond to current events. While most FOREX trading is speculative, both
types of trade require up-to-the-minute information and an analysis of current and
historical conditions.
Traders rely on both fundamental and technical analyses. Fundamental analysis is based
on news information about political conditions, economic policies, trade patterns, interest
rates and unemployment rates. Technical analysis relies on historical charting to identify
trends and patterns over time. Information needed for both types of analyses is available
in real time on the Internet. Most online brokers offer live news feeds and streaming
rates for observing minute by minute changes in the market.
All this information can help you decide which currencies to buy. More tools are available
to help you minimize your risk and maximize your profits.
The Risk Probability Calculator (RPC) can be used to identify trades that have more
potential gain than potential loss. The RPC can also help you target exit points to end
the trade.
Pivot Points can be used to predict movements of currency prices. They are calculated
as an average of the currencies high, low and closing prices. Pivot Point Calculators tell
you whether prices fall in the normal trading range or extreme trading ranges.
Pip value calculators are used to tell you the value of each pip (smallest currency unit)
according to various sized lots. Pip calculators can tell you the actual profit or loss that
will result from movements in the FOREX.
Once a trader has decided which currency pair to trade, he logs on to his online account
provided by his broker. The desired currency pair is entered and the current exchange
rate appears on the screen. The amount of the trade is entered (how much currency you
wish to buy). Some brokers may give you the option of specifying the amount you wish to
risk. This automatically enters a 'stop loss rate' into your order.
After the details of the trade are entered, you will be taken to a confirmation screen where
you can accept the current price on screen. You may be given the option of 'freezing' the
quoted price, meaning the price of your transaction is exactly what you see on screen
without any slippage. Accept the rate and your deal is running.
Just as you can enter a 'stop loss rate' to automatically sell the currency if it falls below a
certain rate, you can enter a 'take profit rate' to automatically sell the currency when it
reaches a certain level. If you don't enter a 'take profit rate' you need to monitor the
movement of the currency to decide when to close the deal and take either your profits or
your losses.

FOREX Trading Strategies

To be a successful FOREX trader you need a trading strategy. There is no one set
strategy that is good for all traders; rather, each trader needs to develop his or her
individual approach to the FOREX. Some traders rely solely on technical analysis while
others prefer fundamental analysis, but many successful FOREX traders use a
combination of both to get a broad overview of the market and for plotting entry and exit
points.
Technical analysis relies on one key concept: Prices move by trends. The common
saying in FOREX is 'The trend is your friend.' Market movements have identifiable
patterns that have been studied over many years and a thorough understanding of these
trends and how they can be read forms the basis of a good trading strategy.
There are many analytical tools available to understand market movements. The
beginner FOREX trader is well advised to study each one separately for getting a working
knowledge of their concepts and application. Once one has been understood, keep on
using it while studying others. Each tool tends to reinforce the others.
Support and resistance levels are used in many FOREX trading strategies. 'Support'
refers to the price level that is repeatedly seen as the bottom – when the price reaches
this level it tends to rise. Resistance levels are upper prices that the currency rarely
trades beyond. Support and resistance levels contain price movements for a period of
time.
When currency prices break through support or resistance levels, the prices are expected
to continue in that direction. For example, if the price rises above the previous resistance
level, it is seen as bullish – the price should continue to rise.
To find support and resistance levels, price charts need to be analyzed for unbroken
support and resistance levels. Charts can be analyzed in any time frame; however longer
time frames establish more important support/resistance levels. Traders can use
support/resistance levels to determine when to enter or exit a transaction.
Moving averages are another common tool in FOREX trading strategies. The simple
moving average (SMA) shows the average price in a given period of time over a specified
period of time. Moving averages serve to eliminate short term price fluctuations giving a
clearer picture of price movements. FOREX traders can plot a SMA to determine when
prices have a tendency to rise or fall. If prices cross above the SMA they have a
tendency to keep on rising. Conversely, prices below the SMA have a tendency to
continue their downward motion.
These are two examples of trading strategies that can be used individually or in
combination. In practice, the FOREX trader should have a repertoire of trading tools to
examine market conditions and to support the findings of one study or another. If several
indicators show that the market is moving in a particular direction the trader can act with
more assurance than when relying on a single indicator.
Similarly, fundamental analysis can be used to reinforce technical findings, or vice versa.
Ideally, the FOREX trader will take several indicators into account when plotting a trading
strategy.
Every trading strategy should provide clear guidelines about when to enter a trade, what
to expect in terms of market movement, when to exit a trade, and how much loss can be
accepted in case the deal moves against the trader. Following these simple guidelines
and learning about technical analysis can help you become a successful FOREX trader.

FOREX Trading Systems and Software

Almost every online FOREX broker has a software package for their clients to make
transactions and get information about market prices. Due to the relative maturity of
online trading there is a consensus among FOREX brokers about what clients need in
terms of software tools. There are two main classes of FOREX software – web based
and client based.
All FOREX software needs to provide up-to-the-second market information. The fast
moving pace of the FOREX demands real-time data delivery for making decisions about
when to enter and exit the market. FOREX dealers claim their software performs well
with a minimum of delay, but in fact there can be a number of factors that could delay
data transmission.
Internet connection speed and distance from the broker's servers are the two main factors
that can slow down data transmission. FOREX traders should have a reasonably modern
computer and a high speed Internet connection to take full advantage of the FOREX
software offered by their broker. It may also pay to choose a broker in the same area as
you live. Traders in Bangkok who deal with brokers in Ohio may experience delays –
especially during volatile market conditions.
Web Based or Client Based?
Web based software is on the broker's website – you don't have to install any software on
your computer. Client based software requires you to download and install the software
package used by your broker. Which is better? More and more brokers are offering web
based client software for reasons of convenience, safety and reliability. Web based
software allows you to log on to your account from any computer – you can make trades
from any location that has an Internet connection. Client based software, on the other
hand, restricts you to making trades from just one computer.
Besides the convenience, web based software offers greater security. Data is secured
with high-strength encryption making it impossible for outside parties to access during
transmission. Client based software is also secured during transmission but there are
more possibilities for data loss from the trader's computer. Viruses and hackers may be
able to access valuable financial data stored in a home or office computer.
Features
FOREX software needs to access real-time quotes and offer a means to enter and exit
the market. Even the most basic packages offer these functions. Current quotes can be
seen for most currency pairs and the software allows you to buy or sell at market prices
or enter and exit the market using stops or limits. Ideally, trading software should have
integrated charting functions with a variety of viewing functions.
Basic software packages should be offered free of charge, but many brokers also have
more advanced packages available for a monthly fee. Some of the features you could
expect to see in advanced software include the ability to trade directly from the chart and
full analytical functions.
Technology
The backbone of FOREX software is a series of data servers that allow you to connect to
your broker's web site and make transactions. Servers operated by the FOREX broker
need to be reliable and secure for maintaining data integrity and assuring accurate
transaction processing. Servers are subject to power outages and natural disasters, so to
ensure maximum uptime, the broker should operate at least two sets of servers in
separate locations. Brokers should also offer regular data backups to guarantee the
integrity of their customer's financial data in case of server failure.

FOREX Signals

One of the disadvantages of FOREX trading is the time investment needed to monitor the
markets for advantageous entry and exit points. It's possible to sit in front of a computer
monitor for hours watching the markets.
Of course, you can use automated orders such as limits and stops. These allow you to
walk away from your computer with the knowledge that your losses will be kept to a
minimum, but by doing so, you may miss out on potential profits because your limit order
kicks in too soon.
If you don't have the time to watch your computer monitor and still wish to achieve as
much profit as possible, consider signing up for a FOREX signal service. These services
monitor and analyze the market for you and send their findings directly to your computer
desktop, email, or SMS on your cell phone or pager.
Companies that offer FOREX signals do so on a paid basis, so you have to sign up and
pay a monthly or yearly fee. Some brokers may offer this service as an extra which
integrates into their trading software. You can receive signals as a popup on your screen
or by any of the other methods described above.
There are usually a limited number of currency pairs that are available for FOREX
signals. Most services offer signals on EUR/USD, USD/JPY, GBP/USD, USD/CHF, but
specialized services may offer other currency pairs.
FOREX signals are primarily based on technical analysis of market conditions. Most
companies use a combination of indicators to identify main trends and entry and exit
points. The results are sent to subscribers who have the option of acting on them or
passing. Some services will even execute the trade for you.
Using a variety of technical studies, various types of signals can be derived from currency
charts. The SMA (Simple Moving Average) indicates buy signals when currency prices
rise above the average line. Sell signals occur when the price falls below the moving
average line.
MACD (Moving Average Convergence Divergence) studies have a signal line that is used
to generate a buy signal (above the line) or a sell signal (below the line).
Volume indicators are used to determine market interest. High volume (especially near
the bottom of the market) can indicate the start of a new trend while low volume indicates
investor uncertainty.
Bollinger Bands indicate potential changes in the market. Sharp price changes tend to
occur when the bands tighten while prices that touch one band tend to go all the way to
the other band.
Other indicators like volatility and momentum can be used to reinforce signals provided
by other sources. Taken together they form a relatively reliable source of information
about how the market is behaving.
Are signals a sure thing? Of course not, otherwise we would all be millionaires. Signals
can give you good advice about which currencies to trade, but no signal service will
guarantee their information is 100% accurate. Reputable services will show you their track
record, however, and let you see for yourself how they have done in the past.
FOREX signals cost anywhere from $50 to $200 a month. It's up to the individual trader
to decide if the cost is worth it. Don't think that signals can take the place of trader
education – they are advice, and if you don't have the knowledge to analyze the advice,
you should go back to the books before using a signal service

How to Read FOREX Quotes

Currency prices are determined by a number of factors, the most important of which are
economic and political conditions in the issuing country. Political stability, inflation, and
interest rates are all factored into the price of any currency. In addition, governments can
try to control the price of their currency by either flooding the market (to lower the price) or
buying extensively (to raise the price).
Because of the immense volume of FOREX, however, it is impossible for one force to
control the market for any length of time. Market forces will prevail in the long run,
making FOREX one of the most open and fair investment opportunities available.
Each world currency is given a three letter code which is used in FOREX quotes. The
most common currencies are USD (US dollars), EUR (European euros), GBP (United
Kingdom pounds), AUD (Australian dollars), JPY (Japanese yen), CHF (Swiss francs) and
CAD (Canadian dollars).
Prices of foreign exchange are indicated by FOREX quotes in pairs of currencies. The
first currency is the 'base' and the second is the 'quote' currency. In this example:
USD/EUR = 0.8419
...the currency pair is US dollars and European euros. The base currency (USD) is
always at '1' and the quote currency shows how much it costs to buy one unit of the base
currency. In this example, 1 US dollar costs 0.8419 euros.
Conversely...
EUR/USD = 1.1882
...tells us that it costs 1.1882 US dollars to buy 1 euro.
When the price of the quote currency goes up it indicates that the base currency is
becoming stronger – one unit of the base currency will buy more of the quote currency. If
the quote currency falls, however, the base currency is becoming weaker.
FOREX quotes are seen in 'bid' and 'ask' prices. Bid is the price that buyers will pay for
the base currency (while selling the quote currency), and ask is the price that sellers will
sell the base currency (while buying the quote currency).
Symbol Bid Ask
USD/CAD 1.2392 1.2397
This chart tells us that we can buy one American dollar for 1.2397 Canadian dollars, or sell
one American dollar for 1.2392 Canadian dollars. The most commonly traded currencies
pairs are the 'Majors' – GBP/USD, EUR/USD, AUD/USD, USD/JPY, USD/CHF, and
USD/CAD.
We often see exchange rates listed in cross currency charts that list many different
currencies and their values against each other. An example of such a chart is seen here:
US $ Ca $ Euro UK £
US $ 1.00000 1.24060 0.83935 0.56870
Ca $ 0.80606 1.00000 0.67657 0.45841
Euro 1.19140 1.478051.00000 0.67755
UK £ 1.758402.18147 1.47591 1.00000
In this chart, the currencies listed down the left side of the chart are the base currencies
and the currencies at the top are the quote currencies. We can convert the chart above
into currency pairs by following the row beside the base currency. Using US dollars as
the base currency we get the following currency pairs:
USD/CAD = 1.24060
USD/EUR = 0.83935
USD/GBP = 0.56870
...which tells us that one US dollar is equal to the corresponding value of the quote
currency. To find the opposite pair e.g. CAD/USD follow the Canadian dollar row to the
US dollar column - CAD/USD = 0.80606 (one Canadian dollar is worth 0.80606 US
dollars).
There is no standard for cross-currency charts – some have the base currency on the top
and some have it on the side. How to tell which is which? You need to know at least one
pair of currencies and which one of the pair is more valuable.

Calculating FOREX Profits and Losses

FOREX currencies are traded in much smaller divisions than cash. Whereas the smallest
division in US cash is the penny ($0.01), US currency can be traded on the FOREX in
divisions of $0.0001. This smallest division is called the pip (short for Price Interest Point –
sometimes just called 'points'). Since currencies are traded in large lots of (say) $100,000
- small movements in value can generate substantial profits and losses. In a lot of
US$100,000 one pip is worth $10 so an increase in 40 pips (4/10 of one cent) can generate
a profit or loss of $400.
Currencies are traded in lots of various sizes. The standard lot is 100,000 units of the
base currency. A unit is the currency name e.g. one unit of US dollars is the dollar. So a
100,000standard lot of US currency is worth $ . FOREX trades can have lots of various
sizes - a mini lot is 10,000 units, but the most trades are done using standard lots.
Various currencies have different sized pips. The US dollar is expressed in pips of 0.0001
while the Japanese yen is expressed in pips of 0.01. The value of a pip depends on the
size of a lot and the currency pair traded. Currency pairs with USD as the quote (second)
currency (e.g. CAD/USD) always have a pip value of $10 per standard lot or $1 per mini
lot. A pip value calculator can be used to calculate other currencies.
Order Types
A trader has at his disposal different types of orders to make FOREX trades. A clear
understanding of each type of order is necessary to be a successful FOREX trader.
Market Order – is an order to buy or sell at the current market price. They can be used to
enter or exit a trade. Market orders should be used with care because in fast-moving
markets there may be a difference between the price seen at the time a market order is
given and the actual price of the transaction. This is due to slippage – the amount the
market moves in the few seconds between giving an order and having it executed.
Slippage could result in a loss or gain of several pips.
Limit Order – is an order to buy or sell at a certain limit. They can be used to buy
currency below the market price or sell currency above the market price. When buying,
your order is executed when the market falls to your limit order price. When selling, your
order is executed when the market rises to your limit order price. There is no slippage
with limit orders.
Stop Order – is an order to buy above the market or to sell below the market. They are
most commonly used as stop-loss orders to limit losses if the market moves contrary to
what the trader expected. A stop-loss order will sell the currency if the market falls below
the point set by the trader.
One Cancels the Other (OCO) – this order is used when placing a limit order and a stoploss
order at the same time. If either order is executed the other is cancelled, allowing
the trader to make a transaction without monitoring the market. If the market falls, the
stop-loss order will be executed, but if the market rises to the level of the limit order, the
currency will be sold at a profit.
Example OCO Transaction:
Buy: 1 standard lot EUR/USD @ 1.3228 = $132,280
Pip Value: 1 pip = $10
Stop-Loss: 1.3203
Limit: 1.3328
This is an order to buy US dollars at 1.3328 and to sell them if they fall to 1.3203 (resulting
in a loss of 25 pips or $250) or to sell them if they rise to 1.3328 (resulting in a profit of 100
pips or $1,000).
Here's another example:
The current bid/ask price for US dollars and Canadian dollars is
USD/CDN 1.2152/57
...meaning you can buy $1 US for 1.2152 CDN or sell 1.2157 CDN for $1 US.
If you think that the US dollar (USD) is undervalued against the Canadian dollar (CDN)
you would buy USD (simultaneously selling CDN) and wait for the US dollar to rise.
This is the transaction:
Buy USD: 1 standard lot USD/CDN @ 1.2157 = $121,570 CDN
Pip Value: 1 pip = $10
Stop-Loss: 1.2147
Margin: $1,000 (1%)
You are buying US$100,000 and selling CDN$121,570. Your stop loss order will be
executed if the dollar falls below 1.2147, in which case you will lose $100.
However, USD/CDN rises to 1.2192/87. You can now sell $1 US for 1.2192 CDN or sell 1.2187
CDN for $1 US.
Because you entered the transaction by buying US dollars (buying long), you must now
sell US dollars and buy back CDN dollars to realize your profit.
You sell US$100,000 at the current USD/CDN rate of 1.2192, and receive 121,920 CDN for
which you originally paid CDN$121,570. Your profit is $350 Canadian dollars or US$287.19
(350 divided by the current exchange rate of 1.2187).

Currency Option Marketplace

A currency option is a contract that gives the holder the right, but not the obligation to buy
or sell a specified currency during a specific time period. It can be used to hedge a
FOREX transaction and are a favoured method of reducing risk in companies that trade
goods overseas.
There are two basic types of option: Call options and Put options. A call option gives the
holder the right to buy a currency while a put option gives the holder the right to sell.
The worth of an option at expiry is equal to the value realised by the holder in exercising
the option. If the holder gains nothing, the option is worth nothing. The value at any
other time of the contract duration is the 'intrinsic value' – the value that can be realized if
the holder exercises his option.
Intrinsic value is linked to the 'strike price' – the value specified by the option contract. A
call option has intrinsic value if the spot (current) price is above the strike price. A put
option has intrinsic value if the spot price is below the strike price.
If the option contract has intrinsic value it is said to be 'in the money', otherwise it is 'out
of the money' or 'at the money' (at par). Options would only be exercised if they are in
the money.
Options are priced according to complex formulas that take into consideration both the
spot value and time value. Time value is calculated according to expected market
conditions including volatility and the difference in interest rates between the two
currencies. Options must be priced low enough to attract potential buyers and high
enough to attract potential writers (the sellers or guarantors of the option).
Currency options are used in FOREX to minimize risk against unexpected moves in the
market. If you buy an option your losses are limited to the cost of the option. Those who
sell options are more vulnerable. They gain the premium but they are exposed to
unlimited loss if the market moves against them.
As a hedging tool, there are many different types of options available. They are often
used by companies that trade overseas to minimize the potential for loss due to
fluctuations in the foreign exchange market.
FOREX trades have a special type of option available known as a Digital Option. This
option pays a specified amount at expiration if the criteria are met, otherwise it pays
nothing.
FOREX traders who wish to use a digital option first decide which direction the market is
moving. They then decide on a payoff amount if the market moves as expected within a
certain time frame. With this information the cost of the option is calculated.
For example:
The price of the euro is currently trading at about 1.2400 and you expect it to rise to 1.2800
within 3 months. You decide to buy a put digital option with a payoff of $5000. The cost
of the option is $800.
If at the end of the 3 months the euro is more than 1.2800 you get $5000. If the price is
less, you lose $800.

Trading Currencies on Margin

The key to FOREX popularity is margin. Without margin, the FOREX would be beyond
the reach of the average investor. So, what exactly is margin and how does it work?
Margin accounts allow FOREX traders to control large amounts of currency with a
relatively small deposit. Establishing a margin account with a FOREX broker enables you
to borrow money from the broker to control currency lots which are usually worth
$100,000. The amount of borrowing power your margin account gives you is the leverage.
Leverage is usually expressed as a ratio – a leverage of 100:1 means you can control
assets worth 100 times your deposit.
What this means in FOREX is that with a 1% margin account you can control standard lots
100,000 of $ with a $1,000 deposit. Trading on margin increases both profits and losses,
and the potential exists for the trader to lose more than his original deposit. With proper
safeguards, however, loss can be limited, and usually brokers will terminate a transaction
that extends beyond the margin deposit.
Benefits
As we mentioned above, trading on margin gives you more buying power and the
potential for more profits (and losses). How does this work, exactly? A 1% margin account
allows you to control a currency lot of $100,000 for $1,000. When dealing with $100,000
small changes in the price of the currency can result in large profits or losses.
FOREX currencies are traded in much smaller units than cash. The American dollar, for
example, is traded in units down to 4 decimal places. Instead of $1.32 FOREX quotes are
seen as $1.3256. The smallest unit in FOREX currencies is called the pip, and when you
have a $100,000 each pip of your total lot is worth $10 (when trading American dollars).
If the price of American dollars changes from 1.3256 to 1.3356, that's a difference of 100 pips
which represents a profit or loss of $1000. Without margin, if you had $1000 of currency,
the price change from 1.3256 to 1.3356 represents a difference of $10. Significant to the
tourist, perhaps, but not the investor.
So the benefit of margin is increased profit potential.
Risks
As there is increased profit potential, there is also increased loss potential. If you are not
careful, your entire margin account could quickly be wiped out. If your margin account is
1% and the currency moves just one cent against you, you lose $1000.
FOREX trading, however, has several methods to limit loss. Stop loss orders
automatically close your position if the value of the currency crosses a pre-determined
point. Stop loss orders allow you to limit your losses to a specified amount while still
allowing potential profit taking.
An often overlooked risk is the possibility that your broker may close your position if your
potential losses approach the balance of your margin account. You may be riding out a
down trend with the expectations of a market reversal, but unless you replenish your
margin account you may find your position has been closed. If this happens, you lose all
of your margin.
For example:
You sell EUR/USD at 1.2144 (sell 100,000 euros and buy 121,440 US dollars) with the
expectation that the euro will fall in price. You have a 1% margin account which means
the required margin is $1,214.40. You have $1250 in your margin account, so to enter this
position your margin account is left with $35.60.
You have not specified a stop loss order, and after you enter this position the euro
suddenly rallies, gaining 0.0263 for a price of 1.2407. 100,000 euros are now worth
US$124,070 and your 1% margin requirements have risen to $1,240.70. Depending on the
policy of your broker, your position may be automatically closed or the extra funds in your
margin account may be used to make up the difference. In any case, if the euro
continues to gain value and you wish to ride it out (bad idea) you will have to add more
funds to your margin account or risk losing everything.
Another example:
/ You buy USD CHF at 1.2623 with the expectation that the US dollar will gain against the
Swiss franc. You buy a standard lot of 100,000 American dollars for 126,230 Swiss francs
with a margin requirement of 1% or $1,000.
As expected, the US dollar rises to 1.2683 at which point you close your position. You sell
100,000 American dollars for 126,830 Swiss francs for a profit of 600 francs or US$473.08
(600 francs divided by the exchange rate of 1.2683).

FOREX Trading Philosophy

Many beginning FOREX traders are captivated by the allure of easy money. FOREX
websites offer 'risk-free' trading, 'high returns' 'low investment' – these claims have a grain
of truth in them, but the reality of FOREX is a bit more complex.
There are two common mistakes that many beginner traders make – trading without a
strategy and letting emotions rule their decisions. After opening a FOREX account it may
be tempting to dive right in and start trading. Watching the movements of EUR/USD for
example, you may feel that you are letting an opportunity pass you by if you don't enter
the market immediately. You buy and watch the market move against you. You panic
and sell, only to see the market recover.
This kind of undisciplined approach to FOREX is guaranteed to lose you money. FOREX
traders need to have a rational trading strategy and not allow emotions to rule their
trading decisions.
To make rational trading decisions the FOREX trader must be well-educated in market
movements. He must be able to apply technical studies to charts and plot out entry and
exit points. He must take advantage of the various types of orders to minimize his risk
and maximize his profit.
The first step in becoming a successful FOREX trader is to understand the market and
the forces behind it. Who trades FOREX and why? Who is successful and why are they
successful? This knowledge will allow you to identify successful trading strategies and
use them as models for your own.
There are 5 major groups of investors who participate in FOREX – Governments, Banks,
Corporations, Investment Funds, and traders. Each group has varying objectives, but the
one thing that all the groups (except traders) have in common is external control. Every
organization has rules and guidelines for trading currencies and can be held accountable
for their trading decisions. Individual traders, on the other hand, are accountable only to
themselves.
This means that the trader who lacks rules and guidelines is playing a losing game.
Large organizations and educated traders approach the FOREX with strategies, and if
you hope to succeed as a FOREX trader you must play by the same rules.
Money Management
Money management is part and parcel of any trading strategy. Besides knowing which
currencies to trade and recognizing entry and exit signals, the successful trader has to
manage his resources and integrate money management into his trading plan. Position
size, margin, recent profits and losses, and contingency plans all need to be considered
before entering the market.
There are various strategies for approaching money management. Many of them rely on
the calculation of core equity. Core equity is your starting balance minus the money used
in open positions. If the starting balance is $10,000 and you have $1000 in open positions
your core equity is $9000.
When entering a position try to limit risk to 1% to 3% of each trade. This means that if you
are trading a standard FOREX lot of $100,000 you should limit your risk to $1000 to $3000
– preferably $1000. You do this by placing a stop loss order 100 pips (when 1 pip = $10)
above or below your entry position.
As your core equity rises or falls you can adjust the dollar amount of your risk. With a
starting balance of $10,000 and one open position your core equity is $9000. If you wish
to add a second open position, your core equity would fall to $8000 and you should limit
your risk to $900. Risk in a third position should be limited to $800.
By the same principal you can also raise your risk level as your core equity rises. If you
have been trading successfully and made a $5000 profit, your core equity is now $15,000.
You could raise your risk to $1500 per transaction. Alternatively, you could risk more from
the profit than from the original starting balance. Some traders may risk up to 5% against
their realized profits ($5,000 on a $100,000 lot) for greater profit potential.

FOREX Brokers

Most FOREX traders use a broker to handle their transactions. What exactly is a broker?
Strictly speaking, a broker is an individual or a company that buys and sells orders
according the investor's decisions. Brokers earn money by charging a commission or a
fee for their services.
A FOREX broker needs to be associated with a large financial institution such as a bank
in order to provide the funds necessary for margin trading. In the United States a broker
should be registered as a Futures Commission Merchant (FCM) with the Commodity
Futures Trading Commission (CFTC) as protection against fraud and abusive trade
practices.
Before trading FOREX you need to set up an account with a FOREX broker. You may
feel overwhelmed by the number of brokers who offer their services online. Deciding on
a 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.
The best advertising is word-of-mouth advertising, and this is just as valid in FOREX
trading as it is for any other type of business. Talk to friends and associates to see who
they are dealing with and find if they have any complaints or difficulties in dealing with a
particular broker.
You could try selecting a few online brokers and contact their Internet help desks to see
how quickly they respond to enquiries and whether or not they answer questions to your
satisfaction. Keep in mind, however, that pre-sales service may be better than after sales
service. This can be true for any online business, not just FOREX brokers.
Customer satisfaction and safety are just part of the story. You want to find a broker who
executes orders quickly and with minimum slippage. All online brokers should offer
automatic execution and have clear policies regarding slippage. They should be able to
tell you how much slippage can be expected in both normal and fast-moving markets.
Next you want to know the fees involved. What is the spread? Is spread fixed or variable
according to the type of account? Are mini accounts subject to wider spreads? Are there
any other charges? Smaller spreads mean more profit for the trader, but there may be a
trade-off between spread and service. Look at the overall picture before deciding to go
with a particular broker.
Margin accounts are the lifeblood of FOREX trading, so be sure you understand the
broker's margin terms before setting up an account. You need to know the margin
requirements and how margin is calculated. Does margin change according to the
currency traded? Is it the same every day of the week? Some brokers may offer different
margins for mini and standard accounts.
Trading software is very important for the online FOREX trader. Get a feel for the options
that are available by trying out a demo account at a few online brokers. Above all, you
are looking for reliability and the ability to perform well in fast-moving markets. The
software should offer automatic trading and may have special features such as trailing
stops and trading from the chart. Some features may only be available at an extra cost,
so be sure you understand what your trading needs are and how much the broker
charges to provide them.
Other information to find out about includes the broker's policy regarding minimum
account balances, interest payments on account balances, which currencies can be
traded and whether or not non-standard sized lots can be traded. You should also find
out whether clients' funds are insured and the extent of that insurance.

How to Get Started In FOREX Trading

You may have been hearing about the foreign exchange market (FOREX) and the
investment advantages it offers. You would like to try it out, but don't know where to
start. This short guide will give you the basics in FOREX and tell you what you need to
participate in this fast growing field.
Foreign exchange used to be limited to large players such as national banks and multinational
corporations. In the 1980's the rules were revised to allow smaller investors to
participate using margin accounts. Margin accounts are the reason why FOREX trading
has become so popular. With a 100:1 margin account, you can control $100,000 with a
$1,000 investment.
FOREX is not simple, however, and education is needed to make wise investment
decisions. Although it is relatively easy to start trading on the FOREX, there are risks
involved, so finding out as much as possible about the market is a good move for any
beginner.
FOREX traders usually require a broker to handle transactions. Most brokers are
reputable and are associated with large financial institutions such as banks. A reputable
broker will be registered as a Futures Commission Merchant (FCM) with the Commodity
Futures Trading Commission (CFTC) as protection against fraud and abusive trade
practices.
Opening a FOREX account is as simple as filling out a form and providing the necessary
ID. The form will include a margin agreement that states that the broker can interfere
with any trade it deems to be too risky. This is to protect the interests of the broker –
most trades, after all, are done using the broker's money. Once your account has been
established, you can fund it and begin trading.
Many brokers have different types of accounts to suit the needs of individual investors.
Mini accounts allow you to get involved in FOREX trading for as little as $250, while
standard accounts may have a minimum deposit of $1000 to $2500 depending on the
broker. The amount of leverage – using borrowed money – varies with accounts. High
leverage gives you more money to trade for a given investment.
HOWEVER – beginner traders are advised get accustomed to FOREX by doing paper
trades for a period of time. Paper trades are practice transactions that don't involve real
capital. They allow you to see how the system works while learning how to use the
various software tools that are at provided by most FOREX brokers.
Most online brokers have demo accounts that allow you to make free paper trades for up
to 30 days. Every new FOREX investor is strongly advised to use these demo accounts
at least until they are showing consistently steady profits.
Each broker has their own set of software tools to aid in making transactions, but there
are a few tools that are common to all FOREX brokers. Real time quotes, news feeds,
technical analyses and charts, and profit and loss analyses are some of the features you
should expect to see on most online brokers' web sites.
Almost every broker operates on the Internet. To access their online services you should
have a reasonably modern computer, a fast Internet connection, and an up-to-date
operating system such as Windows XP. Once your account is set up, you can access it
from any computer – just enter your account name and password. If for some reason you
are not able get access to a computer, most brokers will allow you to make trades over
the phone.
Trades are commission free, meaning that you can make many trades in one day without
worrying about incurring high brokerage fees. Brokers make their money on the 'spread'
– the difference between bid and ask prices.

Which strategy should you use?

Another question that is often asked by aspiring traders is “What kind of trading approach
should I use – day trading, swing trading, position trading? How many indicators should I
use? Should I follow the TV news channels?...”

If you are facing similar dilemmas let me try to make an analogy. If you were attacked in
a dark alley and you felt that your life was in real danger what kind of defence technique
would you attempt to use. Would you attempt to kick your assailant with some fancy
kung fu move that you saw in a movie? Or would you use some basic but brutally
effective “knee to the groin”, “thumb to the eye” technique that is easy to implement and
that you are 100% certain will have an effect? When you have your hard earned money
riding on your trades maybe your life is not at stake but your and your family’s livelihood
is. The goal of all the other traders in the market is to take your money. And if you are
going to play around with some fancy tools and indicators that you don’t even understand
you can be assured that your hard earned money will be paying someone’s BMW lease
payments.

Why should you trade forex market?

Simply said, no other trading instrument comes even closely to forex market when it
comes to liquidity, 24hr market environment and last but not the least, profit potential.
Forex (currency) market is the largest (most liquid) financial market in the world, with an
average daily volume of more than US$ 1.5 trillion, which is more than all of the global
equity markets combined.
Forex trading day starts in Wellington, New Zealand followed by Sydney, Australia,
Hong Kong and Singapore. Three hours later trading day begins in Dubai (UAE) and
other Middle Eastern countries. In couple of hours they are followed by Frankfurt, Zurich,
Paris, Rome… London is the last one to open in Europe and five hours later it is followed
by New York, Chicago and finally the West Coast. The busiest hours are early European
mornings because at that time major Asian exchanges are still open and European
afternoons because at that time major US markets are open at the same time as Europe.
Therefore, wherever you live and whatever your work hours are you can always find
I do agree with the statement that financial markets are efficient. They are very
efficient in one thing - transferring money from bad and naive traders/investors to
the pockets of those that know what are they doing. You are now probably asking
yourself “What am I doing in this field? Do I have any chance to succeed?” The
answer is “Yes, you do.”. The system that we are about to reveal to you is a fail
proof entry and exit strategy that will put you on equal level with big investment
firms and with experienced professional traders.
some time to participate in forex trading as opposed to stock market where you are
usually limited to the regular business hours.
Another property of forex market that makes it an excellent trading instrument is use of
leverage. Many beginning traders don’t fully understand the concept of leverage.
Basically, if you have a start up capital of $5,000 and if you trade on a 1:50 margin you
can effectively control a capital of $250,000. However, a two percent move against you
and your capital is completely wiped out. If you are a beginning trader you should not use
more than 1:20 margin until you get comfortable and profitable and then and only then
you can attempt to use higher margins. What does 1:20 margin mean? It means that with
your $5,000 you will control a capital of $100,000. Let’s say you are trading EUR/USD
and by using our entry strategy you have decided to enter the trade on a long side. That
means that you are betting that USD will depreciate against Euro. Let’s say current
EUR/USD rate is 1.305. Again, if your trading capital is $5,000 and you are using 1:20
leverage you will effectively be exchanging $100,000 to Euros. If the current rate is 1.305
you will receive 100,000/1.305 = 76,628 Euros. If the trade goes in your direction the
margin will work in your favour and 1% decline in USD will mean 20% increase in your
start up capital. So if EUR/USD rate moves from 1.305 to 1.318 you will be able to
exchange your 76,628 Euros back to $101,000 for a profit of $1,000. Since your start up
capital was $5,000 it is effectively a 20% increase in your account. However, if the trade
went against you and USD appreciated 1% vs. Euro your account would be reduced to
$4,000. That would not have happened as our strategy has built in hard stops to prevent
such outcome.
And the third and equally important property of forex market is the fact that trends in
forex market last longer and are more clearly defined than in any other trading instrument.