INTRODUCTION TO FOREX

Transcription

1 FOREX 1

2 INTRODUCTION TO FOREX CHAPTER 01 FOREX has become the largest liquid market that exists in our world today. It s quite interesting as the news have it that there s a turnover of about 3.98 trillion each day! Ears are opened to know more, and minds are calculating how to make big bucks out of FOREX but they are yet to understand what it really is about. Don t worry, you ll be taught the basics! Now, what is Forex? Names like the Foreign Currency Market, Foreign Exchange Currency Market and even Fx market are used to describe Forex. But let s tell what it is. Principally, the Forex market is a place for the exchange and speculation of currencies. Investors, individual traders, banks, agencies and even governments participate in Forex. Unlike other markets, this one is accessible every hour of the day. Also, there s no stipulated location for the transactions of Forex. Trading centres are located in New York, London, Paris, Hong Kong and just about all over the world. Like other products, Forex is quoted by major banks, with different prices. It is the brokers that pool enquiries from these banks and arrive at an approximate value. A trader, either an individual or a firm speculates the price of a particular currency against another one. Forex trading is quite like stocks. You are allowed to trade with currency as you please. Your trading depends on what you think the value of a currency is worth, or would later be worth. In Forex, trading can be done up, or down. You think a currency would have its value increased, you buy it. You think it would otherwise decrease, you sell it. Finding buyers in this market is a lot easier than other financial markets. For instance, you may decide to buy Euros at a low rate with the hope of selling it at a higher price, upon envisaging that Euro would soon rise against the dollar. Where the dollar turns out to strengthen, it places you in a position of loss. That is why you need to have some skills to help in Forex trade. Some of the skills include: Flexibility Focus Discipline Patience Logic Staying calm Understanding of risk tolerance Realism And Self Control 2

3 Forex Traders The Forex Market is operated on different levels through financial institutions. Banks employ financial firms widely referred to as dealers. These dealers trade with millions of dollars, usually buying some currency with another currency. Some traders of the Forex market are: Central Banks Central banks of different nations are very active in the Forex market. They create targets for their currencies. Hence, they are mostly in control of money supply, interest rates and at times, inflation. They sometimes use their foreign exchange reserves to bring about a stable market. Commercial Companies These companies have quite a regular participation in the Forex Market. They usually seek foreign exchange for the payment of goods and services. Though they don t contribute to a large amount of trade like banks and other speculators, their activities are of a long-term effect on trade flow. Investment Management Firms These firms are in charge of managing large accounts for customers. They deal with investments like endowments and pension funds. The firms use the forex market to facilitate businesses. A firm with an international equity portfolio needs pairs of foreign currencies so that they can purchase foreign securities. Retail Forex Traders These ones are just growing in the forex market. They usually participate through their brokers or banks. Most foreign exchange brokers operate under the Financial Services Authority, in the UK. Non-bank foreign exchange companies These companies are known for offering both individuals and companies currency exchange, and international payments. They don t allow speculative trading. They exchange currency with payments. In the United Kingdom, 14% of payments and currency transfers are made through the foreign exchange companies. 3

4 Remittance Companies and Bureau de Change These companies are known for their performance of high-volume low value transfers that are made by migrants to their country. The Bureau de Change provide low value forex services to travellers. Usually found at airports and tourist centres, they help exchange physical currency notes that they have obtained form banks and other foreign exchange companies. Popular Strategies for Forex Trade Since you now know what forex trading is, it s good that you create a strategy for trading. As a beginner at Forex trading, or even an existing trader, you need to master these strategies to help you trade properly. They include: Intraday Trading: A conservative approach of trading where trades are focused on the price trends of each day. There s a major focus on the sessions of the forex market. The Forex Grid Strategy- An approach that makes use of buy stop orders to make profits on the natural movements of the market. Forex Scalping- A trade strategy of buying and selling pairs of currencies in short increments of a few seconds to a few hours. It s a hands on strategy that makes use of quite a number of small profits that add up to be meaningful. Forex Hedging- A management technique for risks. The trader offsets envisaged losses and thus takes opposite positions on a particular currency in the forex market. Swing Trading- A trading strategy that is medium term. Larger price movements are focused on. The trader sets up a trade and then in a few days or hours, checks to see it instead of sitting before a trading platform all day long. The Forex Martingale Strategy- IN this strategy, the trader is expected to double investments made in future trades so as to recover any loss that may have occurred. For example, where you invest a pound and lose, you double the pound on your next trade. This strategy is quite risky and so is not advisable for beginners. 4

5 BROKER INTRODUCTION CHAPTER 02 Broker introduction is the direct involvement of a broker with their client. It includes the delegation of trade execution to other commission merchants. The closer merchants who are wither a part of the delegating firm or external agents are given the task of trading on the floor based on recommendations. Fees and commissions obtained are thus shared by based on agreements. Broker introduction is just like stockbroking. Merchants are called introducing brokers, and they are like the stockbrokers of the equities market. While the stockbrokers are given power to carry out their tasks by the Securities and Exchange Commission, introducing brokers register with the Commodity Futures Trading Commission and are regulated by the National Futures Association (NFA). Introducing brokers are of great help to the futures market. They help reduce the work load of trade firms. The arrangement allows them to focus on dealing with the clients while the commission merchants are saddled only with trading floor operations. The latter are responsible for creating platforms that clients can trade on, and also work on managing their accounts. Since it would be rather difficult for them to have accessible offices around countries, broker introduction makes a way for a smooth and easier operation of small offices that are all over the country. While there are a lot of large business located at multiple [places, most broker introduction is carried out by individuals. These introducing brokers are able to serve clients from wherever they are, and they are very mindful of the concept of customer service. Their involvement in Foreign Exchange prevents the excessive cost of running several offices by the Future Commission Firms also known as clearing firms. Each introducing broker relates with a commission merchant. The merchants execute trades and help in depositing customers funds in their accounts. The introducing brokers are the ones that solicit businesses for the merchants. As they are being charged fees for every trade, they participate in the service of the merchant s business. They add profit margins to amounts stipulated by the commodity merchants. Their commission is usually a function of the trading volume. The more the transactions, the less commission rate they charge per trade. Their rates are however, negotiable. In fact, the larger introducing brokers charge at lower rates than the smaller ones. Expenses borne by these brokers are mostly on advertisement. Brokers spend quite a lot of money on calls to bring in clients. Clients leave when they lose money so they need to replace such clients. Most trading accounts opened today are by introducing brokers. However, commodity merchants are still very active in trade marketing. They spend a lot of time ensuring that the introducing brokers employed by them are in compliance with laid down rules. Hence, broker introduction can be said to be a form of agency where there are commodity merchants running trades by the introducing brokers that they have employed to allow an easy relationship with their clients. 5

6 COMMODITIES CHAPTER 03 A commodity is a financial asset that signifies the agreement to either buy or sell an amount of commodity or sets of commodity. A commodity future can be copper, platinum or even oil. A price is predetermined, and a date given for such transaction to take place. Commodity future provides an avenue for traders to makes speculations on price movements. You may decide to trade on commodities that you think would increase or decrease in price. Commodity trading is quite different from Forex trading. While forex trade is trading ion currencies, commodity trading involves trades on manufactured goods like cocoa, coffee, or mined products like oil and gold. Some persons would rather trade in commodities since it s a kind of market that they can easily relate with-a physical one. The commodity market is widely regulated, unlike the forex market which does not have so much of regulation on its activities. Trading is performed on exhanges being made. One amazing thing about trading on commodities is that currencies can be treated as commodities. For instance, the Canadian dollar may be traded on as crude oil. Commodity currencies pay high rollovers. CFDs: What are they? A Contract for Difference is commonly referred to as the CFD. It is a type of derivative trading. It allows for speculation of the rise or fall of global financial markets that is, instruments like currencies, commodities and shares. There s a contract between a trader and a broker that there will be an exchange of the difference between an entry price and an exit price of a particular asset. CFDS have become wildly accepted for their flexibility. They are now the alternative to share trading. 6

7 Bets can be placed on commodities like metals, oil; or on market factors like indices. decide to go short(sell) if you envisage that prices would go down, or buy (go long), if you presume a rise in price rates. You are making trade on the price movement of a specific asset without having to buy the asset. Transactions are done via a network, they are decentralized. To open a position, all you need to do is make a deposit of a percentage of the complete value of a trade. Trading on margin enables the magnification of your returns, or in other cases, losses. When trading, you pay the difference between the purchase and sale price. For instance, if you presume that there would be an increase in the price of oil, you may decide to buy 5 CFDs at 5324 pounds. If there s a rise by 30 points, it becomes 5355 pounds. If you choose to close your position at this point, you would make a profit of 150 pounds which is 30 multiplied by 5, the number of CFDs that you purchased. Where the market does not move in your favour and there s a fall in price, it means that you would lose a hundred and fifty pounds. For CFDs, you can choose the currency you want to trade in, as well as the increase rate you want to adopt. At the end of the day, what you do to calculate profits or losses is that you take the difference between and entry and an exit price, and then multiply by the number of CFD units. CFDs are sometimes complex. The pricing depends on the events of demand and supply over the assets that are being traded. The markets are just the forex market, except that that access depends on the activities of the market per time. When you trade with CFDs, there s an opportunity for you to choose varying contracts of varying value and currency type, too. It all depends on the country from which the selected asset originates. When you trade CFDs, you have the opportunity to select different contracts that vary in increment value and currency type, depending on the country in which the underlying asset originates. CFDs provide a range of trading opportunities that can boost an individual s investment portfolio. Their advantages include: Tax efficiency- there s no requirement for payment of UK Stamp Duty Products leverage- small money can be used to control large values Flexibility- you can both go long and go down on a market Offsetting- potential losses on physical investments can be offset Trading in CFD is ideal for a person that seeks an opportunity to make better returns on money. It should however be noted that there are risks involved. It s safer to hold it open for just a few weeks or even days, and not over a long term. And the great thing is that someone can trade with as little money as they want, and can keep trading for as long as they desire. 7

8 FOREX FOR BEGINNERS CHAPTER 04 Before you get involved in the foreign exchange market as a result of the excitement exhibited by persons around you, you must sit yourself down in the bid to learn what forex actually is, and how it works. The forex market is one that is full of as many risks as there are opportunities. Hence, as a beginner, you must be made aware of some things that would help your transactions in the market a not too shocking experience. Most newcomers in the foreign exchange market have expectations that are mostly unrealistic. In this part, you ll be guided through the world of Forex. You already have an idea of what Forex is- it s the market place for the trade of currencies. Let s take a look at a few basic concepts and terms that recur in the foreign exchange market. Forex Quotes In trading Forex, you ll come across Bid and Ask. They are quotations. The bid price is the purchase price of the currency, while the Ask price is that at which you sell the currency. The numbers that show as quotes for the currencies are based on the rates of current exchange. Forex Spread The difference between a bid and its ask price is known as a spread. In trading forex, for a transaction to be considered profitable, the value of the currency pair must exceed the spread. Low spread trading is very important for forex traders. It helps to make quicker profits since you can make high volumes of smaller trades, and you don t have to rely on larger trades to earn profits. Margin Margin is the money that is in a trader s account. A trader may decide to further trade with the money, or withdraw for alternative use. Leverage This is the capital that is provided by a broker to help boost a client s trading volume. For example, where you have 1000 pounds in your account, you may trade a currency pair worth 10,000. If the trade turns out to be successful, your profits are maximized at a factor of 10. In the same degree, your losses are multiplied where it turns otherwise. ten thousand. 8

9 Benefits of Trading in the Forex Market There are a lot of reasons that people are encouraged to trade Forex. Some of them include the following. Opportunity to earn more money right from the home Acquisition of new skills of trading Achievement of financial freedom Control of the future financial world Market accessibility Low costs of trading Finding the Right Broker Before you rush into employing a broker, here are a few things that you should consider before making a choice of a forex broker. Find out of the prospective broker is in line with these requirements by answering the questions posed. 1. Is this broker being regulated? There is no central regulator for the forex market. However, areas have regulations guiding them. It is thus essential that you find out, and check to see if the broker you are considering is actually regulated by them. In the United Kingdom, the regulatory body is the Financial Conduct Authority. Other regulatory bodies include the Securities and Exchange Commission in the United States of America, and the Australian Securities and Investments Commission in Australia. A licensed broker would always love to proclaim their license, so ask to see one. Working with a licensed broker ensures your protection under the law of your country. Also, your funds are well secured when you go for a broker that has their funds separate from their clients. It guarantees an easy withdrawal when you need one. Another thing you should be on the lookout for is compensation schemes. Check to see whether the broker has financial services compensation scheme that you can benefit from, in case of their bankruptcy. 2. What is the quality of their trading services? It is important that you find this out because their service and the platform on which you trade contribute to the results you yield when you put your money in forex. It is best you choose a broker who offers a high level of liquidity, spreads that are low and of course the ability to execute the orders you place, at the exact prices stipulated by you, or at lease close to what you tell them that you want. Another quality check should be in the area of margins and leverages that are available. You don t have to choose the highest level of leverage when you are just starting to trade Forex. However, it is good that you know that this broker actually offers the highest leverage level as approved by the regulator. This is because as you grow in trading, you may want to increase the level of your leverage, based on what you now prefer. 9

10 3. Which products or markets do they have to offer? Before choosing a broker for your forex trade, ensure that they have access to currency pairs including those that are major, minor and exotic. You should also examine the other instruments that they offer. This makes sure that if you later decide to trade on instruments like commodities, indices, cryptocurrencies and others, you would have the chance. 4. Will the broker s trading style suit you? As a new trader in the foreign exchange market, you most likely would be more comfortable using a nominal leverage. A nominal leverage allows you choose the amount of leverage that you would love to use in trading. It is thus important for you to check whether the broker you are about to employ is not one of those that require that you use the maximum leverage. Also, if you are interested in adopting the Forex scalping strategy, you must make sure that a potential broker is not of too much distance between market prices and your own stop-loss and take profit. 5. Is there an offer of training and support? It is essential that every trader in the forex market is continually educated on how to trade in seasons, in order to achieve great results. Also, there is a need for your broker to provide you with the necessary support. Hence, check to confirm that the broker you re looking at has and phone support that allow enquiries and complaints. 6. What kind of tools do they trade with? You must find out the trading tools that the forex broker makes use of. That s because the quality of such tools determines the experience you have in the market. Usually, the tools made use of depends on the type of platform on which trade is being done. For instance, add-ons and plugins on the MetaTrader 4 and 5 are very good in creating a great trading experience. 7. What does it cost to trade? Since foreign exchange trade generates income for you it is good that you see it as a form of business. Thence, you must consider how you can maximise your earnings while minimising both costs and risks. You should consider what it would cost you to trade through them. Here are a few areas you might want to look at: c c c Their spread size- get one that offers you a low spread. Minimum deposits- find one that can open a live trading account with low amounts of requirements. Commission- choose one that does not charge commissions that cut big into potential profits. Once you are able to answer these questions, you re on your way to succeeding in the forex market. 10

11 What you should look out for when choosing a Forex Trading Platform Apart from choosing a broker, you need to be aware of the platforms on which they trade. The trading platform is the major working tool and so it is important that you get it right, Here are what you should be on the lookout for when considering the options before you. Reliability Make sure the trading platform is one that is reliable to help in the achievement of the results that you want from trading. It is important that you can rely on the prices that are quoted for you, that the data that is being transferred gets transferred in time, and that there s a quick execution of any order you make. Make enquiries and be sure that the platform is they type that is available at all times so that you have real time information that enable you grab opportunities that show up. Security While trading on a platform, your information is put up. You must go for a platform that protects such information. Good trade platforms usually have measures put in place to secure your information, and back up your account details. Platforms that separate your funds from theirs are safer to use. Account management A platform that allows you manage your trades while keeping your account independent should be embraced. It allows you play in the market even without your broker taking any actions. You are able to follow up on trends and positions that open up. Trading functionality Foreign trading allows positions to open, and sets stop loss and take profit levels automatically so that trades can close on their own. Improved platforms can help you to carry out trade strategies where you define parameters for such strategies. They are flexible enough and do not require you to keep monitoring every trade. As a beginner, you don t have problems once you make the right decisions about entering the foreign exchange market. Learn the skills, work with the right broker on the right platform, and your experience is guaranteed to be amazing. 11

12 ADVANCED FOREIGN EXCHANGE In order to make good profits and take control of the foreign exchange market, you have to make a move to embrace advanced trading. You must learn how to use the market situation to your benefit. There are some strategies that are adopted by people who have decided to take ion forex trade as deep source of income. They include forex scalping, hedging, carry trade and a few others. 1. Carry Trade This strategy has to do with the differences in interest rates paid in particular currencies. If you have a currency with you for more than a day, you earn an interest for that currency. Where the currency is short, it incurs an interest charge. Traders who adopt this strategy use currencies with low interest rates to pay for buying another high interest currency. 3. Position Trading Position trading is all about putting a trade based on the overall exposure of the trader to a currency pair. With this strategy, you will position your trade at the average price of your chosen currency pair. For instance, if you previously make 2 short trades on USD/EUR at 1.30 and 1.34 respectively, your average position would be The best thing about this strategy is that it does not need much of your daily attention. If you want to succeed with this strategy, you must carry out a thorough long-term market analysis. Position trading is known as one of the most effective strategies used by many top-earning traders in the world. 4. Triangular Arbitrage CHAPTER 05 Triangular arbitrage is a Forex trading method that is often used by professional cross rate traders. This trading technique involves three simultaneous transactions done in three different currency pairs. If done correctly, you can be able to get a locked in profit and a net flat position. Always remember that there is no single foolproof Forex trading system and technique that will provide you with a hundred percent success. Each of the trading systems is prone to losses and each of the advanced Forex trading strategies involves risks. Positional Trading This is certainly an advanced Forex strategy, as it is employed by the top earning traders. The main advantage of this strategy is that it requires a lot less daily attention, however it can only be completed successfully with a careful long-term market analysis. Sound interesting? Let s look at the details of positional trading. Most Forex trading strategies are performed on small time frames, meaning that the majority of them are actually day trading strategies. Positional trading is something completely different from day trading and it s especially different from scalping. When a trader starts trading positions, he is expected to hold a position for 12

13 quite a long period of time. It is hard to identify the minimum recommended holding time as it mainly depends on the trader s overview of the market and the amount of pips gained. When using positional trading, one of the most advanced Forex techniques, a trader has to do everything completely opposite compared to Forex scalping. The trade size tends to be rather small in the comparison with the trading capital. While scalping, you try to open large positions as you are expecting to make a few pips per trade. During positional trading you are aiming to get more than 100 pips, which can actually make your position safer when the market fluctuates. To avoid extensive risk, a trader is recommended to trade only on a small scale, putting no more than 2% of his funds at the trade margin. This way you can easily afford going down for pips without closing your position. One of the main features of positional trading is to ensure you break even at the end of your trade. Sometimes you may gain some pips per trade, but still lose the funds. How is that possible? This happens because the positions are held for a few weeks or even months, and therefore they are a subject to swaps. Swaps are also known as the fee for transferring your position overnight. You may also find swaps being referred to as rollovers or rollover fees. In other words, a trader may open a long position on EUR/USD on 1st of May and then get rid of this position on 1st of July, with a total gain of 50 pips. However, the swaps on this currency pair could be so high that a 50 pip gain will not be enough to compensate for a 60 day rollover fee. That being said, it is important to note that rollovers are not always a disadvantage. On some trading instruments there are positive rollovers. This means that by actually holding a position you are profiting too. There is even another advanced Forex trading strategy called carry trading, which is based on earning through rollovers. To perform positional trading successfully, you certainly need to have a great overview of the current economic situation in the countries of the currencies you are planning to trade, along with current geopolitical issues. Most of your analysis should happen before you open a position, while further analysis should mostly be used in the identification of the exit point. NFP Trading NFP trading is described quickly in this article. Generally, NFP, or Nonfarm Payrolls, is the major economic news released in the US once every month. Usually this type of market news has a severe impact on day traders as it can easily fluctuate a price of USD pairs for 50 or more pips. The main disadvantage of this trading strategy is that it is tight to the NFP releases, so you can only employ NFP trading once a month. NFP is like a Forex advanced level of scalping. A few hours before NFP results are set to be released, the market starts to fluctuate. Your main aim here is to identify the possible results of the NFP and judge how different will it be from both the previous and forecast values. You can observe these values using the Forex Calendar page. You also have to make sure you have enough margin to withhold any possible market fluctuation before the NFP results are released. Once the news is out, the price of the pair may change its direction drastically. If the direction of the change is the way you expected, you may gain a high number of pips in just a few hours. Conversely, if the change happens in the opposite direction, then your stop-loss is triggered. In other words, NFP trading is all about making many pips out of a winning trade and restricting your losses if the prediction doesn t work out. 13

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