MEET THE FOREX MARKET

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Paula Hodges
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2 Often, people jump into the foreign exchange forex market without taking the time to learn the basics. It is nearly impossible to achieve long-term, sustainable trading success without first having a clue how the market is structured and how it works. LET S DIP OUR TOES IN. The forex market is by far the largest and most liquid financial market in the world. Daily activity is usually in the region of close to US$5 trillion - over 200 times the amount of daily activity experienced on the New York Stock Exchange. Unlike the stock market there is no central marketplace. All transactions are conducted over-the-counter, which means that it is the buyers and sellers that dictate prices. There are a number of different active participants in the forex market. These vary from large institutions like commercial banks, hedge funds, central banks and global corporations to individual retail traders like you. $5.00 TRILLION AVERAGE DAILY TRADING VOLUME $22.4 BILLION $18.0 BILLION $7.2 BILLION FOREX MARKET NEW YORK STOCK EXCHANGE TOKYO STOCK EXCHANGE LONDON STOCK EXCHANGE 2

3 FINANCIAL INSTITUTIONS FIRMS & CORPORATIONS INVESTMENT HEDGE-FUNDS PARTICIPANTS OF THE FOREX MARKET CENTRAL BANKS COMMERCIAL BANKS INDIVIDUAL TRADERS The Forex Market is both liquid and volatile. Volatility within the forex market is both good and bad. It creates opportunities for people to take advantage of market fluctuations and make profits, but greater volatility also means greater risk potential. QUICK DEFINITION Volatility: Is a measure of how much the price of a currency changes over time. The more a price can change the more volatile it is. Liquidity: Measures the amount of buyers and sellers in the market willing to trade at any given time. The more liquid the better the market is for a trader. BELIEVE IT OR NOT, AT SOME POINT YOU MAY HAVE ALREADY BEEN A PART OF THE FOREX MARKET. Maybe not as a trader, but each time you have: Gone on holiday overseas and used Rands to buy another currency, Sent or received money to and from another country, Purchased goods or services on websites like Amazon, ebay and Alibaba, you have contributed to the supply or demand of a particular currency. 3

4 1.1 WHAT IS FOREX & FOREX TRADING? On a daily basis we come across radio, television and business reports mentioning the terms FX rate, currency exchange rates or foreign exchange rate. These terms all mean the same thing. When forex is mentioned it is usually shown with complicated looking graphs like these: SIMPLY PUT, FOREX REFERS TO HOW THE CURRENCY (MONEY) OF A PARTICULAR COUNTRY RELATES TO THE CURRENCY (MONEY) OF ANOTHER COUNTRY. Forex CFD trading refers to the trading of international currencies against one another in a global financial market with the intention of making profits. As a trader you can trade hundreds of different currencies such as: US Dollar Rand Euro British Pound LATER ON WE WILL LOOK AT HOW TO READ CURRENCY PAIRS AND LIST SOME OF THE MOST COMMONLY TRADED CURRENCY PAIRS. EXAMPLE: HOW MANY RANDS IT WOULD TAKE TO BUY ONE US DOLLAR. 4

5 1.2 WHY TRADE FOREX CFDS? You can trade on the go CFD trading is done online, so you ll have the markets at your fingers regardless of where you are and what device you re on As a trader, you can trade often As a trader you will be able to access the forex market 24 hours a day, Monday to Friday. However, the Forex market is closed over weekends. This makes it very convenient for someone who trades on a part time basis Transaction costs are low Generally, trading forex CFDs is cheaper than trading other securities such as shares. This is because there are no commissions that would arise if there were exchange fees, clearing fees and government fees to be paid. The cost of trading forex is built into the bid/ask spread (more on that later) You don t need too much to get started Compared to trading shares and other financial instruments, forex trading requires very little money to get started. Depending on your broker you can get started by depositing just a few dollars. This means that even with very little disposable income, forex trading is accessible The market is very liquid Since the forex market is so big, it consists of many buyers and sellers who are active on a daily basis. This makes the market extremely liquid. In other words, it is constantly moving and changing. This is an advantage because at any given time there is someone willing to take the other side of your trade meaning that under normal market conditions you are unlikely to ever be stuck in a trade. 1.3 CURRENCY PAIRS Currencies are traded as pairs and are therefore described like this: BASE CURRENCY GBP USD = QUOTE CURRENCY When looking at a currency pair, the currency named first (on the left) is referred to as the base currency and the second one (on the right) is known as the quote currency. The price represents how many units of the quote currency are needed to buy one unit of the base currency. In other words, in the example below, it would cost US$ to purchase 1GBP. The currency price represents the value of the base currency in relation to the quote currency. If the price of a currency pair rises, the base currency has strengthened against the counter currency. IF THE PRICE OF THE PAIR DECLINES, THE BASE CURRENCY HAS WEAKENED RELATIVE TO THE QUOTE CURRENCY. 5

6 CURRENCY PAIRS ARE TYPICALLY CLASSIFIED BASED ON LIQUIDITY. Currency pairs fall into three main groups: Major currency pairs Cross currency pairs Exotics pairs The major pairs are the most widely traded, followed by the crosses and lastly the exotic pairs. MAJOR CURRENCIES The most commonly traded (and, therefore, most liquid) currencies are called the majors. The majors include: US Dollar Japanese Yen Euro British Pound Swiss Franc Canadian Dollar New Zealand Dollar Australian Dollar DEFINITION OF MAJOR CURRENCY PAIRS IS MISSING CURRENCY SYMBOL EUR/USD CURRENCIES Euro vs. U.S Dollar THERE ARE SOME ADVANTAGES TO TRADING MAJORS, ESPECIALLY FOR A NOVICE TRADER... GBP/USD AUD/USD USD/JPY USD/CHF NZD/CAD NZD/CHF British Sterling vs. U.S Dollar Australian Dollar vs. U.S Dollar U.S Dollar vs. Japanese Yen U.S Dollar vs. Swiss Franc U.S Dollar vs. Canadian Dollar New Zealand Dollar vs. U.S Dollar MAJOR CURRENCY PAIRS These include: Trading on the liquid currency pairs. Greater number of trading opportunities. More information, analysis & commentary is readily available on these pairs. Slippage is less likely to occur when trading highly liquid currency pairs. 6

7 CROSS CURRENCY PAIRS Cross currency pairs, also known as crosses, are currency pairs that do not include the US dollar. The most popular cross currency pairs consist of all the other major currencies against each other. These are the most traded cross currency pairs: Warning: It is strongly recommended that beginner traders only trade exotics after they have gained enough experience and profits from trading the more liquid currency pairs. EXOTIC CURRENCIES ARE LESS LIQUID AND, THEREFORE, CAN BE RISKIER. CURRENCY SYMBOL CURRENCIES EUR/JPY Euro vs. Japanese Yen EUR/GBP Euro vs. British Pound EUR/CHF Euro vs. Swiss Franc EUR/AUD Euro vs. Australian Dollar GBP/CHF British Pound vs. Swiss Franc GBP/JPY British Pound vs. Japanese Yen CURRENCY SYMBOL EXOTIC PAIR CHF/JPY Swiss Franc vs. Japanese Yen USD/ZAR U.S. Dollar vs South African Rand AUD/JPY Australian Dollar vs. Japanese Yen USD/TRY U.S. Dollar vs Turkish Lira NZD/JPY New Zealand Follar vs. Japanese Yen USD/MXN U.S. Dollar vs Mexican Peso EUR/CAD Euro vs. Canadian Dollar USD/SGD U.S. Dollar vs Singapore Dollar CAD/JPY Canadian Dollar vs. Japanese Yen USD/BRL U.S. Dollar vs Brazilian Real MOST POPULAR CROSS CURRENCY PAIRS EXOTIC CURRENCY PAIRS Exotic currency pairs are those that are made up of at least one emerging market currency. Some examples of emerging markets include countries like Brazil, South Africa, Mexico, Turkey and Singapore. 7

8 1.4 HOW CAN I MAKE MONEY FROM TRADING FOREX? Trading on the Forex market centres on the concept of buying and selling currencies. You can either buying (by placing a buy order) or selling (by placing a sell order). You would make a profit when markets move in the direction of your trade. Direction of market movement BUYING ACTION (BUY ORDER) Buying is associated with an upward move in the market trend SELLING ACTION (SELL ORDER) 1 2 Selling is associated with an downward move in the market trend 6 4 AN ADVANTAGE OF FOREX IS THAT IT IS POSSIBLE TO MAKE PROFITS IN A SPACE OF MINUTES, HOURS OR DAYS......depending on what type of trader you are, and how you interpret the movements of the market. Through trading forex CFDs (which we will look at in the next module), a trader can magnify their potential profits through leverage. On the flip side, they can also magnify their potential losses. When do you make a profit? If you buy and the the price rises you profit. If you sell and then the price drops you profit Generally you want to buy low and sell high Generally you want to buy high and sell low E XAMPLE - EUR/USD is You buy 10,000 EUR, which costs - $15,000 - After 2 hours the EUR strengthens and now cost 2 USD (EUR/USD = ). - You decide to sell, therefore making $20,000 PROFIT = Selling price-cost price = $20,000-$15,000 = $5,000 8

9 1.5 COMMON MARKET TERMINOLOGY Here are some terms you need to get comfortable with as you learn more about becoming a trader. You ll find these terms mentioned throughout the course. LONG & SHORT When a trader wishes to enter the market, s/he can either buy or sell a currency pair. When a position is opened by buying, the trader is purchasing the base currency while selling the counter currency. This is known as going long. When a trader chooses to enter a position by selling, he or she is selling the base currency while buying the counter currency. This is known as going short. Direction BUY or SELL Currency How would you profit? LONG You are buying EUR/USD Your outlook is that the EUR will strengthen, so you buy it hoping to sell it at higher price at a profit. You will profit if the EUR strengthens. SHORT You are selling USD/JYP Your outlook is that the USD will weaken, so you sell it (by buying the Yen) hoping to buy it at a lower price at a profit. You will profit if the USD weakens. 9

10 PIP PIP stands for percentage in point. It is smallest unit of measurement in forex trading. 10,000 PIPS (1 $ = 10, 000 PIPS) 6,000 PIPS (10 CENTS = 1,000 PIPS) 500 PIPS (1 CENT = 100 PIPS) 60 PIPS (1/10 CENT = 10 PIPS) 7 PIPS (1/1O0 CENT = 1 PIPS) If you want to measure how much a currency price has changed over time you would do so in pips. 1pip = 1/100th of a cent = The fourth decimal place of a currency quote represents pips. GBP/USD = THIS IS A PIP LOT OR CONTRACT SIZE When you walk into a store you can only buy eggs in multiple of 6s. The same concept applies to buying and selling forex. A contract or lot refers to the different number of units of currency that a trader can buy or sell. The largest contract/lot size is a standard lot and this consists of a 100,000 units of a given currency. On a trading platform, 100,000 units of currency are described as a volume of 1 (see table below). The smallest contract type typically offered is a micro lot (1,000 units). The volume of currency that can be traded is determined by the contract size. There are usually three lot/contract sizes: CONTRACT UNITS OF CURRENCY VOLUME VALUE OF A PIP Standard 100, $10 Mini 10, $1 Micro 10, $0.10 You can place trades of any volume from 0.01 to 10 lots and it is always in multiples of a standard, mini or micro lot. E XAMPLE - Trader Joe wants to buy 3000 units of the EUR/USD currency - Essentially, he wants to buy 3 x micro lots = 3 x The volume he wants to buy = 0.03 You might have picked up in the table above, that the value of each 1 PIP movement will vary depending on the contract size. This is very similar to what happens in day to day business. 10

11 Someone who orders a product in bulk from a wholesaler or supplier may be offered a lower price than someone who buys a single product. So, for an institutional trader trading in standard lots, the value of each 1 PIP movement = $10. Most retail traders trade mini and micro contracts. The standard lots are usually traded by large independent traders or institutional traders such as banks. This is usually because of the amount of capital they have available. At Uprise Markets, we recommend that our traders start with smaller volumes and increase the size of their trades as they get more confident and learn to interpret the markets better. We ll take a more in-depth look at how to determine the volume size before entering a trade in the Risk Management module. Below is an example of how we might calculate spread on a trade: SPREAD If you watch business news or have spent time on any forex trading platform you may have seen a currency pair represented as below. BID PRICE EUR/USD 1,36 1,36 SELL BUY ASK PRICE Each currency pair price has two parts to it: the bid and the ask price. The bid price is the price at which you are able to sell the pair. The ask price is the price at which you can buy the currency pair. Spread refers to the difference between the bid price and the ask price. The spread is expressed in pips = ASK BID SPREAD 2.1 PIPS Earlier we mentioned that, unlike stock brokers, forex brokers do not charge commission fees. Instead, Forex brokers earn their income from the spread. Depending on your broker, you would either be charged a fixed spread each time you trade a particular currency pair or you can be charged a variable spread that depends on what is happening in the market in real time. We offer variable spreads to our clients. E XAMPLE - Using the above bid and ask price: Bid and Ask Spread (in pips) = Ask price-bid price = 2.1 pip - If you were trading 1 mini lot (a contract were every 1 pip move = $1) - The spread (in dollar value) that we would charge = Spread (in pips) pip value = 2.1 $1 = $

12 YOU HAVE REACHED THE END OF THE FIRST MODULE. C ONGRATULATIONS!

CONTENTS. What is Forex Advantages of Forex Trading. 5. Currency Pairs Categories.. 6. Forex Trading Sessions...

CONTENTS. What is Forex Advantages of Forex Trading. 5. Currency Pairs Categories.. 6. Forex Trading Sessions... CONTENTS What is Forex... 3 Advantages of Forex Trading. 5 Currency Pairs Categories.. 6 Forex Trading Sessions... 8 How to Read a Quote.. 10 Spread, Pips, and Lot.. 11 Margin, Leverage and Rollover. 12