Express-course "Forex" Chapter 1. Introduction to Forex Until the early 1970s, the price of the currency of a country in the world was determined by the gold reserve of this country - in the world there was a gold and currency standard. Each currency had its equivalent, expressed in ounces of gold. Soon everything changed, the gold and foreign exchange standard was abandoned, and floating exchange rates were introduced - the price of the currency began to be determined solely by its demand and supply. So the international currency market - Forex has been formed. On Forex currency unit of one country is sold for a certain number of units of currency of another country. Since it is quite difficult to imagine how money can be sold for money, you can think of currency as a security that gives you the right to share in the economy of the corresponding country. That is why the health of the country's economy is determined by the stability of its currency. So, trading in Forex, we trade in parts of the economies of the world. What is unique about Forex? Imagine a market where you can buy or sell at any time whatever you want. You brought a product to such a market and at the same instant you found a buyer for it at a mutually beneficial price. These are characteristics of an ideal highly liquid market. Liquidity just means the opportunity at any time to sell or buy goods at a mutually beneficial price, or, as they write in textbooks, exchange goods for money, and money for goods. What is necessary for an ideal market? First, the lack of monopoly and fair competition. Secondly, a huge number of participants. Thirdly, round the clock work. These are the basic requirements for an ideal market, if you want, you can count from a dozen more, deduce a system with a hundred equations and defend a doctoral dissertation on this topic. But we will not deviate from the topic, at the moment it is important only to understand that Forex is the most highly liquid market in the world! Turnover on Forex is more than 3 trillion (!) US dollars a day. Everyone can become a participant in Forex. All that is necessary for this is a certain amount of starting capital (we'll talk about this later) and Internet access. With such a huge number of participants, none of them (even the central banks of the highly developed countries of the world) can for a long time individually influence the demand and supply of a certain currency. All processes that affect supply and demand are the natural processes of the life of the economy of different countries. In these processes there are both regularities and surprises. Learning to understand and respond in a timely manner to changes in these processes is an important part of forex trading, called fundamental analysis. There is still technical analysis, but we will talk about this to everyone later, and now we will not run ahead. An interesting fact is that until the late 1990s, only large financial institutions and banks traded on Forex. To trade in the market, capital was required of several tens of millions of US dollars, just such amounts were contracts of purchase / sale between its participants. With the development of the Internet, everything has changed, there were exchange intermediaries that provide their services to individuals. Taking advantage of the benefits of margin trading, individuals with a capital of several thousand dollars can enter into contracts for the purchase / sale of currencies for hundreds of thousands of dollars, risking solely their capital. The principle of margin trading underlies the trade in the Forex market by individuals and will be discussed in detail later.
Forex has no physical location or central exchange. Trading platform on Forex is the whole world! Forex trading does not stop even for a minute. In the calendar days, it begins in the Far East in Wellington, New Zealand, passing successively the time zones - in Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt am Main, Zurich, London and ending the day in New York and Los Angeles, Angeles. Of the listed cities, Tokyo (Japan), London (Great Britain) and New York (USA) are of greatest importance with respect to Forex. Depending on the time of day, one currency can be traded on Forex more actively than the other - this is due to the time of operation of the largest financial centers of the respective countries. Let's sum up the introduction. The international currency market of Forex has several advantages compared to other markets, for example, with stock markets (in stock markets they trade shares) - there is no need to not sleep at night in the Russian Far East, waiting for the end of the stock market closing in Moscow. Forex is working around the clock and is the most highly liquid market in the world. The spread of the Internet has led to the emergence of exchange intermediaries that provide private individuals with the opportunity to work and earn money on Forex. It so happened that the competition among such exchange intermediaries on the Internet is great, which led to quite profitable offers of Forex trading for individuals. In the introductory part, we intentionally did not use many special terms and concepts applied to Forex, so as not to overload the reader with a large amount of information at once. In the following sections of the site, the picture of Forex trading will become more and more clear.
Chapter 2. Participants of Forex Before you start working on Forex, you need to understand what place a private investor takes in the system of world currency exchange. Studying the type of participants in Forex and their impact on this market will help to understand how the world's exchange rates are changing. A slightly simplified scheme of interaction of Forex participants is given below. The central link in the system of international currency exchange is brokerage firms, they are also called brokerage houses. They act as intermediaries between other major Forex participants. Commercial banks are the main participants of Forex. They can make transactions for the purchase / sale of currency, both on their own behalf and on the orders of their clients. Such transactions can be concluded either directly with other commercial banks, with which it was possible to come to an agreement on quotations, or through brokerage firms. The simplified scheme of interaction here is the following: the dealer department of a commercial bank wishing to acquire a currency of interest to it, communicates with a brokerage firm and asks what terms of the transaction other commercial banks offer. If the terms of the transaction suit, commercial banks conclude a transaction through a brokerage firm, which in turn earns on commission (percent of the transaction). Thus, brokerage firms are the central place (!), Where the real exchange rate is formed. Commercial banks also receive information about the current level of the course from brokerage firms. Another major participant in Forex is the central banks of the world. These participants enter the market, usually not for profit, but for the purpose of adjusting the exchange rate, and, consequently, the economy of their country. Often, central banks enter into transactions not directly, but through one or more commercial banks, masking their activities. Central banks of developed countries can unite to achieve a common goal. All listed Forex participants are active participants, that is, they not only make transactions in the foreign exchange market, but also offer their own prices (quotes). Active participants, as a rule, make transactions for amounts of millions of US dollars and do not use margin trading (it will be described in more detail later). Active participants of Forex are also called market makers (from the English phrase "market makers"). In addition to active participants, passive participants also work on Forex - that is, those who do not set quotations, and can only make deals on quotations offered by active participants. First of all, passive participants are various investment funds. These companies, carrying out currency speculation, place their funds in the securities of governments and corporations of different countries. One of the most famous investment funds is the "Quantum" fund of George Soros. At the disposal of investment funds are billions of US dollars, moreover, they can attract
billions of US dollars of borrowed funds, so investment funds can resist even the intervention of central banks in the foreign exchange market. Participants of foreign trade operations are another type of passive participants in Forex. These are companies exporting abroad or importing from abroad. If the transaction for the import of goods is carried out in foreign currency, then such currency must be purchased before the transaction is concluded. On the other hand, if a transaction for the export of goods is in foreign currency, then such currency must be sold after the transaction is concluded. Such operations, as a rule, are carried out exclusively through commercial banks. The next passive participant can be noted international corporations - these are companies that have branches abroad. When you move funds from branches abroad to central offices, you can not do without conversion transactions made through commercial banks. Gradually, we came to the role of a private investor in the international currency market Forex. A private investor, as a rule, does not have the capital sufficient to make transactions through brokerage houses - the minimum amount of such a deal on Forex is 100,000 US dollars. Through commercial banks, a private investor can make currency purchase / sale transactions, but it is impossible to speculate on private bank rates for private investors: they change, as a rule, only once a day, and the difference between the purchase and sale rate (spread, about it later) is very is high to get some profit from the operation. That is why on Forex there appeared so-called commission houses (they can also be called retail brokerage houses), whose target customers are private investors. Using the principle of margin trading (which will be discussed in more detail later), a private investor can, with relatively little capital, make deals hundreds of times higher than this capital through a commission house, but at the same time risk only with his capital (without risking other people's means). With the development of the Internet, brokerage houses have evolved into dealing centers and can now provide their services to everyone who wants on a global scale. Anyone who wants, having an amount of several thousand dollars, can try himself at work on Forex.
Chapter 3. Currency designation The goods sold in the usual for us commodity market are sold for money. How is it going on the world currency market, where the money itself acts as a commodity? It's very simple - on Forex, one currency is traded relative to another, that is, one unit of one currency is offered a certain number of units of another currency. Since there are many types of currencies, in order not to get mixed up in them, the international committee on standardization assigned to each currency a code mark of three Latin letters. The first two letters determine the country of origin of the currency, the third letter, as a rule (but not always) is the first letter of the monetary unit of this country. For example, in the code mark JPY, the first two letters JP define the country Japan, and the third letter Y determines the currency of Japan Yen. Despite the rapid growth of foreign exchange operations in Euro (EUR) on Forex, the central currency in the world foreign exchange market still remains the US dollar (USD). The volume of trading in different currencies is not the same for Forex. The diagram for comparison shows the percentage of transactions of major currency transactions in the world foreign exchange market in 2004 (according to the three-year survey of Central Banks published by the Swiss bank Bank for International Settlements in April 2007). Below is the decoding of the currency codes presented in the diagram, together with their alternative codes, often found in specialized literature, as well as symbols and synonyms (nickname) in dealer slang. Synonyms are often used not in relation to the currency itself, but in relation to a pair of traded currencies, mainly to a pair with the US dollar. For example, "cable" in Forex is often used in relation to the pair GBP / USD (British pound sterling is sold and bought for US dollars).
Chapter 4. Types of Operations The concept of the type of conversion operation for Forex is closely intertwined with the terminology of financial instruments. In the financial markets, which besides the Forex market also include the gold market, the credit market and the securities market, financial means are understood as the ways of performing financial transactions. Further, only financial instruments relating to the international currency market of Forex will be considered. Types of conversion operations (financial instruments related to Forex) are shown in the figure. Conversion transaction is a transaction of participants of Forex on exchange of the stipulated amount of currency of one country to the currency of another country for a certain date according to the established quotation. Conversion operations on Forex differ by value date, i.е. the date of delivery of the currency relative to the date of conclusion of the currency purchase / sale transaction. On this basis, conversion operations can be divided into two categories, as shown in the figure: spot type operations or current conversion operations; Forward conversion operations. The largest volume of operations on Forex is occupied by operations such as spot (spot). In the international practice it is accepted that the date for the value of spot-type transactions is the 2nd working day after the conclusion of the transaction. Such conditions are quite convenient for counterparties (participants) of the transaction, because during the current and next business day you can process all necessary documentation and issue payment documents. The market where the currency is exchanged at the current (spot) quotes is called the spot market.
It is worth mentioning that such a principle of mutual settlements for spot operations is valid only for large participants of the international currency market. For private investors (clients of retail brokerage houses) working on Forex via the Internet, the transaction is instantaneous at the click of a mouse. In such transactions, the value date as such loses its meaning - the customer's account always reflects the current state of his work on Forex. Forward (forward) conversion operations include forwards, futures, options and swaps. They are also called derivatives. Such financial instruments were specially developed for real business, as they allow to reduce possible risks from changes in quotations in the international currency market in the future. For a private investor who wants to earn on Forex via the Internet, such financial instruments are of little importance. Nevertheless, they will be considered for understanding the general picture of types of conversion operations. Forwards, or as they are also called forward contracts, are concluded between the parties to the transaction on the condition of exchanging a certain amount of the currency at the agreed quotations in advance on a predetermined date (value date). The deal will be executed regardless of what current (spot) prices will be in the currency market Forex on the value date. The amount of the transaction, quotes and the date of currency valuation can be any - it all depends on the agreement to which the counterparties will come. Forward contracts for Forex can be useful, for example, when a Russian company plans to purchase equipment for US dollars abroad. Let's imagine that such a company does not currently have enough money to complete the operation, but expects the receipt of cash in rubles to a current account within a month. It also expects the exchange rate to change in an unfavorable direction for itself, i.e. the appreciation of the dollar is expected. In this case, it makes sense to conclude a forward contract with the bank for the purchase of the required amount of US dollars with a value date of one month at favorable to the company's quotes. Naturally, the bank can not go on such terms, if the US dollar is also expected to rise in price, and finding a counterparty for such a deal can be a difficult task. Forward contracts on the one hand minimize risks, and on the other hand they can become a source of lost profit. So, if in the previous example, in a month the US dollar does not rise in price, but will become cheaper, then the company will have a lost profit. After all, the company could pay less for the equipment. Futures (futures), in contrast to forward contracts, have standard maturity (value) and fixed amounts of currency. This feature allows them to be sold as ordinary securities. For trading in futures forex there is a separate market - the futures market (futures market). The average duration of the circulation of futures in this market is approximately 3 months. Options are similar to futures, but weaken the obligations of one of the participants in the transaction. So, if you are obliged to make an operation on the agreed terms of the transaction when buying a futures, then in the case of an option, you can refuse the transaction at your discretion. Options on Forex are also traded in a separate market - the options market. Swaps (swaps) is a kind of conversion transaction in which the parties enter into a transaction for the purchase / sale of a certain amount of currency with the obligation to make a reverse trade after a certain period of time. For example, a company buys $ 1,000 for a ruble at a current (spot)
quote from a bank with an obligation to sell the bank $ 1,000 to the bank in a month for those current (spot) quotes that will be traded on Forex in a month. Swaps are non-standardized contracts, so they are not traded on a separate market. Of all the described conversion operations (financial instruments) for a private investor wishing to earn on Forex via the Internet, spot spot operations in the spot market are most important. It is the spot forex market that is discussed in detail in the following chapters. Chapter 5. Currency quotes When we buy goods in a store, the price tag on the product reflects the value of the goods in units of the national currency. And we have no questions if we are going to buy a book at the price of 100 rubles - we take a book, prepare 100 rubles and go to the checkout. At Forex, one currency is always traded against another currency, so a simple price tag is not enough here. Suppose we are dealing with the US dollar and the Euro. To assess the value of currencies, we need to know the value of one US dollar, expressed in Euros or the value of Euro, expressed in US dollars. That is, we need to know the exchange rate of one currency in relation to another. This exchange rate is reflected in the quotation of the type A / B. In our case, with the Euro and the US dollar, the quotation looks like EUR / USD. The currency that stands before the "/" sign is called the base currency, and the currency that stands after the "/" sign is called the quoted currency (counter or quoted currency). For any pair of currencies on Forex, the position of the currency in the quotation is strictly defined. For the Euro
and the US dollar, it looks exactly like EUR / USD, and it never appears as USD / EUR in the official quotes lists. Thus, EUR is the base currency, and USD is the quoted currency. What determines the position of the currency in the quotation? Let's digress for a while from Forex and consider a single country, for example, Japan. Each country historically has its own rules for recording exchange rates for each foreign currency. Such recording rules are, as a rule, explained solely by the convenience of presenting information. Agree, because it is more convenient to say that one US dollar can be bought or sold for 104.78 Japanese Yens, than to say that one Japanese Yen can be bought or sold for 0.0095 US dollars. That is why the exchange rate of the Japanese Yen in relation to the US dollar is quoted USD / JPY, and not vice versa. The method of recording the exchange rate, in which the value of a unit of foreign currency is expressed in a certain number of units of the national currency, is called direct quotation. The method of recording the exchange rate, in which the value of a unit of the national currency is expressed in terms of a certain number of units of foreign exchange, is called a reverse quote. In our example, USD / JPY is a direct quote for Japan. Since there is no concept of the national currency on Forex, and the main reserve world currency is the US dollar, the rules for recording exchange rates prevailing in the corresponding countries are used to denote quotes with the US dollar. The concepts of direct and reverse quotes on Forex are used in relation to the US dollar. With some currency pairs, the US dollar will be the base currency of the quotation, and the quote will be reversed. With some currency pairs, the US dollar will be quoted currency, and the quote will be direct. For example, in pairing with the Japanese Yen (USD / JPY), the US dollar is the base currency in the reverse quotation, and paired with the British Pound Sterling (GBP / USD) - quoted currency in direct quotation. When we say that the quotation A / B is equal to X, we mean that one unit of the base currency A can be bought or sold for X units of the quoted currency B. In our example with the Euro and the US dollar, if we say that the EUR / USD quotation is 1.2845, we mean that we can buy or sell one Euro for 1.2845 US dollars. In other words, the purchase / sale transactions always refer to the base currency of the quotation. The table provides examples of quotes for Forex in relation to the US dollar:
From the table it can be concluded that one Euro is sold / bought for 1.2845 US dollars, one US dollar is sold / bought for 97.50 Japanese Yen, etc. It is important to know that in some lists of quotes on the Internet the emphasis on direct / reverse quotation is not made and it is understood that the user is knowledgeable, understanding which currency in the quotation is the base. For example, on the Internet, you can find a quotation written as JPY / USD 97.50, although in fact a reverse quote in relation to the US dollar is meant, i.e. USD / JPY 97.50. Sometimes quotations relative to the US dollar are indicated by only one currency, for example JPY 97.50. Therefore, it is very important to learn the pairs of quotes that you intend to use in Forex trading and know which quote (direct or reverse) it is relative to the US dollar, that is, you need to know the quotation base in the pair! Otherwise, you can mistakenly take a diametrically opposite decision to buy / sell. This is especially true in relation to the Swiss franc (CHF), which, together with the US dollar, is always quoted currency. That is, a record of the form CHF 1.1623 means that one US dollar is sold / bought for 1.1623 Swiss francs, and not vice versa. In addition to understanding the quotes themselves, it is very important to understand the direction of the change in quotations. After all, our main goal in working with Forex is, like in any deal, to buy cheaper and sell more expensive. For direct and reverse quotes, the direction of change in rates has opposite meanings. For a direct quote against the US dollar, for example, GBP / USD, an increase in quotes means a rise in the price of the British pound sterling and a cheaper US dollar, because one pound sterling can now be bought / sold for more US dollars. And for a reverse quote in relation to the US dollar, for example, USD / JPY, an increase in the quotation means a rise in the price of the US dollar and a reduction in the price of the Japanese Yen, because one US dollar can now be bought / sold for more Japanese Yen. That is why it is important not to confuse the type of quotation with respect to the currency of interest when making an operation on Forex. This principle is shown in the figure, which is a simplified graphs for changing quotations. In the above table, you can see that for different quotes different accuracy of their values is used (different number of characters after the decimal point). Minimal change in the value of the quotation is called a point (point, pip) and for different quotes it is different. For example, for an EUR / USD quote, one item is 0.0001, and for a USD / JPY quote, one item is 0.01. It should be noted that the higher figures of the quotation (big figure) tend to change rather slowly over time. Of great interest is the cost of one item, expressed in US dollars. In cases with direct quotations in relation to the US dollar, this does not represent a problem, since the item is already expressed in US dollars. In the case of inverse quotes in relation to the US dollar, the value of one point in US dollars must be calculated according to a special formula, which will be discussed later when we learn to calculate the profit / loss from the transaction. In this chapter, all quotes were expressed in spot (current) prices. We deliberately did not complicate the chapter's material by introducing the concepts of purchase price, selling price, spread and cross rates. These concepts will be discussed in the following chapters.
Chapter 6. Purchase / Sale and Spread Rates Until now, when considering quotations, to simplify the understanding of the material of the site, we deliberately used only the current (spot) exchange rates on Forex. In fact, any quotation on Forex has two rates (two prices) - the purchase rate (bid) and the selling rate (ask). These courses are usually indicated by a slash "/", where the purchase rate is indicated to the line, and after the line - the selling rate, for example USD / JPY 104.75 / 104.85. Under the course of buying is understood the price at which the party that put the quote, agree to buy your base currency from you. Under the sales rate is understood the price at which the party that put the quotation, agrees to sell you the base currency. That is, the concepts of buying and selling in relation to you are "turned upside down". You buy and sell in this formulation, not you, but the party offering you quotation. In other words, if you are going to buy the base currency of the quotation, you need to look at the asking price (ask). If you are going to sell the base currency of the quotation, then you need to look at the purchase price (bid). For example, if you are going to purchase $ 100 for the Japanese Yen at USD / JPY 104.75 / 104.85, then you will need 100 x 104.85 = 10,485 Japanese Yens. If you are going to purchase Japanese Yen by selling $ 100, you will receive 100 x 104.75 = 10 475 Japanese Yens. Depending on the trading platform provided by the Internet brokers to work for their clients, the graphical representation of the quotes will vary. An example of graphical display of quotations is shown in the figure. Since the older figures of the quote (big figure) change slowly over time, they are often not displayed in the course of selling (asking) official quotations for Forex. For example, the above quotation of the US dollar against the Japanese Yen may look like USD / JPY 104.75 / 85. The term big figure in the dealership slang means a base number of 100 points, so in the sales rate (ask) quotes, as a rule, only the last 2 digits are displayed. The difference between the selling rate and the purchase price (the right and left side of the quotation) is called a spread. The spread serves as the basis for profit for the party setting the quotation. Consider an exchange with a typical US forex quotation of the US dollar to the Japanese Yen USD / JPY 104.75 / 85 with a spread of 10 points. You sell 100 dollars and get 100 x 104.75 = 10 475 Japanese Yens. If someone else now comes and buys these $ 100 in the exchange office, he will have to pay 100 x 104.85 = 10,485 Japanese Yens. Thus, the exchange office will earn 10,485-10,475 = 10 Japanese Yen. As you can see from the example, the exchange office earns on the opposite transactions with the currency, i.e. when someone buys, and someone sells. This principle is the basis for obtaining brokerage houses profits in the Forex market. The profit of 10 Japanese Yen (about 10 cents in recalculation for US dollars) is negligible compared to the transaction amount of $ 100. That is why the exchange points use a much larger spread than in the Forex quotes, where the minimum transaction size is much higher and is about
$ 100,000. The most realistic exchange rate for the exchange would be USD / JPY 102.00 / 108.00 with a spread of 600 points. Then the profit from the transaction in 100 US dollars would be 600 Japanese Yen (or 5.56 US dollars in terms of the same quotation). We will also learn how to determine the profit from the transaction and recalculate it into the currency of interest to us in the following chapters of the site. At this point, it is important only to understand that in any quotation for Forex there are two courses (purchase rate and selling rate), and that the difference between these rates is called the spread and is expressed in points. So, the spread is the source of income for the party setting the quotation. That is why, retail brokerage houses that offer private investors the opportunity to work on Forex via the Internet, as a rule, do not take commissions for transactions committed - they earn a spread. In the subsequent chapters of the site, when we learn to open and close positions on Forex, we will explain in detail why a large spread is not beneficial for a private investor. In the meantime, it should be understood that when choosing an Internet broker, first of all, it is worth paying attention to the amount of spread that is offered by - the smaller the spread, the better! Where do the buying and selling courses come from? Who sets them? Quotations of currencies are determined solely by the demand and supply of currencies in the international foreign exchange market. The main influence on the exchange rates is provided by the major active participants of the Forex market (the classification of participants in the Forex market was discussed earlier in the relevant chapter). Picking up the main course of the course change, large passive participants and millions of small participants also influence the further course change. Thus, if the majority of participants tries to sell an individual currency, the price of it falls. If the main trend is to buy this currency, then the price of it is growing. The task of the trader, therefore, in time to recognize this trend. For different participants of the international currency market at different times, the spread in the quotation is not the same. For large Forex traders who trade for millions of US dollars, the spread is minimal and is usually only a few points, since even a small spread in such transactions can bring tangible profits. For small Forex traders making transactions for smaller amounts, the spread is larger. So, in exchange points the size of the spread can reach hundreds of points. In an unstable, rapidly changing exchange rate, the size of the spread may increase. So, during the moments of buying or selling currency, caused by the release of an important economic indicator (the elements of fundamental analysis will be described in detail in the section Forex School), Internet brokers often increase the size of the spread, and it is also worth considering when choosing an Internet broker - a broker with a fixed constant spread. The size of the spread may depend on the liquidity of the market for a single currency. If the currency is not actively traded on Forex, the spread on the relevant quotes may be larger. This is especially true for interbank currency exchange, when banks exchange "exotic" low liquid currencies of underdeveloped countries. Private investors are mainly working on Forex with quotes of highly liquid currencies. For large participants of the international currency market, the size of the spread may depend on the amount of the transaction. If the amount is very different from the average market amount for
an individual currency, then the spread may be larger. After all, large transactions expose the bank to significant risks, while for smaller amounts the bank's expenses on their carrying out increase. Ultimately, the relationship between the counterparties of the transaction can affect the size of the spread. If there are solid business relations between the parties to the transaction, they can come to an agreement on reducing the size of the spread. Conversely, if the bank's dealer does not wish to conduct an operation with an individual counterparty, it may deliberately overstate the spread in the quotation, deliberately forcing the counterparty to abandon the operation. So, the purchase rate (bid), the ask rate and the size of the spread in the quotation are key concepts when working on Forex. A private investor needs to clearly understand their meaning. After all, when working on Forex, decisions should be made quickly, and for this, there should be no problems in understanding the basic concepts! Chapter 7. Cross-rates Forex transactions are not only against the US dollar, although until now we deliberately did not consider such operations in order to simplify the presentation of the site material. Exchange rates in which the US dollar is not present are called cross rates. With cross-rates on Forex, as a rule, only experienced traders work, as for effective work with them, in-depth knowledge of economic indicators and indicators of individual countries is needed. As an example of cross-rate quotes, quote the British pound sterling to the Japanese Jena (GBP / JPY), quote the Euro to the Japanese Yen (EUR / JPY), or quote the British pound sterling to the Euro (GBP / EUR). For major (dollar) quotations, the positions of currencies in them are strictly defined. The positions of the same currencies in cross-rate quotations may vary depending on the side that gives the quotation. For example, a bank in Canada can give a quote of the Canadian dollar to the Euro as CAD / EUR, and a bank in Europe can give such a quotation as EUR / CAD. This nuance should be considered when making transactions on cross-rates, so as not to make a false purchase / sale decision. As an exception, we can quote the British pound sterling, which is always quoted in cross-rates in the form of GBP /, that is, it is always the base currency. Why cross-rates are of interest in Forex? Imagine a situation when you expect a big economic recovery in Canada, caused by the development of new oil fields (Canada - one of the main oil exporters on the world stage). At the same time, the release of the next economic indicator in Japan indicates a temporary decline in the Japanese economy. Since the state of the country's economy is directly proportional to the value of its currency in the world foreign exchange market, it is obviously worth buying Canadian dollars (CAD) and selling Japanese Yen (JPY). But if you make such transactions in relation to the US dollar, you can get an ambiguous result. The US dollar may either rise in price or fall, as we may not have clear data on the state of the US economy. Therefore, the purchase of Canadian dollars for US dollars (at the USD / CAD quote) may not yield the expected profit, just as the sale of Japanese Yen for US dollars (at USD / JPY). If we do these transactions simultaneously with the same size of the deal, then we, as it were, exclude the US dollar from the "equation", and are no longer dependent on the economic state of the American economy. We achieve this effect by working with cross-rates on Forex - we, as it were, exclude the influence of the US economy on the change in the direction of the currencies of interest to us.
The vast majority of operations on Forex are transactions on basic (dollar) quotes. The market of cross-rates on Forex is much less liquid. Therefore, quotes for cross-rates are not calculated relative to the demand and supply of currencies in relation to each other, as is the case with basic quotes. Otherwise, the market for cross-rates would have turned out to be speculative, and some of its participants could fully control it. Thus, in spite of the fact that the US dollar is not present in the quotes for cross-rates, cross rates are calculated precisely with respect to the main quotations with the US dollar. So how are cross-rates calculated? There are three possible options for calculating cross-rates, depending on whether the US dollar is the basic or quoted currency in the main quotations of currencies of interest to us. In doing so, we will use the simple rules of multiplication and division of fractions, known to us from the school course of mathematics. At the same time, you should not take the quotation of USD / JPY literally as a fraction, of course. After all, if the record of quotation of the Japanese Yen to the US dollar would be represented by a real fraction, then the quotation of the quotation as JPY / USD would correspond to the value of the quotation 104.78 (the amount of Japanese Yen for one US dollar). In practice, as we know, the reverse writing of USD / JPY is used. The first type of calculation is used for currencies with direct quotes relative to the US dollar (the US dollar is the base currency of the quotation for both currencies). Consider the Japanese Yen (JPY) and the Swiss Franc (CHF). Having quotes relative to the US dollar USD / JPY and USD / CHF, using the fractional properties, you can deduce the cross-rate of the Swiss franc against the Japanese Yen: CHF / JPY = USD / JPY: USD / CHF, that is, it is necessary to divide the dollar quotation of the Japanese Yen by the dollar quotation of the Swiss franc. Having, for example, USD / JPY 104.78 and USD / CHF 1.0505, the cross rate of the Swiss franc against the Japanese Yen will be (rounded) equal to CHF / JPY 99.74. The second type of calculation is used for currencies with direct and reverse quotations relative to the US dollar (the US dollar is the base currency of the quotation for one currency and quoted currency quotes for another). Consider the Japanese Yen (JPY) and the Australian Dollar (AUD). Having quotes relative to the US dollar USD / JPY and AUD / USD, using fractional properties, you can deduce the cross rate of the Australian dollar to the Japanese Yen: AUD / JPY = AUD / USD * USD / JPY, that is, it is necessary to multiply the dollar quotation of the Australian dollar by the dollar quotation of the Japanese Yen. Having, for example, USD / JPY 104.78 and AUD / USD 1.0564, the cross rate of the Australian dollar to the Japanese Yen will be (rounded) equal to AUD / JPY 110.69. The third type of calculation is used for currencies with reverse quotes relative to the US dollar (the US dollar is quoted currency quotes for both currencies). Consider the British pound sterling (GBP) and the Australian dollar (AUD). Having quotes relative to the US dollar GBP / USD and AUD / USD, you can use the fractional properties to derive the cross rate of the British pound sterling against the Australian dollar: GBP / AUD = GBP / USD: AUD / USD,
that is, it is necessary to divide the dollar quotation of the British pound sterling by the dollar quotation of the Australian dollar. Having, for example, GBP / USD 0.5028 and AUD / USD 1.0564, the cross rate of the British pound sterling to the Australian dollar will be (rounded) equal to GBP / AUD 0.4760. It is worth noting that, in order to simplify the calculation formulas, we excluded from consideration the concept of the bid price and ask price of the currency quotes and have so far used only current (spot) prices. But each basic (dollar) quote has two prices, and the calculated cross-rate quote also has two prices - so where is the purchase price to be put in the formula, and where is the selling price? The answer to this question lies in understanding the logic of calculating cross-rates. Let's return to the example of the first type of calculation with the Swiss franc (CHF) and the Japanese Yen (JPY). We are interested in the cross-rate quote CHF / JPY. To determine the rate of buying a Swiss franc in such a quotation (buying / selling rates, as we already know, always refer to the base currency of the quotation), one must reason as follows. We are interested in buying a Swiss franc, so first we have to buy dollars for the Japanese Yen, and then sell them for Swiss francs. Thus, in the USD / JPY quote, we are interested in the purchase price, and in the USD / CHF quotation, the selling rate. Hence the rate of buying a Swiss franc for the Japanese Yen in a quotation at the cross rate of CHF / JPY is calculated by the formula: CHF/JPY(bid) = USD/JPY(bid) : USD/CHF(ask) Similarly, you can calculate the formula for the exchange rate of the Swiss franc for the Japanese Yen in the quotation at the cross rate of CHF / JPY: CHF/JPY(ask) = USD/JPY(ask) : USD/CHF(bid)
For examples in the second and third types of calculation formulas are calculated similarly: AUD / JPY (bid) = AUD / USD (bid) * USD / JPY (bid), AUD / JPY (ask) = AUD / USD (ask) * USD / JPY (ask), GBP / AUD (bid) = GBP / USD (bid): AUD / USD (ask), GBP / AUD (ask) = GBP / USD (ask): AUD / USD (bid). It is worth noting that the dealers do not use these formulas practically because they are cumbersome. There is a more convenient conventional way of calculating buying and selling rates in quotations for cross-rates on Forex. This method consists in the following. The average is taken from the purchase and sale rates for each of the dollar quotes. Then, using the formulas for current (spot) prices, the current value of the cross-rate quote is calculated. Then this value is "pushed" in opposite directions by a certain number of points (a spread is set), and thus, purchase and sale rates are obtained for the cross-rate quotation. Consider the example with the Swiss franc (CHF) and the Japanese Yen (JPY). Suppose, the rates of buying / selling these currencies against the US dollar are as follows: USD / CHF 1.0502 / 08 and USD / JPY 104.74 / 82. The averaged courses are calculated: USD / CHF (avg) = (1.0502 + 1.0508) / 2 = 1.0505, USD / JPY (avg) = (104.74 + 104.82) / 2 = 104.78, which are then used in formulas for calculating quotations for cross-rates for current (spot) prices. The calculated value of CHF / JPY (avg) 99.74 then "moves apart", say 5 points in both directions, forming the purchase and sale rates of CHF / JPY 99.69 / 79. It should be taken into account that in such a simplified way of calculating there are pitfalls. Since the money for Forex is earned on the opposite (overlapping) transactions, the spread must be large enough to avoid losses during a reverse transaction with another counterparty. This is especially true for low-liquid markets for "exotic" cross-rates. Summarizing the chapter, we will say that the analysis and forecasting of cross-rates is no different from analyzing and forecasting the main rates in relation to the US dollar.
Chapter 8. Forex trading hours Despite the fact that the Forex currency market operates around the clock, there are certain time periods in which it is more or less active with respect to transactions with certain currencies. This is explained by the time of operation of the world's major financial markets. We all know about the existence of time zones, because Russia in this regard is a unique country - its territory lies immediately in 10 time zones. This means that at one and the same time in different cities of the world local time is different, and a day in one place of the planet can mean the night in another. For the convenience of time orientation, the notion of Greenwich Mean Time, or world time, which is designated GMT (Greenwich Meridian Time), was introduced. GMT is the local time in the vicinity of the Greenwich (zero) meridian. In this neighborhood, European countries include Great Britain and Portugal. As a Forex trader you can be located anywhere in the world, but it is important to know in which time zone you are located, and how your local time relates to the local time of operation of the world's major financial centers. The figure shows a map of the world, where each color defines the time zone: It is worth noting that in some countries the daylight saving time is practiced, therefore at different times of the year such countries will be in two neighboring time zones. The figure shows the time zones corresponding to the winter time. All activity on the Forex currency market is conditionally divided into 4 trading sessions: Pacific, Asian, European and American. Each session is active during business hours of the respective region. The Pacific session begins the first, when financial markets begin in Wellington (New Zealand) and Sydney (Australia). Almost immediately after it begins the Asian session, when Tokyo, Japan, Hong Kong (Hong Kong) and Singapore (Singapore) wake up. The most active trades during these sessions occur with the participation of the British pound sterling: GBP / JPY, GBP / CHF. In addition, such pairs with the US dollar are traded as USD / JPY, AUD / USD and NZD / USD, as the opening of the Asian session is accompanied by the closure of the American session of the previous day. The euro hardly trades until the opening of the European session in London. The European session begins at the close of the Pacific and Asian sessions. The largest financial centers of Europe awake in London (Great Britain), Frankfurt (Germany), Zurich (Switzerland). London - the largest financial center of the world, where up to 30% of all trades in the international foreign exchange market. During the European session, pairs with the British Pound (GBP) and Euro (EUR) are actively traded. The Japanese Yen (JPY), on the contrary, loses its attractiveness during the trading day. In addition, pairs with USD are traded: USD / CHF, USD / CAD, EUR / USD. By the middle of the European session, the American session begins with the opening of the largest financial centers in New York (USA), where up to 15% of the world trading volume on Forex. Most transactions are made during the simultaneous activity of European and American sessions, when the liquidity of such pairs as USD / CHF, GBP / USD, USD / CAD and EUR / USD is high. By the middle of the American session, when Los Angeles wakes up, the European session is finishing its work, so the liquidity of the trading market for European cross-rates (EUR / GBP and EUR / CHF) is falling. Experienced traders practically do not trade these pairs during the American session.
Depending on the summer or winter season, the time in different financial centers of the world will differ from the GMT world time by the number of hours shown in the following table: It can be seen from the table that not all countries practice the transition to summer time, since they are in the same time zones both in winter and summer. When working on Forex, in addition to the activity of the world's major financial centers during the relevant trading sessions, one should also take into account the fact that on Saturday, Sunday and official holidays, financial centers are closed. Activity on the world foreign exchange market is minimal these days, and therefore, liquidity is low. The market seems to freeze in anticipation. Even the market reaction to significant events in the world is postponed until Monday (the next business day). Therefore, experienced traders try to close all open positions on Friday (about opening and closing positions will be told later), in order to avoid the unforeseen movement of exchange rates caused by events in the world over the weekend. On Monday, Forex is usually in a waiting state, and there are no active trades on it. Participants are only trying to determine the dominant trends in exchange rates. Since Tuesday, active bidding starts, which continue until the end of the Friday American session.
Chapter 9. Margin Trading In the previous chapter, the work in the Forex market was compared with the possibility of earning money on operations of buying and selling in the exchange office. It was shown that Forex has a number of advantages that allow you to receive significant income in a short time. The main advantage standing in the "bottom of the pyramid" of such earnings is marginal trade, which was introduced for the first time at Forex in 1986. Margin trading allows investors with relatively small capital to work in the Forex market. Without it, work on the foreign exchange exchange of private investors would be impossible, since the minimum amount of a contract for Forex (one lot) is about $ 100,000. The principle of margin trading is as follows. The exchange intermediary (the Internet broker or the dealing company) gives to the clients the credit for fulfillment of gamble with currency on the security of the money resources available for the client, called the insurance deposit. The size of the insurance deposit, as a rule, is 1-5% of the size of the client's forex transactions and depends on the size of the provided leverage. Leverage can be 1:20, 1:50, 1: 100 and even 1: 200 and depends on the conditions of a particular Internet broker. This means that if you have a security deposit of $ 1,000, the client can get $ 20,000 to $ 200,000 on loans for making forex deals. Making deals on large amounts, we can get a big profit. But since in this case transactions are made on borrowed funds, the risk of losses increases in proportion to the probable income. In other words, we can double the amount on our account as quickly as we lose everything. As we have already said, the loan is provided on the security deposit, which is also called a security deposit or margin (hence the name margin trading). This means that by obtaining a loan for the implementation of speculation with the currency in the Forex market, the client risks solely by his own means. The client can not lose more money than is available on his insurance deposit. In this respect, companies that provide intermediary services in the international foreign exchange market are fully protected. What is the point of Internet brokers (dealing companies) providing you with a loan for making transactions on Forex? There are several sources of income for such companies, which we will discuss in detail. First, for each transaction made by the client, the company may be charged a commission. This means that when you close a position from your account, a certain amount is automatically written off, regardless of whether the transaction brought a profit or loss to you. Secondly, such companies earn on the spread, as they provide their clients with a slightly larger spread than the real market quotations. After all, by order of the client, the company makes transactions on its own behalf and for its own funds (as if given to you on credit) at the quotes