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Technical Analysis

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Basic Forex forecast methods:

Technical analysis and fundamental analysis

This chapter and the next one provide insight into the two major methods of analysis used to forecast the behavior of the  Forex market.  Technical analysis and fundamental analysis differ greatly,  but both can be useful forecasting tools for the  Forex trader. They have the same goal - to predict a price or movement.  The technician studies the effect, while the fundamentalist studies the causes of market movements.  Many successful traders combine a mixture of both approaches for superior results.

In this chapter...

The categories and approaches in  Forex  Technical  Analysis all aim to support the investor in determining his/her views and forecasts regarding the exchange rates of currency pairs.  This chapter describes the approaches , methods and tools used to this end.   However, this chapter does not intend to provide a comprehensive and/or professional level of knowledge and skill , but rather let the reader become familiar wit the terms and tools used by technical analysts.

As there are many ways to categorize the tools available , the description of tools in this chapter may sometimes sem repetitive.  The sections in this chapter are:


  • Technical Analysis: backround, advantages, disadvantages;
  • Various techniques and terms;
  • Charts and diagrams;
  • Technical Analysis Categories / approaches:
a. Price indicators;
b. Number theory;
c. Waves;
d. Gaps;
e. Trends;

  • Some other popular tools;
  • Another way to categorize Technical Indicators.
Technical analysis

Technical analysis is a method of predicting price movements and future market trends by studying what has occurred in the past using charts.  Technical analysis is concerned with what has actually happened in the market , rather than what should happen, and takes into accound the price of instruments and the volume of trading , and creates charts from that data as a primary tool.  One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments simultaneously.

Technical analysis is built on three essential principles:

  1. Market action discounts everything! This means that the actual price is a reflection of everything that is known to the market that could affect it. Some of these factors are: fundamentals supply and demand, political factors and market sentiment.  However , the pure technical analyst is only concerned with price movements, not with the reasons for any changes.
  2. Prices move in trends.  Technical analysis is used to identify patterns of market behavior that have long been recognized as significant.  For many given patterns there is a high probability that they will produce the expected results.  There are also recognized patterns that repeat themselves on a consistent basis.
  3. History repeats itself.  Forex chart patterns have been recognized and categorized for over 100 years, and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little over time.  Since patterns have worked well in the past, it is assumed that they will continue to work well into the future.
Disadvantages of Technical Analysis

  • Some critics claim that the Down approach is quite weak , since today's prices do not necessarily project future prices.
  • The critics claim that signals about the changing of a trend appear too late, often after the change had already taken place.  Therefore , traders who rely on technical analysis react too late, hence losing about 1/3 of the fluctuations;
  • Analysis made in short time intervals may be exposed to "noise" , and may result in a misreading of market directions;
  • The use of most patterns has been widely publicized in the last several years.  Many traders are quite familiar with these patterns and often act on them in concern.  This cretaes a self-fulfilling probhecy, as waves of buying or selling are created in response to "bullish" or "bearish" patterns.
Advantages of Technical Analysis

  • Technical analysis can be used to project movements of any asset available for trade in the capital market;
  • Technical analysis focuses on what is happened, and is therefore valid at any price level;
  • The technical approach concentrates on prices, which neutralizes external factors. Pure technical analysis is based on objective tools while disregarding emotions and other factors;
  • Signaling indicators sometimes point to the imminent end of a trend, before it shows in the actual market. Accordingly, the trader can mainting profit or minimize losses.
Various techniques and terms

Many different techniques and indicators can be used to follow and predict trends in markets.  The objective is to predict the major components of the trend: İts direction, its level and the timming.  Some of the most widely known include:

  • Bollinger Bands- a range of price volatility named after John Bollinger, who invented them in the 1980s.  They evolved from the concept of trading bands, and can be used to measure the relative height or depth of price.  A band is plotted two standard deviations away from a simple moving average.  As standard deviation is a measure of volatility, Bollinger Bands adjust themselves to market conditions.  When the markets become more volatile, the bands widen , and during less volatile periods, the bands contract.  Bollinger Bands are one of the most popular technical analysis techniques.  The closer prices move to the upper band , the more overbought is the market, and the closer prices move to the lower band, the more oversold is the market.
  • Support / Resistance - The support level is the lowest price an instrument trades at over a period of time.  The longer the price stays at a particular level, the stronger the support at that level.  On the chart this is price level under the market where buying interest is sufficiently strong to overcome selling pressure.  Some traders believe that the stronger the support at a given level, the less likely it will break below that level in the future.  The Resistance level is a price at which in instrument or market can trade, but which it cannot exceed, for a certain period of time.  On the chart this is a price level over the market where selling pressure overcomes buying pressure, and a price advence is turned back.
  • Support / Resistance Breakout - when a price passes through and stays beyond an area of supportor resistance.
  • CCI - Commodity Channel Index - an oscillator used to help determine when an investment instrument has been overbought and oversold.  The Commodity  Channel  Index,  first developed by Donald Lambert, quantifies the relationship between the asset's price, a moving average of the asset's price, and normal deviations from that average.  The CCI has seen substantial growth in popularity amongst technical investors; today's traders often use the indicator to determine cyclical trends in equities and currencies as well as commodities.         The CCI,  when used in conjunction with other oscillators, can be a valuable tool to identify potential peaks and valleys in the asset's price, and thus provide investors with reasonable evidence to estimate changes in the direction of price movement of the asset.
  • Hikkake Pattern - a method of identifying reversals and continuation patterns, this was discovered and introduced to the market through a series of published articles written by technical analyst Daniel L.Chesler,  CMT.  Used for determining market turning -points and continuations.  It is simple pattern that can be viewed in market price data, using traditional bar charts, or Japanese candlestick charts.
  • Moving averages - are used to emphasize the direction of a trend and to smooth out price and volume fluctuations, or "noise" that can confuse interpretation. There are seven different types of moving averages;
  1. simple (artichmetic)
  2. exponential
  3. time series
  4. weighed
  5. triangular
  6. variable
  7. volume adjusted
The only significant difference between the various types of moving averages is the weight assigned to the most recent data.  For example, a simple (arithmetic) moving average is calculatd by adding the closing price of the  instrument for a number of time periods, then dividing this total by the number of time periods.
The most popular method of interpreting a moving average is to compare the relationship between a moving average of the instrument's closing price, and the instrument's closing price itself.
  • Sell signal:   when the instrument's price falls below its moving average
  • Buy signal:   when the instrument's price rises above its moving average
The other technique is called the double crossover, which used short-term and long-term averages.   Typically ,  upward momentum is confirmed when a short-term average crossed above a longer-term average.  Downward momentum is confirmed when a short-term average crossed below a long-term average.
  • MACD - Moving Average Convergence / Divergance - a technical indicator, developed by Gerald Appel, used to detect swings in the price of financial instruments.  The MACD is computed using two exponentially smoothed moving averages of the security's historical price , and is usually shown over a period of tşime on a chart.  By then comparing the MACD is frequently used in conjunction with other technical indicators such as the RSI and the stochastic ascillator.
  • Momentum - is an oscillator designed to measure the rate of price change, not the actual price level. This ascillator consists of the net difference between the current closing price and the oldest closing price from a predetermined period.
M = CCP - OCP
Where:                   CCP- current closing price
                              OCP- old clossing price
Momentum and rate of change (ROC) are simple indicators showing the difference between today's closing price and the close N days ago. "Momentum" is simply the difference , and the ROC is a ratio expressed in percentage.   They refer in general to prices continuing to trend.  The momentum and ROC indicators show that by remaining positive, while an uptrend is sustained, or negative, while a downtrend is sustained.
A crossing up through zero may be used as a signal to buy, or a crossing down through zero as a signal to sell.  How high the indicators get shows how strong the trend is.
  • RSI - Relative Strenght Index- a technical momentum indicator, devised by Welles Wilder, measures the relative changes between the higher and lower closing prices.  RSI compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset.
The formula for calculating RSI is:

RSI=100 - <100 / (1+RS)>
Where:
RS - average of N days up closses, divided by average  of N days down closses
N- predetermined number of days

The RSI ranges from 0 to 100.   An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback.  Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued.  A trader using RSI should be aware that large surges and drops in the price of an asset will affect the RSI by creating false buy or sell signals.  The RSI is best used as a valuable complement to other stock-picking tools.

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Training for success

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Understanding the nuances  of the  Forex market requires experience and training, but is critical to succes.  In fact,  ongoing leraning is as important to the veteran trader as it is to the beginner.   The foreign currency market is massive, and the key to succes is knowledge.   Through training, observation and practice, you can learn hoe to identify and understand where the forex market is going, and what controls that direction.
To invest in the right currencies at the right time in a large, nonstop and global trading arena, there is much to learn.  Forex markets move quickly and can take new directions from moment to moment.  Forex training helps you asses when to enter a currency based on the direction it is taking, and how to forecast its direction for the near future.

Trainig with Easy-Forex

Easy-Forex offers one of the most effective forms of training through hands on experience.  For as little as USD 25 at risk per trade, you can start trading while learning in real-time.  Easy-Forex strongly recommends starting with very small volumes, and depositing an amount to cover a series of trades.  Learn the basics of the foreign exchange market, trading terminology, advanced technical analysis, and how to develop succesful trading strategies.  Discover how the Forex market offers more opportunities for quick financial gains than almost any other market.

The many available resources and tools to train yourself

There are many free tools and resources available in the market, particularly online. Among these, you will find;

Charts

There are many kinds of charts. Start with simple charts.  Try to identify trends and major changes, and try to relate them to technical patterns as well as to macro events.  Make an effort to determine the general magnitude of each change on the chart.

Guided tours

Most platforms provide guided tours, demos or tutorials, either online or via download.

News / breaking news

Keep abreast of world news.  Read all the headlines, particularly those directly related to Forex. Check the impact of such news, if any, on the charts.

Forex outlooks

Read daily/weekly outlooks posted on Forex or general financial sites. Many include alerts to upcoming reports and events such as market indicators and interest rate decision.

Forecasts

Read forecasts , some of which are available free of charge.  Bear in mind that forecasts and predictions are made by people , none of whom can guarantee the occurrence of future events...

Indices

Follow the indices of the leading markets.  Compare them to the changes in the  Forex  market,  as well as to changes in particular currency pairs.

Economic indicators

Pay attention to the release of economic indicators , and try to identify their impact on the market in general , and on specific currency pairs in particular.

Glossary

Don't hesitate to browse  Forex glossaries , which are offered free on many platforms.  A given word may have different meaning is it relates to  Forex and to the terminology used by the  Forex market participants.

Seminars and courses

Try to attend professional  Forex seminars.  Some seminars are offered free,  often as parts of a client recruitment process by a given platform ; many are, neverthelles, worth attending.  Educational courses are offered online and by many post-secondary institutions.

Forex books

Read, or even just browse.  Many books are offered free,  or as part of a service package to the trader.For many , historical background and technical analysis are topics better covered in books than in an educational setting.

Internet forums / blogs

Visit and participate in  Forex forums.   This gives you an opportunity to learn from the experience of others. Of course ,  remember that some forum participants may be biased, promoting a given  Forex platform or their own agenda.

So much to consider...

To succed as a  Forex trader ,  you must take into consideration a wide variety of factors such as:

  • spread ("pips");
  • commissions and fees;
  • ease of access to the trading platform;
  • minimum amounts needed for trading;
  • additional amounts needed (if any);
  • control over activity and positions;
  • the platform software requirements;
  • ease of deposits and withdrawals;
  • personal service and support provided by the platform;
  • the platform's business partners;
  • the platform's management , offices and outreach;
  • the products offered onboard the platform; and many others.
Online training, no downloads

Easy Forex is dedicated to educating its customers.  Customers can access free one-on-one online trading.  The training goal is to each people specific strategies for trading currencies over the internet.  Both novice investors and expert day traders have benefited from the training provided by Easy Forex.

The "demo" account idea

Many Forex platforms offer new registrants a "demo" account.  A typical example would provide 10,000 " demo" dollars that can be "traded" as a means of learning how to succeed in  Forex.
Easy Forex does not offer "demo" accounts.   Coming to understand that reason must rule over emotion is the most important lesson a trader can learn, and it cannot be done with play money.  If there is no learning, so "demo" accounts tend to have little educational value.  Rather,  Easy Forex allows you to start trading with just $100, including full access to one-on-one training.   New registrants are thus able to garner both an educational and experiential benefit unavailable through simulated situations.
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Overview of trading Forex online

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How a Forex system operates in real time

Online foreign exchange trading occurs in real time.  Exchange rates are constantly changing, in intervals of seconds.  Quotes are accurate for the time they are displayed only.  At any moment a different rate may be quoted.  When a trader locks in a rate and executes a transaction, that transaction is immediately processed; the trade has been executed.

Up-to-date exchange rates

As rates change so rapidly , any Forex software must display the most up-to-date rates.  To accomplish this, the Forex software is continuously communicating with a remote server that provides the most current exchange rates.  The rates quoted , inlike traditional bank exchange rates,  are actual tradable rates.  A trader may choose to "lock in" to a rate (called the "freeze rate") only as long as it is displayed.

Trading online on Forex platforms

The internet revolution caused a major change in the way  Forex trading is conducted throughout the world.
Until the advent of the internet-Forex age at the end of the 1990s,  Forex trading was conducted via phone orders (or fax, or in-person), posted to brokers or banks.  Most of the trading could be executed only during business hours.  The same was true for most activities related to  Forex ,  such as making the deposit necessary for trading ,  not to mention profit taking.  The internet has radically altered the  Forex market,  enabling around the clock trading and conveniences such as the use of credit cards for fund deposits.

Forex on the internet: basic steps

In general,  the individual  Forex trader is required to fulfill two steps prior to trading:

  • Register at the trading platform
  • Deposit funds to facilitate trading
Requirements vary with each trading platform, but these steps bear further discussion:

Registering

Registration is done online by the individual trader.  There are various forms used in the industry.  Some are quite simple ,  where others are longer and more time-consuming.  In part , this can be attributed to governmental or other authorities' requirements, though some Forex platforms require more information than is actually needed.  Some even require a face-to-face meeting, or to obtain hard copies of required documents such as a passport, or driver's license.

The key requirement for registration are the trader's full name, telephone, e-mail address, residence, and sometimes also the trader's yearly income or capital (equity) and an ID number (passport / driver's license / SSN / etc.).  Typically, the Forex platform is not required to run a thorough check, but rely on the registrant to be truthful.  Nevertheless, each Forex platform conducts certain routines, in order to check and verify the authenticity of the details provided.
Registrants are required to declare that funds used for trading are not in question, and are not the result of any criminal act or money laundering activity.  This is mandatory as part of a global anti-money laundering effort.

It is advised that the reader becomes familiar with Anti-Money Laundering regulations,  and the procedures associated with the prevention of this criminal activity.

Depositing funds

New registrants must deposit funds to facilitate trading.  However,  the majority of the Forex platforms today require that, in addition to funds used for actual trading, an additional amount be deposited.   Often called "maintenance margin" or "activity collateral" , its purpose is for the platform to have an additional guarantee.  Some of the platforms that require an additional deposit do pay interest on the collateral, which is "frozen" under the trader's name.
Trading Platform does NOT require any additional guarantee, and allows trading with 100% of the amount deposited. This site is able to provide these advantages because it assures "guaranteed rates and Stop-Loss". That means that there will never be any additional requirement for funds as a result of a "gap" that causes you to surpass the Stop-Loss.

Trading online

The trading platform operates 24 hours a day just as the global Forex market runs around the clock.
However , many online Forex market makers require the download and installation of software specific to their own trading platform.   Consequently, accessibility is limited to those terminals that have the software.   Since Forex trading is borderless, and may be performed at any given time, it is obviously advantageous to have access to trading from as many locations as possible.   Trading platform is a fully web-based system, which means trading can be conducted from any computer connected to the internet.   Traders are only required to log-in , ensure they have available funds to rate, or make new deposits, and commence trading.

The Trading Platform: real-time software

The main feature of any Forex trading platform is real time access to exchange rates, to deal and order making, to deposits and withdrawals, and to monitoring the status of positions and one's account.
Trading platform system user web services to continuously fetch the most current exchange rates.   The most recent data displays without the need for a page refresh.   This includes account status screens such as "My Position" , which updates continually to reflect changes in rates and other real time elements.

Transaction processing and storage

As soon as a transaction is executed, the relevant data is processed securely and sent to the data server where it is stored.   A backup is created on a different server farm, to ensure data integrity and continuity.  All of this happens in real time, with no human intervention.

Trading via brokers and dealing rooms (by phone)

Performing Forex trading via Dealing Room dealers (over the phone) requires knowledge about the way dealing rooms work , and the terminologies used in the course of trading.
At start, the client should specify whether he/she is interested in obtaining a QUOTE (in order to make a deal) or just an INDICATION.   In the case of an indication, the price given does not bind the dealer, but rather provides information about market conditions.

When asking for QUOTE , the trader must specify the currency pair and the deal amount (volume).  For example :  "Need a quote for EUR/USD  in EUR100,000"

It is wise to withold from the dealer the intended direction of the deal, specifying the pair only.   Accordingly, the dealer then provides a quote compirising two prices, buy and sell ("both sides quote"). The quote binds the dealer for the very second it is given.   If the trader does not immediately ask for execution, then the price is no longer in force.   The dealer would then tell the customer "risk" or "change" , meaning - the price quoted is no longer in force.   In such case, the trader should ask for a new price.

On the other hand , in order to make a deal, the trader must proclaim "buy" or "sell", together with the currency (orthe price).

An example:

  • The trader asks for a quote for EUR/USD
  • The dealer says "1.5010/15".
  • If the trader wants to sell EUR , he / she says "buy" (or "buy EURO", or "15").
  • If the trader wants to sell EUR , he / she says "sell" (or "sell EURO", or "10").
The moment the trader says "buy" (or "sell") he/she is bound to the deal, regardless of the market situation.
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What is the global Forex market?

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Today, the forex market is a nonstop cash market where currencies of nations are traded,  typically via brokers.  Foreign currencies are continually and simultaneously bought and sold across local and global markets.   The value of traders investment increases or decreases based  on currency movements.  Foreign exchange market conditions can change at any time in response to real-time events.

The main attractions of short-term currency trading to private investors are:


  • 24-hour trading,  5 days a week with nonstop access (24/7) to global Forex dealers.
  • An enormous liquid marketi making it easy to trade most currencies.
  • Volatile markets offering profit opportunities.
  • Standard instruments for controlling risk exposure.
  • The ability to profit in rising as well as falling markets.
  • Leveraged trading with low margin requirements.
  • Many options for zero commission trading.
A brief history of the Forex market

The following is an overview into the historical evolution of the foreign exchange market and the roots of the international currency trading, from the days of the gold exchange, through the Bretton-Woods Agreement. to its current manifestation.

The Gold exchange period and the Bretton-Woods Agreement

The bretton-Woods Agreement, established in 1944, fixed national currencies against the US dollar, and set the dollar at a rate of  US 35 per ounce of gold. In 1967 , a Chicago bank refused to make a loan in pound sterling to a college professor by the name of Milton Friedman, because he had intended to use the funds to short the British currency.  The bank's refusal to grant the loan was due to the Bretton-Woods Agreement.

Bretton-Woods was aimed at establishing international monetary stability by preventing money from taking flight across countries, thus curbing speculation in foreign currencies. Between 1876 and World War I ,  the gold exchange standard had ruled over the international economic system.  Under the gold standard , currencies experienced an era of stability because they were supported by the price of gold.

However, the gold standard had a weakness in that it tended to create boombust economies.  As an economy strengthened, it would  import a great deal, running down the gold reserves required to support its currency.  As a result, the money supply would diminish, interest rates would escalate and economic activity would slow to the point of recession.  Ultimately,  prices of commodities would hit rock bottom, thus appearing attractive to other nations, who would then sprint into a buying frenzy.  In turn , this would inject the economy with gold until it increased its money supply, thus driving down interest rates and restoring wealth.  Such boom-bust patterns were common throughout the era of the gold standard, until World War I  temporarily discontinued trade flows and the free movement of gold.

The Bretton-Woods Agreement was founded after World War II, in order to stabilize and regulate the international Forex market.  Participating countries agreed to try to maintain the value of their currency within a narrow margin against the dollar and an equivalent rate of gold.  The dollar gained a premium position as a reference currency, reflecting the shift in global economic dominance from Europe to the USA.  Countries were prohibited from devaluing their currencies to benefit export markets, and were only allowed to devalue their currencies by less than 10% Post-war construction during the 1950s, however , required great volumes of Forex trading as masses of capital were needed.  This had a destabilizing effect on the exchange rates established in Bretton-Woods.

In 1971, the agreement was scrapped when the US dollar ceased to be exchangeable for gold.  By 1973,  the forces of supply and demand were in control of the currencies of major industrialized naions, and currency now moved more freely across borders.  Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s.  New financial instruments, market deregulation and trade liberalization emerged, further stoking growth of Forex markets.

The explosion of computer technology that began in the 1980s accelerated the pace by extending the market continuum for cross-border capital movements throught Asian, European and American time zones.  Transactions in foreign exchange increased rapidly from nearly $70 bilion a day in the 1980s , to more than $3 trillion a day two decades later.


The explosion of the euro market

The rapid development of the Eurodollar market ,  which can be defined as US dollars dposited in banks outside the US, was a major mechanism for speeding up Forex trading. Similarly , Euro markets are those where currencies are deposited outside their country of origin.  The Eurodollar market came into being in the 1950s as a result of the Soviet Union depositing US dollars earned from oil revenue outside the US , in fear of having these assets frozen by US regulators.  This gave rise to a vast offshore pool of dollars outside the control of US authorities.  The US government reacted by imposing laws to restrict dollar lending to foreigners.  Euro markets were particularly attractive because they had far fewer regulations and offered higher yields.  From the late 1980s onwards, US companies bagan to borrow offshore, finding Euro markets an advantageous place for holding excess liquidity, providing short term loans and financing imports and exports.

London was and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market, when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance.    London's convenient geographical location (operating during Asian and American markets)  is also instrumental in preserving its dominance in the Euro market.

Euro-Dollar currency exchange

The euro to US dollar exchange rate is the price at which the world demand for US dollars equals the world supply of euros.  Regardless of geographical origin, a rise in the world demand for euros leads to an appreciation of the euro.

Factors affecting the Euro to US dollar exchange rate

Four factors are identified as fundamental determinants of the real euro to US dollar exchange rate.

  • The international real interest rate differential between the Federal Reserve and European Central Bank.
  • Relative prices in the traded and non-traded goods sectors.
  • The real oil price
  • The relative fiscal position of the US and Euro zone.
The nominal bilateral US dollar to euro exchange is the exchange rate that attracts the most attention.  Notwithstanding the comparative importance of bilateral trade links with US , trade with the UK is, to some extent, more important for the euro.

The following chart illustrates the EUR/USD exchange rate over time , from the inauguration of the euro, until mid 2006.  Note that each line (the EUR/USD,  USD/EUR)  is a "mirror"  image of the other, since both are reciprocal to one another. This chart is illustrates the steady (general) decline of the USD (in terms of euro) from the beginning of 2002 until the end of 2004.

EUR-USD rates 1998-2008

In the long run, the correlation between the bilateral US dollar to euro exchange rate, and different measures of the effective exchange rate of Euroland , has been rather hight, especially when one looks at the effective real exchange rate.  As inflation is at very similar levels in the US and the Euro area, there is no need to adjust the US dollar to Euro rate for inflation differentials.  However, because the Euro zone also trades intensively with countries that have relatively high inflation rates  (e.g. some countries in Central and Eastern Europe, Turkey, etc.), it is more importand to downplay nominal exchange rate measures by looking at relative price and cost developments.


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What is Forex trading? What is a Forex deal?

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What is Forex trading? What is a Forex deal?
The investor's goal in   Forex   trading is  to  profit   from   foreign   currency movements.

 More than 95% of all Forex trading performed today is for speculative purposes (e.g.  to   profit   from   currency   movements).   The   rest   belongs   to   hedging (managing business exposures to various currencies) and other activities.
Forex trades  (trading onboard internet platforms) are non-delivery trades: currencies are not physically traded, but rather there are currency contracts which are agreed upon and performed. Both parties  to  fulfill their obligations: one side undertakes to sell the amount specified, and the other undertakes to buy it. As mentioned, over 95% of the market activity is for speculative purposes, so there is no intention on either side to actually perform the contract (the physical delivery of the currencies). Thus , the contract ends by offsetting it against an opposite position, resulting in the profit and loss of the parties involved.

Components of a Forex deal

A Forex deal is a contract agreed upon between the trader and the market maker (i.e. the Trading Platform).  The contract is comprised of the following components:


  • The currency pairs (which currency to buy; which currency to sell)
  • The principal amount (or "face", "nominal": the amount of currency involved in the deal)
Time frame is also a factor in some deals, but this chapter focuses on Day-Trading (similar to "Spot" or " "Current Time " trading ), in which deals have a lifespan of no more than a single full day.  Thus,  time frame does not play into the equation.  Note, however, that deals can be renewed ("rolled-over") to the next day for a limited period of time.

The Forex deal, in this context, is therefore an obligation to buy and sell a specified amount of a particular pair of currencies at a pre-determined exchange rate.
Forex trading is always done in currency pairs. For example, imagine that the exchange rate of EUR/USD (euros  to  US  dollars)  on a certain day is  1.5000 (this number is also referred to as a "spot rate" , or just "rate" , for short) If an investor had bought 1,000 euros on that date, he would have paid 1,500.00 US dollars. If one year later, the Forex  rate was 1.5100, the value of the euro has increased in relation to the US dollar. The investor could now sell the 1,03300 euros in order to receive 1,510.00 US dollars. The investor would then have USD 10.00 more than when he started a year earlier.

Trade only when you expect the currency you are buying to increase in value relative to the currency you are selling.  If the currency you are buying does increase in value , you must sell back that currency in order to lock in the profit. An open trade (also called an "open position") is one in which a trader has bought or sold a particular currency pair, and has not yet sold or bought back the equivalent amount to complete the deal.

It is estimated that around 95% of the Fx market is speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather , they where solely speculating on the movement of that particular currency.

Exchange rate

Because currencies are traded in pairs and exchanged one against the other when traded, the rate at which they are exchanged is called the exchange rate. The majority of currencies are traded against the US dollar (USD), which is traded more than any other currency. The four currencies traded most frequently after the US dollar are the euro (EUR), the japanese yen (JPY), the British pound sterling (GBP) and the Swiss franc (CHF). These five currencies make up the majority of the market and are called the major currencies or "the Majors". Some sources also include the Australian dollar (AUD) within the group of major currencies.
The first currency in the exchange pair is referred to as the base currency. The second currency is the counter currency or quote currency. The counter or quote currency is thus the numerator in the ratio, and the base currency is the denominator.
The exchange rate tells a buyer how much of the counter or quote currency must be paid to obtain one unit of the base currency. The exchange rate also tells a seller how much is received in the counter or quote currency when selling one unit of the base currency. For example , an exchange rate for EUR/USD of 1.5083 specifies to the buyer of euros that 1.5083 USD must be paid to obtain 1 euro.

Spreads

It is the difference between BUY and SELL, or BID and ASK. In other words, this is the difference between the market maker's "selling" price (to its clients) and the price the market maker"buys" it from its clients.
If an investor buys a acurrency and immediately sells it (and thus there is no change in the rate of exchange), the investor will lose money. The reason for this is "the spread".   At any given moment, the amound that will be received in the counter currency when selling a unit of base currency will be lover than the amount of counter currency.  For instance, the EUR/USD bid/ask currency rates at your bank may be 1.4975/1.5025, representing a spread of 500 pips (percentage in points; one pip =0.0001).   Such a rate is much higher than the bid/ask currency rates that online Forex investors commonly encounter , such as 1.5015/1.5020, with a spread of 5 pips. In general , smaller spreads are better for Forex investors since they require a smaller movement in exchange rates in order to profit from a trade.

Prices, Quotes and Indications

The price of a currency (in terms of the counter currency), is called "Quote". There are two kinds of quotes in the Forex market.

Direct Quote: the price for 1 US dollar in terms of the other currency , e.g. Japanese Yen, Canadian dollar, etc.
İndirect Quote: the price of 1 unit of a currency in terms of US dollars, e.g. British pound, euro.

The market maker provides the investor with a quote.  The quote is the price the market maker will honor when the deal is executed.    This is unlike an "indication" by the market maker , which informs the trader about the market price level , but is not the final rate for a deal.
Cross rates - any quote which is not against the US dollar is called "cross".  For example , GBP/JPY is a cross rate , since it is calculated via the US dollar.  Here is how the GBP/JPY rate is calculated.

GBP/USD = 2.0000;
USD/JPY =110.00;
Therefore: GBP/FPY = 110.00 X 2.0000 = 220.00.

Margin

Banks and/or online trading providers need collateral to ensure that the investor can pay in the event of a loss. The collateral is called the "margin" and is also known as minimum security in Forex markets.   In practice, it is a deposit to the traders account that is intended to cover any currency trading losses in the future.
Margin enables private investors to trade in markets that have hight minimum units of trading, by allowing traders to hold a much larger position than their account value. Margin trading also enhances the rate of profit, but smilarly enhances the rate of loss, beyond that taken without leveraging.

Maintenance Margin

Most trading platforms requre a "maintenance margin" be deposited by the trader parallel to the margins deposides for actual trades. The main reason for this is to ensure the necessary amount is available in the event of a "gap" or "slippage" in rates.   Maintenance margins are also used to cover administrative costs.
When a trader sets a Stop-Loss rate, most market makers cannot guarantee that the stop-loss will actually be used.  For example , if the market for a particular counter currency had a vertical fall from 1.1850 to 1.1900 between the close and opening of the market, and the trader had a stop-loss of 1.1875, at which rate would the deal be closed? No matter how the rate slippage is accounted for, the trader would probably be required to add-up on his initial margin to finalize the automatically closed transaction.  The funds from the maintenance margin might be used for this purpose.

Leverage

Leveraged financing is a common practia in Forex trading, and allows traders to use credit, such as a trade purchased on margin, to maximize returns.Collateral for the loan/leverage in the margined account is provided by the initial deposit.  This can create the opportunity to control USD 100,000 for as little as USD 1,000.
There are five ways private investors can trade in Forex, directly or indirectly:


  • The spot market
  • Forwards and futures
  • Options
  • Contracts for difference
  • Spread betting
Please note that this blog focuses on the most common way of trading in the Forex market, "Day-Trading" (related to "Spot").   Please ferer to the glossary for explanations of each of the five ways investors can trade in Forex.

A spot transaction

A spot transaction is a straightforward exchange of one currency for another.The spot rate is the current market price , which is also called the "benchmark price". Spot transactions do not require immediate settlement, or payment "on the spot".  The settlement date , or "value date" is the secont business day after the "deal date" (or "trade date") on which the transaction is agreed by the trader and market maker. The two-day period provides time to confirm the agreement and to arranege the clearing and necessary debiting and crediting of bank accounts in various international locations.

Risks

Although Forex trading trading can lead to very profitable results,  there are substantial risks involved: exchange rate risks,interest rate risks, credit risks and event risks.
Approximately 80% of all currency transactions last a period of seven days or less, with more than 40% lasting fewer than two days. Given the extremely short lifespan of the typical trade,  technical indicators heavily influence entr, exit and order placement decisions.

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Forex? What is it, anyway?

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The market
The currency trading (foreign exchange, forex, fx) market is the biggest and fastest growing market on earth. Its daily turnover is more than 2.5 tirilion dollars. The participants in this market are central and commercial banks, corporations , institutional investors, hedge funds, and private individuals like you.

What happens in the market?
Markets are places where goods are traded, and the same goes with forex. In forex markets, the 'goods' are the currencies of various countries (as well as gold and silver). For example, you might buy euro with US dollars, or you might sell Japanese Yen for Canadian dollars. It's as basic as trading one currency for another.
Of course, you don't have to purchase or sell actual, physical currency: you trade and work with yourn own base currency, and deal with any currency pair you wish to.

"Leverage" is the Forex advantage
The ratio of investment to actual value is called "leverage". Using a $ 1,000 to buy a forex contract with a $ 100,000 value is "leveraging" at a 1:100 ratio. The $ 1,000 is all you invest and all you risk , but the gains you can make may be many times greater.

How does one profit in the Forex market?
Obviously, buy  low  and  sell  high! The profit potential comes from the fluctuations (changes) in the currency exchange market. Unlike the stock market , where share are purchased, Forex trading does not require physical purchase of the currencies, but rather involves contracts for amound and exchange rate of currency pairs.
The  advantageous thing about the forex market is that regular daily fluctuations - in the regular currency exchange markets, often around 1% - are multiplied by 100! (Easy-Forex generally offers trading ratios from 1:50 to 1:200).

How risky is forex trading?
You cannot lose more than your initial investment (also called your "margin"). The profit you may make is unlimited, but you can never lose more than you can afford to lose.

How do I start trading?
If you wish to trade using the Easy-Forex Trading Platform, or any other , you must first register and then  deposit the amount you wish to have in your margin account to invest. Registering is easy with Easy-Forex and it accepts payment via most major   credit cards,  PayPal,  Western  Union.     Once your deposit has been received, you are ready to start trading

How do I monitor my Forex trading?
Online , anywhere , anytime.  you have full control to monitor your trading status, check scenarios, change some terms in your Forex deals, close deals, or withdraw profits.
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