currency trading guide

8/6/2019 Currency Trading Guide

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Table of Contents

Introduction to the Forex Market ...................................................................... 3

How is Foreign Exchange Traded .................................................................... 4

The Advantages of Trading ............................................................................. 6

Currency Pairs ................................................................................................. 7

The Concept of Leverage ................................................................................ 8

Trading Costs .................................................................................................. 9

Fundamental Analysis .................................................................................... 10

Technical Analysis ......................................................................................... 14

Risk Management .......................................................................................... 19Psychology of the Trader ............................................................................... 20

Contacting US ................................................................................................ 22


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Introduction to the Forex Market

Forex the foreign exchange market is the World's most interesting financial

market. It is one of the few markets whose sheer size makes it almost impossible

for any one person, institution or government to control. Unlike other financial

security markets forex has no centralized market. There is no single location where

transactions are placed.

Forex is the largest financial market in the world. The market is open 24 hours a

day from Monday to Friday and it records trading volumes of more than $3 trillion

per day. The massive trade volume in the forex market three times greater than

the sum of all US financial markets combined - makes the forex market the most

liquid market in the World. Your trades will always be carried out immediately.

In the forex market the transactions that are undertaken are necessary because

large institutions, governments, businesses and individuals need foreign currency

to buy and sell goods and service. The foreign exchange market allows fund

managers, banks, companies and individuals to buy and sell foreign exchange

globally.

The market was previously an Inter Bank market. It was generally conducted

between large financial corporations, brokers and even governments. The market

has now moved to such a state that anyone can participate. However, the market

still get its prices from the largest participants in the market, based in financial

centers such as London and New York.

There are many different types of traders in the forex market. This is because the

amount of money used in trades can be anything from a few thousand dollars to

billions of dollars and the leverage in the market can vary from 1:1 to as high as

400:1.


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How is Foreign Exchange Traded?

In forex trading one currency is always bought and another sold at the same time.

Currencies are quoted and traded in pairs such as EUR-USD. The major currencies

are EUR (euro), GBP (sterling/British pound), AUD (Australian dollar), NZD (New

Zealand dollar), CAD (Canadian dollar), CHF (Swiss franc) and JPY (Japanese yen)

and they are traded against the USD (US dollar). The major currencies are always

quoted in the following order:

The first currency listed in a pair is known as the base currency, while the secondcurrency is called the counter or quote currency. The base currency is the "basis" for

the Bid price (the cost of selling the base currency) or the Ask price (the cost of

buying the base currency). For example, if you Ask EUR/USD you have bought euros

(and simultaneously sold dollars). You would do this if you expected that the euro

would rise in value against the US dollar.

If the EUR/USD is quoted at 1.5460, that means that one euro is currently worth just

over $1.54. If the market moves from 1.5460 up to 1.5461 that represents a move of

one pip. A pip is the smallest increment of a currency pair and it is one ten

thousandth of a euro, dollar or pound and one hundredth of a yen.

Forex is traditionally traded in lots, which represent 100,000 units of the base

currency although much smaller lot sizes are available today. In the case of the

EUR/USD currency pair, a pip is worth $10 in one lot and is $1 in a 10,000 EUR/USD

position so a movement of one pip would be worth $10 on a 100,000 position and

$1 on a 10,000 position.


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A Trade Example

You think that the euro will rise against the dollar and so you Ask the EUR-USD

currency pair. You are correct, the price rises and you close the trade.

The EUR/USD was trading at 1.5460 when you asked (bought) it.

The EUR/USD was trading at 1.5590 when you bid (sold) it.

You bought at 1.5460 and sold at 1.5590 for a profit of 0.0130 or 130 pips.

If your trade had been worth $100,000 each pip would have been worth $10.

On 130 pips x $10 you would make a $1,300 profit

In forex, you also have the opportunity to short sell (Bid first) a currency pair if you

think it will fall in price. If you had thought that the euro was going to fall relative tothe U.S. dollar you would have Bid on the EUR-USD currency pair. Again, you were

correct and you closed your position for a profit.

The EUR/USD was trading at 1.5460 when you bid it.

The EUR/USD was trading at 1.5330 when you sold it.

You sold at 1.5460 and closed your position at 1.5330 for a profit of 0.0130 or 130 pips.

Again your position was $100,000 making each pip worth $10.

130 pips x $10 = $1,300 profit

Remember that these are profitable examples. Always evaluate your positions

carefully; ending up on the wrong side of a trade can be very expensive.


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The Advantages of Trading in the Forex Market

High Leverage: Generally forex brokerage service providers offer a leverage of

100:1 however, XForex offers customers leverage of 400:1. This means for every

$1,000 you place in your account you have access to trade with $400,000 worth of

contracts..

Low Margin: Traders can utilize a small amount of funds in order to take a large

position. If you should happen to incur a loss, your broker will close your position

when the loss equals the balance in your account.

Liquidity: The forex market trades between $2.5 and $3 trillion daily. The enormous

size of the market means trades can always be carried out immediately and that the

market is too large for any one player to control.

24 Hours Trading: The forex market operates 24 hours a day from Monday

morning Sydney Australia time to Friday evening New York (EST) time. Therefore

traders have immediate access to information, their accounts and transaction ability

without after hours price fluctuation vulnerability.

Trade Both Sides of the Market: You can profit from price movements in either

direction, whether prices are going up or down. You can profit in a bear or a bull

market and the economy of any country is irrelevant to make profits.

Low Trading Costs: Forex brokers will only charge you for the difference of a buy

and sell price quote. There are no commissions or other charges payable by the

trader.


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Currency Pairs

What is the significance of currency pairs? A currency pair represents the

exchange rate between two currencies. For example, the rate at which the

EUR/USD is trading represents the number of US Dollars one Euro can purchase.

The first currency listed is always the base currency.

When to buy a pair. If, e.g. a trader believed that the Bank of Japan was likely to

intervene to cause a decrease in the yen against the US dollar, then the trader

would Buy USD-JPY (Ask the US Dollar/Bid the Yen) expecting that the price of the

USD-JPY would rise.

When to sell a pair. If a trader believed, e.g. that Japanese investors were losingfaith in the United States' economy and were pulling money out of the US into

Japan, then the trader would Sell USD-JPY (Bid the US Dollar/Ask the Yen)

expecting that the price of the USD-JPY would fall.

Below is an example of how currency pairs are listed on the XForex trading

platform. The currency pairs are listed on the left side of the screen. The Bid price is

the level at which a trader Bids the currency pair and the Ask price is the level at

which a trader Asks the currency pair.


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The Concept of Leverage What is Leverage?

Leverage allows traders to borrow money and use it to invest in the foreign

exchange market. Due to the availability of leverage, clients are able to make large

investments without needing huge amounts of capital. In other markets, such as the

equities market, clients would have to pay 50% of the full amount for each share of

stock they were investing in. Most market makers allow positions to be leveraged up

to 100:1. This means that if a trader wanted to Ask a lot worth $100,000, with

100:1 leverage the trader only has to put up $1,000. XForex offers leverage up to

400:1. Leverage multiplies all aspects of a trade including both profitability and risk.

Increasing your leverage increases the opportunity both to take bigger profits and

sometimes to rack up bigger losses.

What is margin? Margin is a deposit, that guarantees your trading losses. The

margin requirement allows traders to hold a position much larger than the account

value. In the event that funds in the account fall below the margin requirements,

your broker will close some or all open positions. This prevents clients' accounts

from falling into a negative balance, even in a highly volatile, fast moving market.

How are leverage and margin related? Leverage and margin are related in the

way mentioned above the amount of leverage a market maker gives to a client

defines the amount of margin that the client will have to commit in order to take a

position in the market. For example, when leverage is 100:1, the 1 in the leverage

ratio signifies the amount of capital the customer has invested of his own money,

which is also known as the margin.


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Trading Costs

How much does it cost for a trader to make a trade? Traders do not take

positions on a currency pair at the exact rate at which the currencies are trading.

Instead, they are offered two rates for the currency pair: the bid rate and the ask

rate.

The bid rate is the price at which traders can Sell the pair.

The ask rate is the price at which traders can Buy the pair.

Above are some example currency pairs. The ask (Buy) rate is always higher than

the bid (Sell) rate and the spread on the EUR/USD is 3 pips, meaning that if a trader

Asks this pair, then the Bid rate of this pair will have to go up 3 pips in order for the

trader to break even.

The ask rate will always be higher than the bid rate. The difference between the bid

rate and the ask rate is the spread. The spread is an automatic adjustment that is

made to the trader's account when making the trade. Because of this spread,

traders will begin every position they assume with a small loss and will need to gain

some profit in order to break even.

For example, if a trader Asks into a position at the ask rate, and then immediately

closes the position at the bid rate, the trader will have a loss on their account that is

equal to the spread. These spreads are seen in every kind of market. However, it

can be difficult to identify the spread cost in the equities and futures markets due to

the broker-based system they use.


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Fundamental Analysis

What influences prices in the forex market? Prices in the currencies market are

affected by macroeconomic factors, such as inflation, unemployment, and industrial

production. Information on events such as these is easy to find. Fundamental

analysis is based on the analysis of economic data, and traders try to use this

information to take positions in the market in order to make profit.

There are three main macroeconomic factors a trader should focus on when

analyzing foreign exchange rates:

Interest Rates: Each currency has an overnight lending rate. This is determined by

a countrys central bank. Lower interest rates usually lead to the value of the

country's currency declining. This is largely due to traders who execute carry-trades.

A carry-trade is a trade where a currency with a low interest rate is sold and a

currency with a high interest rate is bought. This is based on the idea that

currencies with higher interest rates will generally rise in value, and will rollover and

allow trades to earn interest on a daily basis.

Employment: The unemployment rate is a key indicator of its economic strength. If

a country has a high unemployment rate, it means its economy is not strong enough

to provide people with jobs, and this leads to a decline in the currency value.

Geopolitical Events: Key international political events affect not only the foreign

exchange market, but all other markets as well.


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Fundamental Analysis Techniques

How does fundamental analysis explain long term trends? Fundamental

analysis is very useful for determining long term trends within a currency pair. By

focusing on long term economic factors that affect countries, fundamental analysis

predicts long term trends.

Examples of How to Use Fundamental Analysis with the Major Currency Pairs

EUR/USD

When the dollar weakens the EUR/USD will rise and if the USD recovers then a

strong foreign demand will send the EUR/USD lower. If you think the U.S. economy

will become weaker and hurt the US dollar, you can ASK the EUR/USD. If you think

that there will be increased foreign demand for US financial instruments such as

equities and treasuries, that benefit the US dollar, you can BID EUR/USD as you are

expecting the euro to lose value against the dollar.

USD/JPY

Japanese government intervention to weaken their currency sends the USD/JPY

higher and gains in the Nikkei and demand for Japanese assets drive the USD/JPY

down. For example, if you think that the Japanese government will continue to

weaken the yen in order to help its export industry, you would click on ASK,

expecting the U.S. dollar to increase in value against the yen. If you think that

Japanese investors are pulling money out of U.S. financial markets and repatriating

funds back into the Japanese asset markets, such as the Nikkei, you would click on

BID. This means that you expect the yen to strengthen against the U.S. dollar as

Japanese investors Bid their assets and convert their dollars back into yen.

GBP/USD

High Yield and attractive growth in the UK drives the GBP/USD higher. Speculation

about the UK adopting the euro will send the GBP/USD lower. For example, if you

think the British economy will benefit from high yield and attractive growth in the

future, you would click ASK, which means that you expect the British Pound to

strengthen against the U.S. dollar. If you believe the British are about to commit

themselves to adopting the Euro, you would click BID, expecting the pound to


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weaken against the dollar as the British devalue their currency in anticipation of

merging with the euro.

USD/CHF

Global stability and global recovery send the USD/CHF higher, the USD/CHFweakens on geopolitical instability. For example, if you think that the market is

headed towards a period of global stability and economic recovery, meaning that

investors no longer need to park their money in a safe haven currency such as the

Swiss franc, you would click ASK, expecting the U.S. dollar to strengthen against

the Swiss franc. If you believe that due to instability in the Middle East and in U.S.

financial markets, the dollar will continue to weaken, you would click BID, expecting

the Swiss franc to strengthen against the dollar.

EUR/CHF

The Swiss government uses verbal intervention to weaken the franc, sending the

EUR/CHF higher. If inflation took off in Germany and France it could drive the

EUR/CHF lower. Thus, for example, if you think the Swiss government wishes to

devalue the currency to help exports in Europe, you would click ASK, expecting the

euro to increase in value against the Swiss franc. If inflation started taking off in

Germany and France, you would click BID expecting the Swiss franc to increase in

value against a devalued euro.

AUD/USD

Rising commodity prices send the AUD/USD higher. Droughts hurt the Australian

economy and the AUD/USD. For example, if you think that commodity prices are

going to rise dramatically, thus benefiting the Australian dollar, you would click ASK,

expecting the Aussie to strengthen against the U.S. dollar due to Australia's status

as one of the world's leading commodity exporters. If you believe that Australia will

face another drought, hurting the domestic economy, you would click BID, expecting

the U.S. dollar to strengthen against the Australian dollar.

USD/CAD

Canadian economic underperformance against the US sends the USD/CAD higher.

Higher interest rates and a rebounding labor market in Canada will help to drive the

USD/CAD lower. If, for example, you think that the U.S. economy is going to

rebound while the Canadian economy goes into recession, you would click ASK,


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expecting the U.S. dollar to strengthen against the Canadian dollar. If you believe

that the higher yields and rebounding labor market in Canada warrants a higher

valuation for the Canadian dollar against the U.S. dollar, you would click BID,

expecting the Canadian dollar to strengthen against the U.S. dollar.

NZD/USD

Bad weather in the US, increasing demand for foreign wheat, would send the

NZD/USD higher. The expectation that New Zealand Interest rates will decrease

would send the NZD/USD lower. If, for example, you think that Hurricane damage in

the US will lead to an increase in wheat imports from foreign nations, such as New

Zealand, you would click ASK, expecting the New Zealand Dollar to strengthen in

value against the U.S. dollar. If you felt that interest rates in New Zealand will fall in

the future while interest rates in the US will continue to rise, you would click BID

expecting the New Zealand dollar to drop in value against the U.S. dollar.


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Technical Analysis

What is so great about technical analysis? Once a trader masters technical

analysis, it can be easily applied to any currency or time frame. Technical analysis

allows the user to figure out, in a relatively short time, where trends are going.

Because of the short time it takes to study price curves, technical analysts are able

to follow many currencies at the same time, whereas fundamental analysts usually

focus on one or two pairs of currencies, because there is so much information in the

market for them to analyze.

Technical analysis offers many different ways for traders to analyze market

information. Traders who use fundamental analysis can sometimes run into trouble

because the sheer amount of data they are attempting to organize can beoverwhelming. This can lead to misdirection, misunderstanding and ultimately, loss

of money. On the other hand, technical analysis can be much more straightforward.

Many traders even consider it to be self-fulfilling, meaning that it works well because

so many traders use it. This is an important aspect of technical analysis because if

many traders are basing their decisions on technical indicators, then the indicators

must be watched since they reflect the sentiment of the market and the majority of

the traders.

Why is the foreign exchange market the best market to use technical

analysis? The foundation behind using technical analysis is to find trends when

they first develop, which allows the trader to follow the trend until it ends. The

foreign exchange market is typically composed of trends and is, therefore, a place

where technical analysis can be effective. Traders are able to speculate on both up

and down trends in the foreign exchange market because it is possible to Ask a

currency and Bid against another currency. This aspect of currency trading works

well with technical analysis, because technical analysis helps determine where the

trends are and which way they are going, thus giving the trader a chance of profitingfrom the market, regardless of its direction.

In comparison to the equities and futures markets, technical analysis is much more

common and popular within the foreign exchange markets, which causes the

traders to pay attention. The market partly moves because of all the technical

analysis performed. For example, according to technical analysis, if a currency pair

decrease, then the majority of traders will Bid the pair, causing it to drop further.


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Support and Resistance

At the core of all technical analysis theory are two very simple concepts: support

and resistance. Support can be defined as a floor through which the currency pair

has trouble falling below. There is no scientific formula for calculating support; it is

something that is typically eyeballed by traders, and which has a subjective

element, as a result.

Resistance, on the other hand, is simply the opposite: it is the upper boundary

through which a currency pair has trouble breaking. Similar to support, resistance

levels are somewhat subjective. Generally, if the market reaches a price level a

certain number of times and cannot sustain a break above that level; it can be

identified as resistance.

The reason why price has trouble breaking these levels is the presence of actual

orders around these levels. A support level is simply a price area where Ask orders

tend to be, and so it takes more than normal Biding pressure to break that level.

Similarly, a resistance level is a price area where Bid orders tend to be, and so it

takes more than normal Asking pressure to break that level.

Support and Resistance in a Range- Trading Markets

One simple way to use support and resistance in trading is to simply trade the

range: in other words, traders can simply Ask at support levels, and Bid at

resistance levels. The forex market is range-bound a majority of the time, making

this a simple and attractive strategy for many market conditions.

The two disadvantages of range- trading:

Trading in a range generally does not result in substantial gains on a per-trade

basis.

When the market breaks out of the range, generally, it will make big moves. As a

result, traders trading with range strategies can suffer big losses when the market

breaks out of the range. The chart below illustrates the concept of range-bound

trading.


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Support and Resistance in Momentum Markets

Another way to use support and resistance is to trade outside of the range; in other

words, to anticipate a breakout. This involves placing orders to Ask above

resistance and to Bid below support. The rationale is that the market will gain

momentum once it breaks out of the range, and thus by placing orders just below or

above of support or resistance, traders may be able to profit if the market continues

to move out of the range and they are on the right side of the market. Momentum

trading is a bit counter-intuitive, as it involves Asking at a higher price and Biding at

a lower price.

Below is a chart that illustrates the concept of momentum trading.


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Tools in Technical Analysis

Oscillators

Oscillators are a type of mechanical trading tool that are used to indicate when a

currency pair is overbought or oversold. A popular oscillator is the Relative Strength

Index.

Relative Strength Index

The relative strength index (RSI) measures a currency pair's strength relative to its

recent past performance. As the indicator is front-weighted (more importance is

given to the most recent data), it usually provides a better velocity reading than

other oscillators. RSI is less affected by sharp movements, and filters out a lot of

"noise" in the Forex market. Many traders also use this indicator as a substitute for

volume confirmation, since the huge amount of traders in the forex market, from all

over the world, make real-time volume reporting impossible. RSI levels are between

0 and 100. Most traders use 30 as an oversold condition and 70 as an overbought

condition, although some traders may use 20 and 80. When choosing the settings

for RSI, traders should typically use the default time period of 14, since that is what

the market as whole tends to look at.

In general RSI is used in five different ways:

Top and Bottoms - Overbought and Oversold conditions are usually signaled at 30

and 70.

Divergences - When a pair makes new highs (lows) but RSI does not, this usually

indicates that a reversal in price is coming.

Support and Resistance - RSI may show levels of support and resistance,

sometimes more clearly than the price chart itself.

Chart Formations - Patterns such as double tops and head and shoulder may be

more visible on RSI rather than on the price charts.

Failure Swings - When RSI breaks out (surpasses previous highs or lows), this may

indicate that a breakout in price is coming.


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RSI was useful in detecting this USD/JPY short after a crossover of the 70

"overbought" level materialized on the daily. Following the clear Bid signals, the pair

moved down 450 pips over the next 30 days.

.


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Psychology of the Trader

What should the psychology of the trader be? Before placing trades, traders

must sufficiently analyze the positions they are about to take. However, many do not

thoroughly plan out their actions, and instead make trades based on guesses and

hunches. This can result in traders losing a lot of money very fast. How can this be

avoided? Through careful planning and analyses, including knowing where to place

Stop Loss and limit orders, a trader can keep losses to a minimum while allowing

profits to run.

Make sure to have a plan that utilizes stop and limit levels before making the trade

in order to minimize losses and lock in profits.

One huge psychological error that many traders make is going against their original

plan; either by closing positions to take a profit before they reach their original profit

target or by failing to close a losing position in the hopes that the market will swing

back in their favor. Another psychological error traders make is to believe that, with

patience, every trade can turn out to be profitable. If there is an instance where a

stop is hit, and then the market goes back in favor of the position the trader had

held, this belief can cause the trader to remove stops from their trades.

What is often forgotten is that stops are there to keep traders from losing more

money than they would like; not to act as roadblocks against profit. It is okay to hit

stops and lose a pre-determined amount of money because when a trader lets

profitable trades run, the loss will be made up for and more. Professional traders

never try to improvise and nor should anyone new to the market. Stick with your

original plan and always follow the precautions you put in place before the trade.

A third important psychological error traders sometimes make is to become too

committed to an individual trade and unwilling to let it go, when this is advisable, as

a result. A trader must keep their original analysis in mind when seeing the result of

a trade, and be objective about what is happening to their position, and what they

should do about it. However, many traders attempt to analyze the position differently

from the original analysis so that the analysis will favor their original position. They

intentionally distort their analysis for one of two reasons: they do not want to close


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the position with a loss or they are hoping that the position will become more

profitable than it already is.

This psychological viewpoint causes many traders to lose the profit that they had

made, or to lose more than they originally would have lost.

A mistake made by many traders is over trading, meaning that they trade much

larger amounts of their account than is reasonable or trade too frequently. Although

leverage allows traders to trade one lot of currency with only $1,000 as a margin

deposit, it does not mean that traders should trade their entire available margin in

one or two trades.

The psychological mistake they are making is that they are thinking of their trade asa $1,000 investment, when in actuality it is a $100,000 investment. Although most

traders perform adequate analysis of currencies before placing trades, they

sometimes use too much of their margin and are later forced to exit the position at

the wrong time. A general rule that traders can try to follow in order to keep from

getting over-leveraged is to never use too much of their account at any given time;

keeping enough margin available to cover your positions is critical to succesful

trading.


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Contacting Us

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On behalf of XForex, welcome; we wish you every success in your trades!

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