Introduction to Forex?

Topic Covers | Introduction on Forex, Explanation of the World Forex Markets, Foreign Exchange


What is Forex?

Basic Explanation of the Worldwide Forex Markets
The Foreign Exchange Market is the place, where currencies are traded. Currencies are very important to most people around the world, whether they realize it or not. The reason is, that currencies need to be exchanged in order to conduct foreign trade and business. If somebody is living in the USA and wants to buy cheese from Switzerland, either the buyer or the company where he buys the cheese from has to pay the Swiss exporter for the cheese in Swiss Francs (CHF). This means that the US importer would have to exchange the equivalent value of US Dollars (USD) into Swiss Francs. The very same is valid for traveling. A German tourist in Egypt can not pay in Euros (EUR) to see the pyramids because it is not the locally accepted currency. Therefore the tourist has to exchange his Euros into the local currency, in this case the Egyptian Pound (EGP), at the current exchange rate.

This absolute need to exchange currencies is the basic reason why the Foreign Exchange Market is the largest and most liquid financial market in the world. For Facts and Figures of the worldwide Foreign Exchange Market please visit our market overview of the Bank for International Settlements (BIS).

One unique aspect of this international market is, that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange place. The market is open 24 hours a day, five days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - across every time zone. This means that when the trading day in the USA ends, the Forex Market begins a new day in Australia, Tokyo and Hong Kong. As such, the FX market can be extremely active any time of the day specially when two major markets are overlapping, with price quotes changing constantly.

One of the main reasons for the immense attractiveness of Forex/4X/FX trading is the Leverage. That's why Forex trading is entirely different from stock trading or futures trading. Foreign Exchange Trading leverage can be enormous, from 1:50 (=invest $ 1, control $ 50) up to 1:1000 (=invest $ 1, control $ 1000), whatever the trader is choosing as risk level and whatever the Broker is offering.
Super high leverage is an important selling point for many Online Forex Brokers. How many times have you seen "control $ 100,000 with an investment of only $ 250"? Those numbers are correct, and the profit (and loss) potential of super high leverage is sometimes scaring, especially for beginners.


How does Foreign Exchange Trading work and how to trade in the Forex Market?

The whole system of quoting prices is quite simple. Currencies are always traded in pairs. All possible pairs have already been created and are available for trading. In other words, you will trade not a separate currency, but the pair and the quote is an exchange rate from one currency to another. The exchange rate is always defined as 1 unit of the first currency in a pair as value of the second currency in a pair.

For example: EUR/CHF=1.2050 means 1 EUR=1.2050 CHF or EUR/JPY=106.35 means 1 EUR=106.35 JPY

When an investor trades in the Foreign Exchange Market, he always trades a combination of two currencies (a cross-pair or currency-pair) in which one currency is bought (long) and the cross currency is sold (short). This means the investor is speculating on the prospect of one of the two currencies appreciating in value in relation to the other one.

If you are investing for example USD 1 with a leverage of 1:400 - you will be in control of USD 400 and the difference of the exchange rate of USD 400 to another currency (like EUR, JPY or CHF), between opening and closing the trade, is your win or loss...

Excerpt From Case Study

Anthony Bolton, Fidelity Investments

 'My ideal stock is one where things have gone wrong in the company, but it looks as if things are changing'
 

Case Study

Now pay attention and learn from my mistakes! I opened an internet sharedealing account about a year-and-a-half ago. As an internet journalist I thought I ought to test out the services I write about. I invested a relatively small amount in a couple of technology-related investment trusts. In about three months I'd doubled my money.

This investing lark was a piece of cake. Shares only seemed to go up, never down. So I invested some more and bought more technology stocks - companies I thought I knew about.

The internet is undoubtedly changing the way the world works and communicates. It is a major revolution and those companies that are making that revolution happen are going to be massive. That was the investment philosophy, anyway. Then came the first sharp correction in about March 2000. Technology companies both sides of the Atlantic had become ridiculously overvalued. The bubble was about to burst. But did I sell? Did I hell! Strange psychology comes into play. When prices are falling you always think they'll start rising again soon. When they're rising, you always think they'll continue doing so, even if you've already made a tidy paper profit.

I invested more - more than I could afford to lose, another classic investor mistake - and became addicted to the daily excitements of live share prices, sometimes swinging 20% throughout the day, and 'real-time' online dealing. And that's the potential problem with internet dealing. It can become addictive. It's there on your computer screen just a few mouse clicks away. And so you dabble when you should just leave well alone. You're tempted to think more and more short-term when novice investors like me should be thinking about investing for five years at least. Each time you deal, the stamp duty and dealing charges eat away at your capital. The sometimes very wide bid-offer spreads (the difference between the buying price and the selling price) leave you sitting on a loss as soon as you've bought. If the price than falls, your losses are instantly compounded. You panic and sell - you're capital is further eroded.

To cut a long story short, I broke every rule in the investment handbook, including not taking profits when I could. The result is that, along with the rest of the technology sector, my original capital has been decimated. After investing for a year-and-a-half I'm poorer, but hopefully wiser.
These are the lessons I've learned so far. They may seem obvious, but you'll be surprised how difficult it is to do the obvious:

•  Decide clearly whether you are a short-term, speculative trader or a long-term investor. Don't fall between two stools.
• Impose stop losses and stick to them rigidly - protect your capital at all costs.
• Never try to guess the bottom of a falling market.
• Don't be afraid to sell up completely and go to cash occasionally.
• Be patient and wait for investment opportunities. Don't dive in at the first opportunity without thinking.
• Take profits when you can and don't be too greedy.
• The trend is your friend - in other words, don't try to beat the market. If it's going down, you probably will, too.
• Don't become obsessed with your favourite stocks. There's not much room for sentiment in investing. Diversify your portfolio across different business sectors so that you're not putting all your eggs in one basket.
• Buying shares solely based tips reduces investing to the level of gambling. Do your own research and follow your own hunches.
• Consider other ways of investing, too, such as unit trusts.

Triple Screen Trading System - Part III

Topic Covers | Active Trading, Technical Analysis, Technical Indicators, Trading Software

TST System - Part III

A trader's chart is the foremost technical tool for making trading decisions with the triple screen trading system. For example, traders commonly use weekly moving average convergence divergence (MACD) histograms to ascertain their longer-term trend of interest. Deciding which stocks to trade on a daily basis, the trader looks for a single uptick or a downtick occurring on the weekly chart to identify a long-term change of trend. When an uptick occurs and the indicator turns up from below its center line, the best market tide buy signals are given. When the indicator turns down from above its center line, the best sell signals are issued.

By using the ocean metaphors that Robert Rhea developed (see Triple Screen Trading System - Part 2), we would label the daily market activity as a wave that goes against the longer-term weekly tide. When the weekly trend is up (uptick on the weekly chart), daily declines present buying opportunities. When the weekly trend is down (downtick on the weekly chart), daily rallies indicate shorting opportunities.

Second Screen – Market Wave

Daily deviations from the longer-term weekly trend are indicated not by trend-following indicators (such as the MACD histogram), but by oscillators. By their nature, oscillators issue buy signals when the markets are in decline and sell signals when the markets are rising. The beauty of the triple screen trading system is that it allows traders to concentrate only on those daily signals that point in the direction of the weekly trend.

For example, when the weekly trend is up, the triple screen trading system considers only buy signals from daily oscillators and eliminates sell signals from the oscillators. When the weekly trend is down, triple screen ignores any buy signals from oscillators and displays only shorting signals. Four possible oscillators that can easily be incorporated into this system are force index, Elder-Ray index, stochastic and Williams %R.

Force Index

A two-day exponential moving average (EMA) of force index can be used in conjunction with the weekly MACD histogram. Indeed, the sensitivity of the two-day EMA of force index makes it most appropriate to combine with other indicators such as the MACD histogram. Specifically, when the two-day EMA of force index swings above its center line, it shows that bulls are stronger than bears. When the two-day EMA of force index falls below its center line, this indicator shows that the bears are stronger.

More specifically, traders should buy when a two-day EMA of force index turns negative during an uptrend. When the weekly MACD histogram indicates an upward trend, the best time to buy is during a momentary pullback, indicated by a negative turn of the two-day EMA of force index.

When a two-day EMA of force index turns negative during a weekly uptrend (as indicated on the weekly MACD histogram), you should place a buy order above the high price of that particular day. If the uptrend is confirmed and prices rally, you will receive a stop order on the long side. If prices decline instead, your order will not be executed; however, you can then lower your buy order so it is within one tick of the high of the latest bar. Once the short-term trend reverses and your buy stop is triggered, you can further protect yourself with another stop below the low of the trade day or of the previous day, whichever low is lower. In a strong uptrend, your protective provision will not be triggered, but your trade will be exited early if the trend proves to be weak.

The same principles apply in reverse during a weekly downtrend. Traders should sell short when a two-day EMA of force index turns positive during the weekly downtrend. You may then place your order to sell short below the low of the latest price bar.

Similar in nature to the long position described above, the short position allows you to employ protective stops to guard your profits and avoid unnecessary losses. If the two-day EMA of force index continues to rally subsequent to the placement of your sell order, you can raise your sell order daily so it is within a single tick of the latest bar's low. When your short position is finally established by falling prices, you can then place a protective stop just above the high of the latest price bar or the previous bar if higher.

If your long or short positions have yet to be closed out, you can use a two-day EMA of force index to add to your positions. In a weekly uptrend, continue adding to longs whenever the force index turns negative; continually add to shorts in downtrends whenever the force index turns positive.
Further, the two-day EMA of force index will indicate the best time at which to close out a position. When trading on the basis of a longer-term weekly trend (as indicated by the weekly MACD histogram), the trader should exit a position only when the weekly trend changes or if there is a divergence between the two-day EMA of force index and the trend. When the divergence between two-day EMA of force index and price is bullish, a strong buy signal is issued. On this basis, a bullish divergence occurs when prices hit a new low but the force index makes a shallower bottom.
Sell signals are given by bearish divergences between two-day EMA of force index and price. A bearish divergence is realized when prices rally to a new high while the force index hits a lower secondary top.

The market wave is the second screen in the triple screen trading system, and the second screen is nicely illustrated by force index; however, others such as Elder-Ray, Stochastic, and Williams %R can also be employed as oscillators for the market wave screen.

To continue learning about the second screen in this system, go to Triple Screen Trading System - Part 4. For further reference, you can also revisit Part 1 and Part 2.

Triple Screen Trading System - Part II

Topic Covers |  Active Trading, Day Trading, Technical Analysis, Technical Indicators, Trading Software

TST System - Part II

Market Trends
The stock market is generally thought to follow three trends, which market analysts have identified throughout history and can assume will continue in the future. These trends are as follows: the long-term trend lasting several years, the intermediate trend of several months and the minor trend that is generally thought to be anything less than several months.

Robert Rhea, one of the market's first technical analysts, labeled these trends as tides (long-term trends), waves (intermediate-term trends) and ripples (short-term trends). Trading in the direction of the market tide is generally the best strategy. Waves offer opportunities to get in or out of trades, and ripples should usually be ignored. While the trading environment has become more complicated since these simplified concepts were articulated in the first half of the 20th century, their fundamental basis remains true. Traders can continue to trade on the basis of tides, waves and ripples, but the time frames to which these illustrations apply should be refined.

 Under the triple screen trading system, the time frame the trader wishes to target is labeled the intermediate time frame. The long-term time frame is one order of magnitude longer while the trader's short-term time frame is one order of magnitude shorter. If your comfort zone, or your intermediate time frame, calls for holding a position for several days or weeks, then you will concern yourself with the daily charts. Your long-term time frame will be one order of magnitude longer, and you will employ the weekly charts to begin your analysis. Your short-term time frame will be defined by the hourly charts.

If you are a day trader who holds a position for a matter of minutes or hours, you can employ the same principles. The intermediate time frame may be a ten-minute chart; an hourly chart corresponds to the long-term time frame, and a two-minute chart is the short-term time frame.

First Screen of the Triple Screen Trading System: Market Tide

The triple screen trading system identifies the long-term chart, or the market tide, as the basis for making trading decision. Traders must begin by analyzing their long-term chart, which is one order of magnitude greater than the time frame that the trader plans to trade. If you would normally start by analyzing the daily charts, try to adapt your thinking to a time frame magnified by five, and embark on your trading analysis by examining the weekly charts instead.

Using trend-following indicators, you can then identify long-term trends. The long-term trend (market tide) is indicated by the slope of the weekly moving average convergence divergence (MACD) histogram, or the relationship between the two latest bars on the chart. When the slope of the MACD histogram is up, the bulls are in control, and the best trading decision is to enter into a long position. When the slope is down, the bears are in control, and you should be thinking about shorting.

Any trend-following indicator that the trader prefers can realistically be used as the first screen of the triple screen trading system. Traders have often used the directional system as the first screen; or even a less complex indicator such as the slope of a 13-week exponential moving average can be employed. Regardless of the trend-following indicator that you opt to start with, the principles are the same: ensure that you analyze the trend using the weekly charts first and then look for ticks in the daily charts that move in the same direction as the weekly trend.

Of crucial importance in employing the market tide is developing your ability to identify the changing of a trend. A single uptick or a downtick of the chart (as in the example above, a single uptick or a downtick of the weekly MACD histogram) would be your means of identifying a long-term trend change. When the indicator turns up below its center line, the best market tide buy signals are given. When the indicator turns down from above its center line, the best sell signals are issued.
The model of seasons for illustrating market pricesfollows a concept developed by Martin Pring. Pring's model hails from a time when economic activity was based on agriculture: seeds were sown in spring, the harvest took place in summer and the fall was used to prepare for the cold spell in winter. In Pring’s model, traders use these parallels by preparing to buy in spring, sell in summer, short stocks in the fall and cover short positions in the winter.

Pring's model is applicable in the use of technical indicators. Indicator "seasons" allow you to determine exactly where you are in the market cycle and to buy when prices are low and short when they go higher. The exact season for any indicator is defined by its slope and its position above or below the center line. When the MACD histogram rises from below its center line, it is spring. When it rises above its center line, it is summer. When it falls from above its center line, it is autumn. When it falls below its center line, it is winter. Spring is the season for trading long, and fall is the best season for selling short.

Whether you prefer to illustrate your first screen of the triple screen trading system by using the ocean metaphor or the analogy of the changing of the seasons, the underlying principles remain the same.

To learn about the second screen in the triple screen system, read Triple Screen Trading System - Part III. For an introduction to this system, go back to Triple Screen Trading System - Part I.

Triple Screen Trading System - Part I

Topic Covers |  Active Trading, Technical Analysis, Technical Indicators, Trading Software

TST System - Part I

Sounding more like a medical diagnostic test, the triple screen trading system was developed by Dr. Alexander Elder in 1985. The medical allusion is no accident: Dr. Elder worked for many years as a psychiatrist in New York before becoming involved in financial trading. Since that time, he has written dozens of articles and books, including "Trading For A Living" (1993). He has also spoken at several major conferences.

Many traders adopt a single screen or indicator that they apply to each and every trade. In principle, there is nothing wrong with adopting and adhering to a single indicator for decision making. In fact, the discipline involved in maintaining a focus on a single measure is related to the personal discipline is, perhaps, one of the main determinants of achieving success as a trader.

What if your chosen indicator is fundamentally flawed?

What if conditions in the market change so that your single screen can no longer account for all of the eventualities operating outside of its measurement? The point is, because the market is very complex, even the most advanced indicators can't work all of the time and under every market condition. For example, in a market uptrend, trend-following indicators rise and issue "buy" signals while oscillators suggest that the market is overbought and issue "sell" signals. In downtrends, trend-following indicators suggest selling short, but oscillators become oversold and issue signals to buy. In a market moving strongly higher or lower, trend-following indicators are ideal, but they are prone to rapid and abrupt changes when markets trade in ranges. Within trading ranges, oscillators are the best choice, but when the markets begin to follow a trend, oscillators issue premature signals.

 To determine a balance of indicator opinion, some traders have tried to average the buy and sell signals issued by various indicators. But there is an inherent flaw to this practice. If the calculation of the number of trend-following indicators is greater than the number of oscillators used, then the result will naturally be skewed toward a trend-following result, and vice versa.

Dr. Elder developed a system to combat the problems of simple averaging while taking advantage of the best of both trend-following and oscillator techniques. Elder's system is meant to counteract the shortfalls of individual indicators at the same time as it serves to detect the market's inherent complexity. Like a triple screen marker in medical science, the triple screen trading system applies not one, not two, but three unique tests, or screens, to every trading decision, which form a combination of trend-following indicators and oscillators.

The Problem of time frames

There is, however, another problem with popular trend-following indicators that must be ironed out before they can be used. The same trend-following indicator may issue conflicting signals when applied to different time frames. For example, the same indicator may point to an uptrend in a daily chart and issue a sell signal and point to a downtrend in a weekly chart. The problem is magnified even further with intraday charts. On these short-term charts, trend-following indicators may fluctuate between buy and sell signals on an hourly or even more frequent basis.

In order to combat this problem, it is helpful to divide time frames into units of five. In dividing monthly charts into weekly charts, there are 4.5 weeks to a month. Moving from weekly charts to daily charts, there are exactly five trading days per week. Progressing one level further, from daily to hourly charts, there are between five to six hours in a trading day. For day traders, hourly charts can be reduced to 10-minute charts (denominator of six) and, finally, from 10-minute charts to two-minute charts (denominator of five).

The crux of this factor of five concept is that trading decisions should be analyzed in the context of at least two time frames. If you prefer to analyze your trading decisions using weekly charts, you should also employ monthly charts. If you day-trade using 10-minute charts, you should first analyze hourly charts.

Once the trader has decided on the time frame to use under the triple screen system, he or she labels this as the intermediate time frame. The long-term time frame is one order of five longer; and the short-term time frame is one order of magnitude shorter.

Traders who carry their trades for several days or weeks will use daily charts as their intermediate time frames. Their long-term time frames will be weekly charts; hourly charts will be their short-term time frame. Day traders who hold their positions for less than an hour will use a 10-minute chart as their intermediate time frame, an hourly chart as their long-term time frame and a two-minute chart as a short-term time frame.

The triple screen trading system requires that the chart for the long-term trend be examined first. This ensures that the trade follows the tide of the long-term trend while allowing for entrance into trades at times when the market moves briefly against the trend. The best buying opportunities occur when a rising market makes a briefer decline; the best shorting opportunities are indicated when a falling market rallies briefly. When the monthly trend is upward, weekly declines represent buying opportunities. Hourly rallies provide opportunities to short when the daily trend is downward.

New to FOREX Trading?

Topic Covers | New Trader, Forex Trading, Easy Demo

Don’t worry, getting started in FOREX trading is easy and you can always test your skills first in a demo account before you go live with real money. To get started in FOREX trading, we have to get to know what FOREX is. FOREX trading involves buying and selling the different currencies of the world. Buying one currency and selling another at the same time make a FOREX deal.

 FOREX market is the largest trading market in the world. It yields an average turnover of $1.9 trillion daily and the figure is nearly 30 times larger than the total volume of equity trades in United States.

Who are the major players in FOREX market?

Although FOREX trading involves such a big volume of trades nowadays, it is not made available for the publics until year 1998. In the past, the FOREX market was not offered to small speculators or individual traders due to the large minimum business sizes and extremely strict financial requirements. At that time, only banks, big multi-national cooperation and major currency dealers were able to take advantage of the currency exchange market's extraordinary liquidity and strong trending nature of world's main currency exchange rates. Only until the late 90s,

FOREX brokers are allowed to break huge sized inter-bank units into smaller units and offer these units to individual traders like you and me. As a fact in FOREX trading, FOREX is mainly traded in large international bank. According to Wall Street Journal Europe, 73% of the trade volume is covered by the major ten. Deutsche Bank, topping the table, had covered 17% of the total currency trades followed by UBS in the second and Citi Group in third taking 12.5% and 7.5% of the market. Other large financial cooperation in the list is HSBC, Barclays, Merril Lynch, J. P. Morgan Chase, Coldman Sachs, ABN Amro, and Morgan Stanley.

Dealer options can be Divided

Topic Covers | Dealer options,Division


Dealer options can be divided into two groups:

Options for selling on the retail market to meet the private speculative demand. Initially, obtaining such options was associated with increased risk, because in the second half of the the 70-ies in the USA there were a lot of cases of fraud involving options because of high market volatility. The reaction of authorities was to introduce new requirements to organization of trading dealers' options. Particularly, it was foreseen to deposit gold in the custodian bank and the option bonus for the dealer before the execution of the option or after the expiration of validity. Gold trading options. The subjects of the deals are gold miners, industrial customers and large-scale dealers.

Deals with such kind of options feature large volumes and longer period of validity. The purpose of such options is to smooth the price risk of producers and consumers of the metal, in other words, it is not the speculative motive, but hedging of the process participants. Unlike stock options characterized by possible transparency of information concerning its key parameters, dealers' options are sold either directly or through a dealer network. Anyway, all the deals with options must be accompanied by appropriate accounting which ensures fulfillment of the option contract terms and reduction of participants' risks.

The volumes of trading futures and options (paper gold) considerably exceed the turnover of buying and selling the noble metal (the latter amounts to only a few percent). At the same time, being the second to the economic meaning of physical gold market, industry of derivatives have recently had a huge impact on the underlying asset price dynamics, because of the superiority of volume. The participants of gold stock deals are interested in high market volatility, because it gives opportunities to maximize the profit. These actions of speculators often sharply increase the movement of the market.

Hence, there were the fantastic rise of gold price in 1980 and its rapid drop in 1997 – 1999.