About forex

Quoted from http://www.forextheory.com/about-forex/:

About forex

FOREX stands for FOReign EXchange market. As the name may suggest, FOREX is an international foreign exchange market, where money is bought and sold freely. FOREX the way its conducted today was launched in the 1970s, upon exchange rates being introduced, where all participants of the market help to set the price of one currency against the other following the laws of supply and demand. In terms of free competition and having the freedom from being binded to some external control FOREX is a perfect market.

FOREX is composed of about 5000 trading institutions including central government banks (such as the US Federal Reserve), all international banks, and commercial brokers and companies for all types of foreign currency exchange. No central location of FOREX exists however major trading centers can be found in major cities such as Tokyo, New York, London, Hong Kong, Paris, Singapore, and Frankfurt, in addition trading is possible by telephone and the Internet. Businesses use FOREX to buy and sell products in other countries, but FOREX is mostly used by currency traders who attempt to make money from small changes in the market.

Forex trading can be accomplished from the comfort of one's home on a computer.

FOREX has many advantages over the futures market. Firstly, FOREX is more of a liquid market and is the biggest financial market in the world towering over the futures market in terms of daily exchanges. This leads to stop orders that can be performed easier and with less problems in the FOREX.

The FOREX is open 24 hours a day on all business days whereas most futures exchanges are only open 7 hours a day. This is one of the things that contributes to making FOREX more liquid allowing FOREX traders to seize advantage of trading opportunities instantly rather than having to wait for the market to open.

FOREX transactions are commission-free. Brokers make money by making a spread which is the difference between the value at which a specific currency can be bought at and sold at. Conversely, traders pay a commission or brokerage fee for each futures transaction they execute.

All FOREX brokers must be affiliated with some large financial institution, such as a bank, so that they may provide the currencies necessary for margin trading. In the U.S brokers should not be trusted unless they are registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) in order to protect against fraud and other malpractices.

Before commencing in trading FOREX one must establish an account with a FOREX broker. Indeed the number of brokers advertising their services online can be overwhelming. Beofore deciding on a broker it would be wise to conduct a little bit of research as it will give some insight into the amount of services that are available and the various fees each broker may charge their clients.

The two main purposes of the forex market are to establish exchange rates between currencies and to provide a vehicle for making cross-border payments. The major parts that compose Forex are the spot market which comprises 37 percent and is used by traders and speculators, swaps which comprise 43 percent and lastly options and forwards which comprise 20 percent. A forex trade has occurred when one currency has been sold as another one has been bought simultaneously.While almost all currencies are tradable, there are five dominant currencies (four currency pairs) which are traded the most of all currencies. The following are 4 currencies are all traded with the US dollar; The Japanese yen (USD/JPY), British pound or cable (GBP/USD), The euro (EUR/USD) and the Swiss franc (USD/CHF).

As previously stated one major difference between Forex and other financial markets is that Forex is open and available to be traded 24 hours a day. Each trading day begins in Sydney, Australia, on Monday mornings. At this time it is still Sunday night in North America and Europe. The trading week Concludes in New York on Friday which is Saturday morning in Australia. Commissions do not exist, rather point spreads which are measured in pips exist, with each pip equating to a tenth of one percent. Since the point spread, in pips, constitutes the cost of entry, it is advantageous to keep it to a low minimum. It is for this reason why the 4 currency pairs are so popular. They are the closest spreads with differences often being as small as three to four pips.

In FOREX, one need not buy currency first as a prerequisite to selling it at a later point in time. One can open positions for selling and buying in any currency without actually possessing it. Internet-brokers typically make $2000 the minimum deposit for working in the FOREX market, and allow a leverage ratio of 1:100. To illustrate, when one opens the position at $100,000, a trader might invest $1,000 and would then receive $990.00 as a credit. The major currencies traded in FOREX, are Japanese yen (JPY), Euro (EUR), Swiss Franc (CHF) and British Pound (GBP). All four of them are paired and traded against the US dollar (USD).

To properly assess the current situation in the market traders must use fundamental or technical analysis, in addition to making decisions with regards to up-to-date information regarding information of political and economic character. Technical analysis is used by a lot of players in the market. That all knowledge about the market and its fluctuations is contained in the price chain is assumed by technical analysis.

Any variable, be it economic psychological, or political, that may exert any kind of influence with regards to the price, has already been taken into consideration by the market and thus already been included in the price. The initial data for technical analysis are rates: both the lowest and the highest rates, in addition to the rate of the opening and closing in a certain time frame, as well as the amount of transactions.

Whereas the forex market may only impact some people to the extent that it informs them what their exchange rate will be when they travel, it has a large impact on others in their attempts to make large gains as well as an impact in their financial planning and future.

Forex theory: technical and fundamental analysis, trading basics and money management

Quoted from http://www.forextheory.com/:

Forex theory: technical and fundamental analysis, trading basics and money management

FOREX (Foreign Exchange Market) is a global currency market that exchanges currency from one country to the currency of another at a changing rate, subject to the date of exchange.

FOREX is a virtual network of currency dealers connected among themselves by means of telecommunications. FOREX currency dealers are connected to leading world financial centres, and round the clock workers. As a result, FOREX forms a united and very efficient system.

The foreign exchange market owes its existence to the 1971 abandonment of the Bretton Woods accord and the subsequent unwinding of the regime of universal fixed exchange rates.

The history of stock exchanges can be traced to 12th century France, when the first brokers are believed to have developed, trading in debt and government securities. Unofficial stock markets existed across Europe through the 1600s, where brokers would meet outside or in coffee houses to make trades. The Amsterdam Stock Exchange, created in 1602, became the first official stock exchange when it began trading shares of the Dutch East India Company. These were the first company shares ever issued.

The main participants of a foreign exchange market are:

  • Commercial banks
  • Exchange markets
  • Central banks
  • Firms that conduct foreign trade transactions
  • Investment funds
  • Broker companies
  • Private persons

Access to foreign exchange (forex), the most extensive market on the planet, is generally through an intermediary known as a forex broker. Similar to a stock broker, these agents can also provide advice on forex trading strategies. This advice to clients often extends to technical analysis and research approaches designed to improve client forex trading performance.

Any company that conducts its business in another currency is exposed to currency risk (or foreign exchange risk, or exchange rate risk). However, this risk is present only if the company's sales currency differs from the company's cost currency – if a company's revenues and expenses are both denominated in the same foreign currency, there is no foreign exchange risk.

The most important forex market is the spot market as it has the largest volume. The market is called the spot market because trades are settled "immediately" or on the spot. In practice this means within two banking days.

There are some other types of Forex along with spot-market: swap contracts, forwards and futures. These called derivatives. Derivatives are powerful tools that can be used to hedge the risks normally associated with production, commerce and finance. Derivatives facilitate risk management by allowing a person to reduce his exposure to certain kinds of risk by transferring those risks to another person that is more willing and able to bear such risks.

But Forex offers a number of advantages over other types of forex trading, including:

  • Powerful forex leverage
  • Zero forex commissions
  • Limited risk
  • Guaranteed prices and Instantaneous Fills
  • 24-hour market

As every successful Forex trader knows, it is not enough just to have the technical knowhow of the actual mechanics of trading the Forex (foreign currency exchange) market, but to recognise that to be a winner relies also on the psychology of trading.

A forex currency trade is the simultaneous buying of one currency and selling of another one. The currency combination used in the trade is called a cross (for example, the Euro/US Dollar, or the GB Pound/Japanese Yen.). The most commonly traded currencies are the so-called "majors" - EURUSD, USDJPY, USDCHF and GBPUSD.

Currencies are traded in dollar amounts called a "lot". One lot is equal to $1,000, which controls $100,000 in currency. This is what is known as the "margin". You can control $100,000 worth of currency for only 1,000 dollars. This is what is called High Leverage.

Currencies are always traded in pairs in the FOREX. The pairs have a unique notation that expresses what currencies are being traded. The symbol for a currency pair will always be in the form ABC/DEF. ABC/DEF is not a real currency pair, it is an example of a symbol for a currency pair. In this example ABC is the symbol for one countries currency and DEF is the symbol for another countries currency.

We know that the FX market is the largest in the world and that your broker or institution that you are trading with is collecting quotes from a centralized feed or individual quotes comprising of interbank rates.

So how are these quotes made up? Well, as we previously mentioned currencies are traded in pairs and are each assigned a symbol. For the Japanese Yen it is JPY, for the Pounds Sterling it is GBP, for Euro it is EUR and for the Swiss Frank it is CHF. So, EUR/USD would be Euro-Dollar pair. GBP/USD would be pounds Sterling-Dollar pair and USD/CHF would be Dollar-Swiss Franc pair and so on.

You will always see the USD quoted first with few exceptions such as Pounds Sterling, Euro Dollar, Australia Dollar and New Zealand Dollar. The first currency quoted is called the base currency. Have a look below for some example.

When you see FX quotes you will actually see two numbers. The first number is called the BID and the second number is called the offer (sometimes called the ASK).

When we trade currencies we open or close short or long position. A short position is where we have a greater outflow than inflow of a given currency. In FX short positions arise when the amount of a given currency sold is greater than the amount purchased. A long position is where we have greater inflows than outflows of a given currency. In FX long positions arise when the amount of a given currency purchased is greater than the amount sold.

Forex trading strategy begins with fundamental and technical analysis.

Fundamental analysis refers to political and economic conditions that may affect currency prices. FOREX traders using fundamental analysis rely on news reports to gather information about unemployment rates, economic policies, inflation, and growth rates.

Fundamental analysis is often used to get an overview of currency movements and to provide a broad picture of economic conditions affecting a specific currency. Most traders rely on technical analysis for plotting entry and exit points into the market and supplement their findings with fundamental analysis.

Currency prices on the FOREX are affected by the forces of supply and demand, which in turn are affected by economic conditions. The two most important economic factors affecting supply and demand are interest rates and the strength of the economy. The strength of the economy is affected by the Gross Domestic Product (GDP), foreign investment and trade balance.

Economic indicators are reports released by the government or a private organization that detail a country's economic performance. Economic reports are the means by which a country's economic health is directly measured, but do remember that a great deal of factors and policies will affect a nation's economic performance.

These reports are released at scheduled times, providing the market with an indication of whether a nation's economy has improved or declined. The effects of these reports are comparable to how earnings reports, SEC filings and other releases may affect securities. In forex, as in the stock market, any deviation from the norm can cause large price and volume movements.

Central banks as Forex participants play a great role in the economy of every country. Central bank is the principal monetary authority of a nation, controlled by the national government. It is responsible for issuing currency, setting monetary policy, interest rates, exchange rate policy and the regulation and supervision of the private banking sector. The Federal Reserve is the central bank of the United States. Others include the European Central Bank, Bank of England, and the Bank of Japan.

Other type of analysis is technical analysis. A technical analysis is founded on three suppositions:

  • Movement of the market considers everything
  • Movement of prices is purposeful
  • History repeats itself

That is, technical analysis is a statistical and mathematical analysis of previous quotes and a prognosis of coming prices. A number of technical indicators have been installed into the PRO-CHARTS trading system. Analyzing the indicators one can come to the conclusion about further movements of the quoted currencies.

Categories of the technical analysis theory:

  • Indicators (Oscillators, eg: Relative Strength Index RSI)
  • Number theory (Fibonacci numbers, Gann numbers)
  • Waves (Elliot wave theory)
  • Gaps (High-Low, Open-Closing)
  • Trends (Following Moving Average)
  • Chart formations (Triangles, Head & Shoulders, Channels, Japanese candlesticks)

The Candlestick chart was actually created by a Japanese Rice merchant, named Munehisa Homma, in the middle ages. If you remember our history, Technical Analysis didn’t become popular until the 1900’s, however, Homma has to be considered one of the “Fathers” for his early work in tracking rice prices through charting. Homma created his candlesticks as “clear” and “shaded” to denote strength and weakness respectively. Today we use “green” (clear) and “red” (shaded) to represent the buying pressure and selling pressure respectively.