MoneyMaestro

A Primer On The Forex Market
September 17, 2003 | By Jason Van Bergen

With the increasingly widespread availability of electronic trading networks, trading on the currency exchanges is now more accessible than ever. The foreign exchange market, or forex, is notoriously the domain of government central banks and commercial and investment banks, not to mention hedge funds and massive international corporations. At first glance, the presence of such heavyweight entities may appear rather daunting to the individual investor. But the presence of such powerful groups and such a massive international market can also work to the benefit of the individual trader. The forex offers trading 24-hours a day, five days a week, and the daily dollar volume of currencies traded in the currency market exceeds $1.4 trillion, making it the largest and most liquid market in the world.

Trading Opportunities
The sheer number of currencies traded serves to ensure a rather extreme level of volatility on a day-to-day basis. There will always be currencies that are moving rapidly up or down, offering opportunities for profit (and commensurate risk) to astute traders. Yet, like the equity markets, forex offers plenty of instruments to mitigate risk and allows the individual to profit in both rising and falling markets. Forex also allows highly leveraged trading with low margin requirements relative to its equity counterparts. Perhaps best of all, forex charges zero dealing commissions!

Many of the instruments utilized in forex - such as forwards and futures, options, spread betting, contracts for difference and the spot market - will appear similar to those used in the equity markets. Since the instruments on the forex often maintain minimum trade sizes in terms of the base currencies (the spot market, for example, requires a minimum trade size of 100,000 units of the base currency), the use of margin is absolutely essential for the person trading these instruments.

Buying and Selling Currencies
Regarding the specifics of buying and selling on forex, it is important to note that currencies are always priced in pairs. All trades result in the simultaneous purchase of one currency and the sale of another. This necessitates a slightly different mode of thinking than what you might be used to. While trading on the forex, you would execute a trade only at a time when you expect the currency you are buying to increase in value relative to the one you are selling. If the currency you are buying does increase in value, you must sell the other currency back in order to lock in a profit. An open trade (or open position), therefore, is a trade in which a trader has bought or sold a particular currency pair and has not yet sold or bought back the equivalent amount to close the position.

Base and Counter Currencies and Quotes
Currency traders must become familiar also with the way currencies are quoted. The first currency in the pair is considered the base currency; and the second is the counter or quote currency. Most of the time, U.S. dollar is considered the base currency, and quotes are expressed in units of US$1 per counter currency (for example, USD/JPY or USD/CAD). The only exceptions to this convention are quotes in relation to the euro, the pound sterling and the Australian dollar - these three are quoted as dollars per foreign currency.

Forex quotes always include a bid and an ask price. The bid is the price at which the market maker is willing to buy the base currency in exchange for the counter currency. The ask price is the price at which the market maker is willing to sell the base currency in exchange for the counter currency. The difference between the bid and the ask prices is referred to as the spread.

The cost of establishing a position is determined by the spread, and prices are always quoted using five numbers (for example, 134.85), the final digit of which is referred to as a point or a pip. For example, if USD/JPY was quoted with a bid of 134.85 and an ask of 134.90, the five-pip spread is the cost of trading this position. From the very start, therefore, the trader must recover the five-pip cost from his or her profits, necessitating a favorable move in the position in order simply to break even.

More about Margin
Trading in the currency markets requires a trader to think in a slightly different way also about margin. Margin on the forex is not a down payment on a future purchase of equity but a deposit to the trader's account that will cover against any currency-trading losses in the future. A typical currency trading system will allow for a very high degree of leverage in its margin requirements, up to 100:1. The system will automatically calculate the funds necessary for current positions and will check for margin availability before executing any trade.

Rollover
In the spot forex market, trades must be settled within two business days. For example, if a trader sells a certain number of currency units on Wednesday, he or she must deliver an equivalent number of units on Friday. But currency trading systems may allow for a "rollover", with which open positions can be swapped forward to the next settlement date (giving an extension of two additional business days). The interest rate for such a swap is predetermined, and, in fact, these swaps are actually financial instruments that can also be traded on the currency market.

In any spot rollover transaction the difference between the interest rates of the base and counter currencies is reflected as an overnight loan. If the trader holds a long position in the currency with the higher interest rate, he or she would gain on the spot rollover. The amount of such a gain would fluctuate day-to-day according to the precise interest-rate differential between the base and the counter currency. Such rollover rates are quoted in dollars and are shown in the interest column of the forex trading system. Rollovers, however, will not affect traders who never hold a position overnight since the rollover is exclusively a day-to-day phenomenon.

Conclusion
As one can immediately see, trading in forex requires a slightly different way of thinking than the way required by equity markets. Yet, for its extreme liquidity, multitude of opportunities for large profits due to strong trends and high levels of available leverage, the currency market are hard to resist for the advanced trader. With such potential, however, comes significant risk, and traders should quickly establish an intimate familiarity with methods of risk management.

All the very best in your trading endeavors!

By Jason Van Bergen

MoneyMaestro

Wading Into The Currency Market
March 15, 2006 | By Kathy Lien, Chief Strategist, FXCM

Whenever you devote money to trading, it is important to take it seriously. Many traders are getting into the forex (FX) market for the first time and are basically starting from square one. But new traders don't have to be left in the dark when it comes to learning to trade currencies; unlike with some of the other markets, there are a variety of free learning tools and resources available to light the way. You can become FX-savvy with the help of virtual demo accounts, mentoring services, online courses, print and online resources, signal services and charts. With so much to choose from, the question you're most likely to ask is, "Where do I start?" Here we cover the preliminary steps you need to take to find your footing in the FX market.

Finding a Broker
The first step is to pick a market maker with which to trade. Some are larger than others, some have tighter spreads and others offer additional bells and whistles. Each market maker has its own advantages and disadvantages, but here are some of the key questions to ask when doing your due diligence:

* Where is the FX market maker incorporated? Is it in a country such as the U.S. or the U.K., or is it offshore?
* Is the FX market maker regulated? If so, in how many countries?
* How large is the market maker? How much excess capital does it have? How many employees?
* Does the market maker have 24-hour telephone support?

In order to ensure that the money you are sending will be safe and that you have a jurisdiction to appeal to in the event of a bankruptcy, you want to find a large market maker that is regulated in at least one or two major countries. Furthermore, the larger the market maker, the more resources it can put toward making sure that its trading platforms and servers remain stable and do not crash when the market becomes very active. Third, you want a market maker with a larger number of employees so that you can place a trade over the phone without having to worry about getting a busy signal. Bottom line, you want to find someone legitimate to trade with and not a bucket shop.

Checking Their Stats
In the U.S., all registered futures commission merchants (FCMs) are required to meet strict financial standards, including capital adequacy requirements, and are required to submit monthly financial reports to regulators. You can visit the website of the Commodity Futures Trading Commission (an independent agency of the U.S. government) to access the latest financial statements of all registered FCMs in the U.S.

Another advantage of dealing with a registered FCM is greater transparency of business practices. The National Futures Association keeps records of all formal proceedings against FCMs, and traders can find out if the firm has had any serious problems with clients or regulators by checking the NFA's Background Affiliation Status Information Center (BASIC) online.

Test Drive
Once you've found a broker, the next step is to test drive its software by opening a demo account. The availability of demo or virtual trading accounts is something unique to this market and one that you want to exploit to your advantage. Your goal is to learn how to use the trading platform and, while you're doing that, to find the trading platform that suits you best. Most demo accounts have exactly the same functionalities as the live accounts, with real-time market prices. The only difference, of course, is that you are not trading with real money.

Demo trading allows you not only to make sure that you fully understand how to use the trading platform, but also to practice some trading strategies and to make money in the paper account before you move onto a live account funded with real money. In other words, it gives you a chance to get a feel for the FX market. (To learn more, see Demo Before You Dive In.)

Do Your Research
When you trade, you never want to trade impulsively. You need to be able to justify your trades, and the way to find justification is by doing your research. There are many books, newspapers and other publications with information about trading the FX market. When choosing a source to consult, make sure it covers:

* The basics of the FX market
* Technical analysis
* Key fundamental news and events

Since the FX market is primarily a technically-driven market, the best book that you can read as a new trader is one on technical analysis. The better you get at technical analysis, the better you can trade the FX market from a speculative perspective. (For further reading, see our Introduction To Technical Analysis.)

When it comes to newspapers, seasoned foreign exchange traders typically refer to the Financial Times and the Wall Street Journal simply because they contain international news. Trading FX involves looking beyond mere economics, since politics and geopolitical risks can also affect a currency's trading behavior. Therefore, it's also important to keep up with major non-financial news sources such as the International Herald Tribune and the BBC (online, on TV or on the radio) for the big stories of the day.

One of the most popular magazines among FX traders is the Economist, because it covers many macro themes; however, currency-specific and trading magazines are also popular.

Once you have a solid foundation in FX trading, you need to keep up to date on daily fundamental and technical developments in the FX market. A variety of free FX-specific research websites, which can be found easily on the internet, will do the trick.

Education and Mentoring Programs - Are They Worth It?
The benefit of online or live courses over books, newspapers and magazines is that you can get answers to the questions that perplex you. Hearing or seeing other people's questions is also extremely valuable, since no one person can think of every possible question. In a classroom setting, either online or live, you can learn from the experiences and frustrations of others. As for a mentor, he or she can draw on personal experience and hopefully teach you to avoid the mistakes he or she has made in the past, saving you both time and money.

What about Trading Systems and Signals?
Many traders wonder whether it is worthwhile to buy into a system or a signal package. System and signals fall into three general categories depending on their methodology: trend, range or fundamental. Fundamental systems are very rare in the FX market; they are mostly used by large hedge funds or banks because they are very long term in nature and do not give many trading signals. The systems that are available to individual traders are typically trend systems or range systems - rarely will you get one system that is able to exploit both markets, because if you do, then you have pretty much found the holy grail of trading.

Even the largest hedge funds in the world are still looking for the switch that can identify whether you are in a trend or a range-bound market. Most large hedge funds tend to be trend following, which is why hedge funds as a group did so poorly in 2004, when the market was trapped in a tight trading range. Range-bound systems will only perform well in range-bound markets, while trend systems will make money in trending markets and lose money in range-bound markets. So when you buy into a system or a signal provider, you should try to find out whether the signals are mostly range-bound signals or trend signals. This way you can know when to take the signals and when to avoid them. (To learn more, see Identifying Trending & Range-Bound Currencies.)

Trading Setups - Finding What Works Best for You
Every trader is different, but the best trading style is probably a combination of both technical and fundamental analysis. Fundamentals can easily throw off technicals, while technicals can explain movements that fundamentals cannot. Smart traders will always be aware of the broader fundamental picture while using their technicals to pinpoint good entry and exit levels; combining both will keep you out of as many bad trades as possible, and it works for both day traders and swing traders. Most free charting packages have everything that a new trader needs, and many trading platforms offer real-time news feeds to keep you up to date on economic news. (For further reading, see Devising A Medium-Term Forex Trading Strategy.)

Conclusion
Learning to trade in the FX market can seem like a daunting task when you're just starting out, but thanks to the many practical and educational resources available to the individual trader, it is not impossible. Learning as much as possible before you put actual money at risk should be at the forefront of your agenda. Print and online publications, trading magazines, personal mentors, online demo accounts and more can all act as invaluable guides on your journey into currency trading.

For further reading, check out Getting Started In Forex, A Primer On The Forex Market and Common Questions About Currency Trading.

By Kathy Lien, Chief Strategist, FXCM

Kathy Lien is Chief Strategist at the world's largest retail forex market maker, Forex Capital Markets in New York. Her book "Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Swings" (2005, Wiley), written for both the novice and expert, has won much acclaim. Easy to read and easy to apply, this book shows traders how to enter the currency market with confidence - and create long-term success! Kathy has taught currency trading seminars across the U.S. and has also written for CBS MarketWatch, Active Trader, Futures and SFO magazines.

Jimski

While knowing nothing of it , I am somewhat attracted to the idea of FOREX trading because of it's 24 hour a day availibility. One of the drawbacks I have in holding down a day job is the lack of time to follow the stock market closely during the day. Also I cannot of course download Quotetracker or similar soft ware at work so tools are limited. As someone said today in chat (MP?)( which I save for later reading) you can trade FOREX watching TV at night , breakfast etc because of it's availablility. I like that aspect because then I can could make use of all the tools at home on my own time. My question having read some of the materials here is it is feasible for the "little guy" to do this when I see you can use 100:1 margin and so on. Sounds like you need to have a lot of financial resources to start with.
Can some of you FOREX guys comment on this and whether the idea of trading FOREX some day while sitting in my easy chair in my slippers at home in the evening is a pipe dream?

mp6140

well, ive been smitten and i dont see recovering soon !

I will attempt to run a FOREX chat, instruction group and trading group in the second room on the chat site during the normal trading day, and at various times in the early morning and at nite. Additionally, if time allows, I will also go over my methods using quotetracker (mikeys method) that were originally designed for newbs and has now grown into a full blown trading system, and prophet.net charts (the RSIWLR and TER analyzers)
those who havent seen FOREX yet are in for the greatest surprise ever known in the market -- something so predictable and smooth that it brings tears to ones eyes and money to their accounts AND you only have to have 3 or 4 symbols on your watchlist constantly, and theyre always the same !

the beauty of forex is that you can trade ANYTIME of the day or nite, and usually find some good trades going on, either long or short, although early in the morning in the US, is one of the best, as is the beginning of the day in the country youre trading its currency. Simply put, I open my charts at 7 or so in the morning, find a currency i like (gee, which of the 4 or 6 shall i do at this particular minute ?) and trade, either shorting on the way down or going long on the way up. At about 8 or 8:30, having been trading while im cleaning up, feeding slink, having my second cup of late supremo and an english muffin with orange marmalade, i sell or cover my short and take a look at what the pennies offer !(although i find myself less and less interested in the rumors, touts and oftimes pure BS that the penny mkt offers !

Invariably, I find myself drawn back to the currencies, as the normal US day starts and traders work the spread and always find another great trade (or 3 at a time, if so inclined) The FOREX market is a market that never sleeps, and until you see it for yourself, words cannot describe what is going on !
the beauty of forex is that you can trade ANYTIME of the day or nite, and invariably find some good trades going on, although early in the morning in the US, is one of the best, as is the beginning of the day in the country youre trading its currency.

the downside trap is that forex gives you immediate 100X or 200X margin and full pattern daytrader status (you can trade the same symbol as much as you want in any one day). This margin, as long as you play smart, simply allows you to make as much as one can do with pennies, but if you get greedy, you can be in trouble easily. So, with the opportunities for profit before you every minute of the day, THERE IS NO NEED TO GET GREEDY, because you can just turn around, short the currency or move over to another one --- there will be good trades CONSTANTLY !

I will say that forex is VERY predictable and VERY simple for one who comes out of the wars of penny stocks for the number of years ive been doing it, and hopefully i can help you all learn it also.

if youre interested, i suggest you get an account with one of the MANY brokers you see listed (try FXDD or FXCM) and bring yourself and your account over to see us and join the ranks of international banking and find out why your banker is a rich man !

FEEDBACK APPRECIATED, SO I CAN TELL IF THIS IS A DUMB IDEA OR NOT !
enjoy and trade well

__________________
Within the great hall at Elfinore stands a wondrous coffer, precisely four cubits square and securely latched against the outside world. Inside that repository, shut away from impertinent eyes, abides many an intriquing trading secret garnered from around the world and over the ages !

As a child, i used to watch from the darkness as the secrets were debated and annotated by the elders. No one there held a single thought of my presence -- BUT I KNOW WHERE THEY HID THE KEY !!

gfunk

mp when will you be in the chat for forex??

mp6140

====================================

all goes well, starting next week !

its like clarinet lessons in school -- cant start till youve got a clarinet, so waiting while peoples get theirs !

mp

OneStockMind

Downloaded FXCM software and their advanced charting plugin.
Will have to spend some time to familiarize myself with the environment but it would be certainly helpful to get help.

One problem is that I am on west coast time so your 6 a.m. EST will not work for me
Lookig forward to try it out.

mp6140

starting to hear not such great things about FXCM spreads and that they dont like traders who make money, cause theyre always on the other side of your trade and wont keep a tight spread if you trade against them.

a shame, because their software, by Currenex, is pretty much the same as used by the professional institutions and is quite good !

unfortunately, hearing it a lot, but also willing to hear other sides also !

enjoy and trade well

mp

luckycharm1

Here is a great one....that works for me.

FXDD