FOREX

FOREX - the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.

Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.

In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.

Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.

Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study.

Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.

This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).

Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.

Online Forex Trading Introduction

The online Forex market, also known simply as Forex, FX or the foreign exchange market is the biggest trading market in the world, with daily Forex trading that exceed $2 trillion.
Even tough we are talking about a huge market, Forex trading is quite simply - the buying of one currency while at the same time selling of another currency. If the trader can predict correctly which currencies will drop and which will rise - he will benefit from his investment.
There are a lot of benefits in Forex investing over other investment markets.

Why is Online Forex Trading Profitable?
The online Forex market has existed since the early 70's. Only in the past few years though, it has become accessible to millions of people through the development of the internet. Because the Forex market is available 24 hours a day, it's the only market that allows you to trade at your convenient time.
Today, because the economy is much more dynamic than it used to be, and the world has become a global village, economic conditions in various countries are also constantly changing, according to such factors as production rate, inflation and unemployment.
As a result, the rate of a specific currency changes and moves up and down in comparison to other currencies. This is the main reason of the process of rate fluctuations in the online Forex market.
In order to evaluate and predict these Forex market changes a trader can use fundamental analysis or technical analysis as a tool for investment. Where as fundamental analysis is a more broad exploration into the economic factors influencing the online Forex, technical analysis uses charts and other indicators to asses price patterns taht re-occur over time and can help predict the forex market.

Foreign Currency exchange rate
Currency exchange rate is the ratio of one currency valued against another. For example, "EUR/USD exchange rate is 1.2505" means that one euro is traded for 1.2505 dollars. If you've already invested in other markets before, you'll find the Forex trading system quite similar, and the transaction to online Forex trading smooth. An example of a Forex trade: During October 2006 you buy 10,000 BRP when the BRP/USD rate was 0.56. A month later, the exchange rate grew to 0.58. This means a profit of $350 in less than a month time.

Online Forex Trading Profits
Another example of an online Forex trade: If you buy EUR/USD, this means you are buying euros, and simultaneously are selling dollars. Your expectation therefore is that the euro will appreciate (go up) relative to the US dollar.
If you believe that the US economy will weaken and this will hurt the US dollar, you would execute a buy EUR/USD order. By doing so you will buy euros in the expectation that the currency will appreciate against the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a sell EUR/USD order. By doing so you have sold euros in the expectation that they will depreciate against the US dollar. More information concerning online Forex trading is available at Forex Floor.
Brat Milman - Managing Editor

The Forex Trading Bid & Ask Prices and Spread

This page covers everything you need to know about the bid and ask prices in the online Forex trading market, From the definition of Forex bid & ask prices, to the use of the bid & ask spread.
A Forex Trading Bid price is the price at which the market is prepared to buy a specific currency pair in the Forex trading market. This is the price that the trader of Forex buys his base currency in. In the quote, the Forex bid price appears to the left of the currency quote. For example, If the EUR/USD pair is 1.2342/47, then the bid price is 1.2342. Meaning you can sell the EUR for 1.2342 USD.
A Forex asking price is the price at which the market is ready to sell a certain Forex Trading currency pair in the online Forex market. This is the price that the trader buys in. It appears to the right of the Forex quote. For example, in the same EUR/USD pair of 1.2342/47, the ask price us 1.2347. This means you can buy one EUR for 1.2347 USD.
The Forex bid & ask spread represents the difference between the purchase and the sale rates. This signifies the expected profit of the online Forex Trading transaction. The value of Bid/Ask Spread is set by the liquidity of a stock. If the stock is highly liquid, it means many stock units are being bought and sold, and the Forex bid/ask spread will be lower. Traders prefer foreign currency with a lower bid/ask spread, because it means their money pair only for the currency and is not wasted on the bid/ask spread difference. A lower Forex bid/ask spread allows the trader to cut down on his losses.
Jim Barns, Market Analyst

How to Use Forex Trading Limit and Stop Orders

In this section we will explain about the different limit order and stop orders that are available and are used for Forex trading strategies. Limit and stop orders have a similarity to support and resistance levels, as they are also usually at the far edges of the currency price graph, and are set either to reap profits or prevent losses.
Limit orders
Forex Trading Limit entry orders are executed only if the currency price touches but not breaks the price you set. Limit orders are done when traders want to set the limit price. These orders are executed only if the currency reaches the limit price you set. Limit orders are used when you want to buy and sell a currency only if it reaches a certain price or better. Let's say the currency pair EUR/USD is worth 1.245, and you buy a limit order of 1.249. This means that the transaction will be executed only if the currency price rises to 1.249.
Stop orders
A stop order is placed to accumulate profits or to prevent losses. To place a stop order, simply specify the price where you'd like to place the stop on. Stop orders are sometimes names stop loss orders, and can occur for both bid and ask transactions.
A stop loss order is a type of Forex Trading limit order that serves as a protection against a large drop in currency price. If the currency price falls beneath the price you set, it is automatically sold, thus ensuring you do not lose too much money.
Take profit orders are limit orders that are set to help investors reap currency price raises. Let's say you buy the EUR/USD for 1.245, and you want to place a stop on 1.240. This means that if, after you buy it, the currency drops to 1.240 or below, your currency will automatically be sold off, and you will prevent any further losses from occurring.
Trailing stop orders
Forex Trading Trailing stop orders are used to lock in profits. Let's say you buy GBP/USD for 1.6540, and the price rises to 1.6570, making you a profit of 30 pips. Now a new stop order is placed at 1.6560, so you lock in the previous rise. When you place a trailing stop you specify the positions of the trailing points, and the increase in the stop will be done automatically. Tania Raven, Market Analyst

How to Utilize a Forex Trading Margin Account

Online forex trading on the margin means you can buy a large sum of foreign currency with actually paying only for a fraction of the investment. This means you pay much less for the currency you buy, by leveraging your initial investment. All of the online Forex trading is done one the margin, and the next example will make it clearer.
For example, If you have $1,000 in a margin account that has a leverage ratio of 1:100, it means you can potentially buy foreign currencies worth up to $100,000, because you place the $1,000 just as a deposit for the leveraged currency.
The major advantage of using a margin trading account is that with margin trading you can increase your buying power and have bigger profits. This is one of the biggest advantages of the online Forex trading.
Avoiding Risks in Margin Trading
-With a Margin Forex trading account, you increase your losses, as well as your profits. So if a currency drops, even by one pip, you are essentially losing 100 times the drop.
-If you invest in a margin account, a drop in the currency can liquidate your account and also leave you owing money. This is why it is important to check and make sure you are also covered in cases of losses.
-Stop losses are one of the tools you can use to ensure your account doesn't drop and is not lost.
-Investing in the margin also needs to take into account how stable the currency is. If the online Forex trading currency is dynamic and has a high rate of fluctuations, a smaller leverage is recommended. To check if the currency is stable you can use technical analysis to examine the different options.
Every time you perform a new trade, part of the account balance in the margin account is put aside as the initial margin requirement of the trade. Before you invest, you should calculate the amount used as the margin requirement. To calculate this, multiply: the current currency price*the units traded*times the margin percent/100. If the requirement is larger do not invest in that currency.
Make sure you invest wisely and read the terms and conditions of the margin Forex trading account thoroughly before the investment.
Paul Gatton, Technical Writer

How to Handle Forex Trading Losses

A smart online Forex trading investor should keep a close record of his trading losses. This is to make sure that the currency doesn’t drop, are updated with its development, and that you have the option to settle trading losses if you start to lose.
To start writing records, first acquire a notebook for the sole propose of online Forex trading record keeping. In this notebook you should write a chart with the following titles:
The trading date
The Beginning balance
The number of trades
The pairs traded
The strategies used
The ending balance
Forex Trading losses
In the lines underneath these columns you need to write the dates in which you do your online Forex trading.
Mistakes to Avoid While Forex Trading
Always Trade with a Stop-Loss Limit Order
The most important thing for an experienced trader is to secure his investments and prevent large Forex trading losses. The option of the stop loss will give you that extra protection that is vital for any investor. In Online Forex trading, the investor online is the one calling the shots, so don't be afraid of using this option to secure your account.
Always Trade with a Take-Profit Limit Order
For the same reasons previously stated, the sound investor should always set a reasonable take-profit limit order. If the currency will rise, you can advance and raise your investment without risking the money you have.
Do not Trade Too Many Pairs All At Once
It is hard to follow up with many Forex trading currencies all at once. This is because for each trade you will have at least three charts, making it hard for you to keep track of your investment. There is also a larger probability that one of your Forex trading currencies drops, something that can endanger all your investments. Focusing on a few pairs will cut down, for the long run, on your trading losses.
Do Not Trade Minor Forex Currencies
Trading minor currencies are more risky, and there is more chance of trading losses. It is not advised to trade in the minors because it fluctuates more risking you funds. This is recommended because most online Forex trading is done for major currencies.
Trade with a Plan
Before starting Forex trading, review several charts that will give you more information about the currencies you want to trade in. These include the 5-second, 1 hour, and 1-day charts. Technical analysis and fundamental analysis can also help your trade. When you analyze the charts, try and find out what is the long term direction of the Forex currency fluctuation.
Cut Your Trading Losses Down
Sometimes it happens that a currency you invest in drops. If you notice a trend early on you are better to cut your trading losses and not continue losing more money. This is because of sunk cost- money that you have lost is better to be left and not counted upon.
Jim Barns, Market Analyst

Moving Average Convergence Divergence (MACD) Simplified

Moving Average Convergence Divergence (MACD) is one of the most used technical analysis indicator in the Forex market commonly known as a lagging indicator because it is based on the moving average but is more sensitive of the price movements.
Moving Average Convergence Divergence (MACD) is one of the most used technical analysis indicator in the Forex market. It is a lagging indicator because it is based on the moving average but is more sensitive of the price movements. This economic indicator is developed and introduced by Mr. Gerald Appel.
MACD uses exponential moving averages (EMA). It should estimate the difference between two exponential moving averages to calculate MACD and is recommended to apply the 26-day and 12-day moving averages of a currency pair. MACD indicator consists of two lines. The first line is the MACD line that uses the 12 period exponential moving average of the price minus 26 period exponential moving average of the price.
MACD = EMA [shorter period] - EMA[longer period]
or
MACD = EMA [12] of price – EMA [26] of price. Signal line is what we call the second line that uses 9 period simple moving average of the previous line (MACD line). Signal = MACD – SMA [9] of MACD
Positive MACD indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. This positive momentum is considered bullish, in which we expect a rise in prices. On the other hand, negative MACD indicates that the rate-of-change of the faster moving average is lower than the rate-of-change for the slower moving average. And this negative momentum is considered bearish.
Therefore, we can say that the MACD indicator is Bullish and Bearish signals generator that used to forecast the market movement. The most used methods of MACD trading are moving average crossing, centerline crossing, and divergence. Traders use MACD to see indications of crossovers, which is regarded as the most significant signal to buy or sell. Traders use MACD to determine whether a particular currency pair is overbought or oversold. It is also used to indicate trend reversals. When the MACD and the currency price move into different directions from one another, it means there is trend reversal. Applications of Moving Average Convergence Divergence includes trend confirmation, measuring the strength of a currency pair, indicator of currency pairs being either overbought or oversold and indicator of reversals.
In summary, MACD chart has the ability to overshadow on trend change, which triggers the sell off or buy in signal. A negative divergence indicates a change of bullish trend to bearish. A positive divergence indicates a change of bearish trend to bullish. MACD is a very simple approach and is now often used together with other technical analysis. And remember that knowledge and right trading platform are the two things needed to be successful in Forex trading.