PDF A Reference forex market - MEC

Currency Trading For Dummies, Getting Started Edition, demystifies the forex market for smart and intelligent investors like you who know something about the potential of the forex market but don't have the foggiest idea how it actually works. We also provide you with the tools to develop the structured game plan you need to seriously trade the forex market. We like to think of the forex market as the "big kahuna" of the financial markets.

News and data events from the Eurozone (and individual countries such as Germany and France), Switzerland and the United Kingdom are usually released in the early hours of the European session. As a result, some of the biggest movements and most active trading takes place in the European currencies (EUR, GBP and CHF) and the euro cross-currency pairs (EUR/CHF and EUR/GBP). Asian trading centers begin to taper off in the late morning hours of the European session, and North American financial centers come in a few hours later, around 07:00.

What Is the Forex Market? 7

The European session coincides with half of the Asian trading day and half of the North American trading session, which means that market interest and liquidity is at its absolute peak during this session. Due to the overlap between the North American and European trading sessions, the trading volumes are much more important. Some of the largest and most significant price directional movements occur during this crossover period.

By itself, the North American trading session accounts for roughly the same share of global trading volume as the Asia-Pacific market, or about 22 percent of global daily trading volume. Although we like to think that the forex market is the be-all and end-all of financial trading markets, it does not exist in a vacuum. Let's take a look at some other key financial markets and see what conclusions we can draw for currency trading.

Currency Trading For Dummies, Getting Started Edition

What Is the Forex Market? 9

The two markets occasionally cross, although this usually only happens at extremes and for very short periods. The fixed income or bond markets have a more intuitive connection to the foreign exchange market because both are heavily influenced by interest rate expectations. However, short-term market dynamics of supply and demand thwart most attempts to create a stable connection between the two markets on a short-term basis.

Sometimes the Forex market reacts first and fastest depending on changes in interest rate expectations. In other cases, the bond market more accurately reflects changes in interest rate expectations, with the forex market later playing a rally. In general, as currency traders, you should definitely keep an eye on benchmark government bond yields of major currency countries to better monitor interest rate market expectations.

The Mechanics of Currency Trading

The Mechanics of Currency Trading 13

But because currency trading involves simultaneous buying and selling, being clear about the terms helps - especially if you're completely new to financial market trading. A long position, or simply a long, refers to a market position in which you have purchased a security. When you are long, you are looking for prices to rise so that you can sell at a higher price than where you bought.

Base currencies and counter currencies

The Mechanics of Currency Trading 15

If you buy at several price levels, you increase the longsand and stay longer. So you are still making an exchange, just in the reverse order and according to currency par quoting terms. The only time you have no market exposure or financial risk is when you are square.

Requirements may vary depending on account size and whether you are trading standard lot sizes (100,000 currencies) or mini-lot sizes (10,000 currencies). Depending on your broker's trading platform, if you are long, the calculation will typically be based on where you can sell at that moment. If you are short, the price used will be where you can buy at that moment.

If you have a winning position open, your unrealized P&L is positive and your margin balance increases. If you take USD/CHF, you have another calculation to do before you can understand it. Understanding the P&L implications of a trading strategy you are considering is essential to maintaining your margin balance and staying in control of your trading.

Rollover rates are based on the difference in the interest rates of the two currencies in the pair you are trading. So if you are square at the end of each trading day, you never have to worry about rollovers. Rollovers can make you money if you are long the currency with the higher interest rate and short the currency with the lower interest rate.

Rollovers cost you if you are short a currency with a higher interest rate and long a currency with a lower interest rate.

Figure 2-1: A dealing box from the FOREX.com trading platform for EUR/USD shows the current bid and offer price

Choosing Your Trading Style

Choosing Your Trading Style 25

If you are a full-time trader, you have a lot of time to devote to market analysis and actually trading the market. But because currencies are traded around the clock, you still need to keep in mind which session you're trading, as well as the daily peaks and troughs of activity and liquidity. This means that you will have to use your free time to do your market research.

Data releases and market events (for example, the retail sales report, Fed speeches, central bank rate announcements) expected for that day: Ideally, you'll monitor data and event calendars one week in advance, so you can anticipate the outcomes along with the rest of the market. Ask yourself on which basis you will make your trading decisions - fundamental analysis or technical analysis. The more of a price change you expect, the more risk you are exposed to.

If you're only going to make a few pips on each trade, you can't afford to lose much more than a few pips on each trade. While this makes the jobs a bit more difficult, it doesn't mean you can't still engage in short-term trading - it just means you'll need to adjust the style's risk parameters. It will also improve your sense of the couple if that couple is all you see.

Look for a brokerage firm that offers click-and-deal trading so you don't have to deal with execution delays or requotes. Adjust your risk and reward expectations to reflect the trading spread of the currency pair you are trading. As with short-term trading, the main distinction in medium-term trading is not the length of time the position is open, but the number of pips you are seeking/risking.

So just accept that you're going to experience some pretty intense emotions when you trade. The market has no idea what your trade size is and how much you are making or losing, but it does know where the current price is. You are going to lose in a fair number of trades. No trader is right all the time.

Figure 3-1: NZD/JPY trends higher in line with carry trade fundamentals (New Zealand’s interest rates are much higher than Japan’s), but it meets sharp setbacks along the way.

Getting Started with Your Practice Account

Specify the amount of the trade you want to make
Click on the Buy or Sell button to execute the trade
Getting Started with Your Practice Account 39

This section assumes that you have signed up for a practice account with an online forex broker and you are ready to start making some practice trades. If you enter an order and subsequent price action triggers its execution, you are in the market, so be as careful as you are thorough when placing your orders in the market. A market move is just as likely to happen while you're sleeping or in the shower as while you're looking at your screen.

If you are short USD/JPY at 117.20, your take-profit order would be to buy back the position and place somewhere below this price, e.g. to 116.80. If you don't, you're leaving it to the market, and that's dangerous. If you are long, your stop-loss order will be to sell, but at a lower price than the current market price.

If you are short, your stop-loss order is to buy, but at a higher price than the current market. The trailing stop adjusts the order speed as the market price moves, but only in the direction of your trade. For example, if you are long EUR/CHF at 1.5750 and you set the trailing stop at 30 pips, the stop will initially become active at pips). If the market never rises and goes straight down, you will be stopped at 1.5720.

So you've pulled the trigger and opened the position and now you're in the market. Depending on the trading style you pursue (short-term versus medium to long-term) and overall market conditions (range-bound versus trending), you either have more or less to do when managing an open position. If you follow a medium to long-term strategy with generally wider stop-loss and take-profit parameters, you may prefer to go with it.

The answers to these questions reveal a lot about how much time and dedication you can devote to your trade.

Mark Galant

Available wherever books are sold!

There has never been a more challenging and exciting time to trade the forex market. At FOREX.com, we focus exclusively on the needs of the individual currency trader, offering an advanced trading platform, premium tools and customized services for the way you trade. After reading this Getting Started edition, I encourage you to explore our website to learn more about the forex market and our trading services and sign up for a free practice account to experience both.

This nuts-and-bolts guide provides essential information on trading currencies and includes a simple action plan for getting started with a practice account. Brian Dolan has over 18 years of experience in the foreign exchange markets and oversees fundamental and technical research at FOREX.com.

The fun and easy way ®

Brian Dolan

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