Legal Disclaimer
Preface
1. The History of Forex
•
Economic Influences on Forex •
The Forex Market Today 2. Trading Forex
•
Currency Pairs •
Majors •
Crosses and Exotics •
Trading Zones and Market Hours 3. Why Trade Forex?
•
Accessibility and Flexibility •
High Liquid Market •
Leverage (Margin Trading) •
Short Trading – Profit from Falling Prices •
Volatility Intra-Day •
Low Spreads •
Margin Policy and Margin Calls •
Dealing Spread •
Lot Sizes 4. PIPS
•
Calculating Pips 5. Order Types
•
Stop Loss Orders •
Limit Order •
Entry Limit Order •
Entry Stop Order •
OCO Order (One Cancels Other) •
Trailing Stop 6. Exit Rules
7. Psychology Rule
s 8. Glossary – Forex Trading Terms and Definitions
2
..................................................................................................................................................
......................................................................................................................................
..........................................................................................................................................................
.............................................................................................................................................
.............................................................................................................................................
.....................................................................................................................................................................................
...............................................................................................................................................................
...............................................................................................................................................................
........................................................................
03
03
06
06
07
09
09
10
11
12
14
14
14
14
16
17
17
17
18
19
20
21
23
23
24
25
25
26
27
29
30
31
L
egal Disclaimer Trading in Forex involves both the opportunity to profit and the risk of loss. This is a risky business,
after all, and you should only invest that which you can easily afford to lose. How do you know what
you can afford to lose? That’s up to you, but if you’re getting overly anxious and losing sleep over an
open trade then you’re probably risking too much money. That said, we hope the information in this
book will make you a better trader. Our lawyers asked that we make sure to use the terms “indemnity”
and “hold-harmless”, so there you go. In short, don’t risk your financial security on Forex.
P
reface B
trillion dollars transacted every day, it’s the perfect playground in which the bulls and bears can battle!
This book has been created by traders with a passion for the markets and a desire to share knowledge
with fellow market participants. Forex for Beginners is your complete step-by-step guide; we’ve removed
as much of the jargon as possible, giving you the tools and techniques that will fast track your understanding
and put you in a confident position from which you can safely and successfully create wealth
through the Foreign Exchange Market.
As all long-term participants find out one way or another, trading Forex is a very personal business. It
is likely to be a gruelling passage of introspection and personal transformation coupled with the most
rewarding experience of personal growth you will ever encounter. That said, the financial markets do
not have time to pity you or wait for you to make a decision.
Superior investors have all done their due diligence and studied quality material in great depth, just as
you are doing now. Their understanding of market movements, market psychology, their own psychology,
and the array of trading tools are second to none, and their aim is to keep everything as simple as
possible. Like any cooking recipe, simplicity is the key to trading successfully. New traders can become
overwhelmed with the amount of information, financial jargon, tools, instruments, strategies, trading
plans, and the new and useless indicators that lure novice traders into believing that this or that new
item will enable them to unlock the mysteries of the market and make millions. These traders will become
confused and fail to realise that simplicity is the key to success; they don’t need to know everything
about the financial markets or about every tool and indicator, as this would be impossible.
So many traders, hoping to discover the golden strategy to trading and instant wealth, jump from one
trading plan to another. The reason they haven’t found success with the information they already have
at their fingertips is that they have not taken the time to study and know it intimately. They don’t realize
that the time it has taken them to learn the basics of each new set of strategies could instead have been
spent on learning one set of strategies thoroughly. This in-depth familiarity produces a level of unconscious
competence in traders, where reactions are automatic and little time is wasted on deciding what
y far the most powerful beast in the financial world is the Foreign Exchange market. With over $3 3
to do next. These traders just know the basic stuff very well!
Less successful traders, in their attempts to make millions, lose a great deal of money on false “signals.”
Remember to never waste effort on foolishness. Trading needs to be carried out mechanically and unemotionally;
in order to achieve this, you need to understand and know every function of your trading
plan thoroughly. Do this and you will never question your next decision. You will, like the traders mentioned
above, always know your next step.
The main focus is to teach people how to achieve the unconscious competence that characterizes all superior
traders and, at the same time, to identify many of the common strategies and tools used by these
successful traders. You will not need to spend thousands of dollars on courses, seminars and books.
Instead, you can save your money and read this book a few times over. There is so much contained
within this one book that you will need to read it several times before you grasp it all. Once you’re comfortable
with the information in this book, then you can progress to the more advanced information on
Markets.com.
You will learn how to keep your trading plan simple and effortless, and how to ensure that your plan
covers all the important components. By removing confusion you will not only develop both structure
and discipline but the self-confidence and trust that will enable you to become the superior trader who
makes Forex trading look easy.
What you need to know, as a trader, is that while many components constitute success, the essential
ones are a combination of a few critical but simple strategies. Together, these create the foundation for
a recipe of consistent success. Having a fantastic entry strategy with a 90% success rate will not guarantee
future success; rather, this will be achieved by careful planning and execution of each component
of the complete plan.
Most importantly, this book is written in a straightforward manner and gets to the point
quickly. Each chapter is summarized for easy reference and an online link/ address made available
for you to follow should you have any questions or wish to take your trading to the next
level.
The road ahead will be challenging and rewarding. Are you ready?
4
Preface – Summary
• When learning to trade, simplicity is key.
• Wherever you live in the world, you can find a market that is moving during your regular
trading time.
• Use one trading plan and two instruments, e.g., 1 Currency Pair and 1 CFD; take the time
to know them intimately. This may take some months.
• Don’t be overwhelmed with financial jargon or new tools; you don’t need to know them to
trade successfully.
• While many components of a trading system constitute success, the correct use and a combination
of a few critical but simple parts is the best strategy.
• Success is based on careful planning and execution of each component of your trading plan.
Reviewing every trade is necessary to understand your performance.
Visit
shape your trading strategy.
www.markets.com and a Markets.com team member will help you 5
6
01.
The History of Forex B
which people traded goods and services for items of equal or similar value – items such as sugar, flour,
clothing, labor, tools, teeth, leather, stones, shells and precious metals. The problem was that the
barter system was imperfect and had limitations; it was difficult, for example, to trade items with a fair
and equal exchange for all parties involved. When countries bartered with one another, they preferred
that the exchange be quick and immediate, which meant that one side of the exchange could not be
delayed.
Money was then introduced and served as a common standard, which in turn encouraged business and
production and allowed industries to flourish. During the Middle Ages, paper money was preferred over
coins – which were bulky and heavy – and were quite impractical, especially for international travelers.
The Foreign Exchange that we know today is the newest addition to the financial markets, with its impressive
revolution over the past 100 years due to the world becoming smaller through the development
of faster transportation and new technologies.
Foreign Exchange is, essentially, the simultaneous exchange of one country’s currency against another
country’s currency. During the centuries between the Middle Ages and the outbreak of World War II,
it was fairly free of speculators (traders who profit on the exchange rate’s movement), but speculator
activity within the Foreign Exchange market increased significantly after the war.
The transformation occurred at the end of World War II (in July, 1944), when the United States, France
and Great Britain convened at the United Nations Monetary and Financial Conference in Bretton Woods,
New Hampshire. Still, between 1973 and 1998, the Foreign Exchange market was considered a “closed”
market and was limited to major banks, financial institutions, multinational organizations and other
large corporations that transacted enormous volumes as they hedged their multinational exposure. It
was virtually impossible for any small individual to compete in this setting. Then, in 1998, the Foreign
Exchange market was opened up to smaller investors and this increased the market’s daily volume to
over 100 times the total share market. In 1977, the foreign exchange was valued at $5 billion; now it
is a massive $3.2 trillion per day.
efore money was invented, a barter system was used. This was a common medium of exchange in Economic Influences on Forex
T
almost always open, traders can trade on the market as soon as news hits. Positions can be monitored
online, anywhere, anytime, giving the investor the ability to control entry or exit positions, change strategy
or withdraw funds. Forex is highly sensitive to economic aspects, in particularly the Gross Domestic
Product (GDP), the Gross National Product (GNP), Inflation, Interest Rates and Employment Figures.
Other factors, such as political stability and crisis factors, also influence Forex.
Economic data is generally released on a monthly basis, except for the Employment Cost Index (ECI) and
he Forex market is heavily influenced by economic, political factors and world events. As Forex is 7
the Gross Domestic Product (GDP), which are quarterly. There are other weekly releases, too, that have
minor effect on the FX movements.
As a Forex trader you need to be very familiar with the economic calendar and be aware of the local
times of the announcements and any changes in conditions that may influence the currency pairs you
are trading. These economic news releases can tell you if the market will move up or down (in the short
term), and can have a high impact on changing the long term market direction. Economic Indicators and
Calenders can be found in the
At times, governments trade in the market to influence the value of their domestic currency: this is called
Central Bank intervention. They will either flood the market with their home currency to lower the currency’s
price, or they will buy it in bulk in order to raise its price. Both of these practices can cause huge
price movements.
When choosing your economic news sources, you only need to worry about the releases that will directly
affect the currencies you are trading, as there is no point in researching unrelated news.
As you trade one currency against the other, realize that good news for one side of the currency pair is
very likely to be bad news for the other side – this will help you decide which side of the currency pair
you should “long” and which you should “short.” For reference, you can find these terms in the Glossary
(at the back of the book).
Markets.com Economic Calendar. The Forex Market Today
T
$3 trillion every day, making it the most liquid and efficient of the available markets. Also, this prevents
companies or individuals from influencing, sustaining or manipulating market movements by making
large trades on the more commonly traded currencies. In this respect, Forex is more stable than the stock
market (which can be susceptible to influence). Another name is “spot trading” or foreign exchange
spot trading, simply because the trades are settled almost immediately (within a maximum of 2 days).
This lucrative trading arena has an “open all hours” appeal, where traders can do business 24 hours
a day, six days a week, through locations such as London, New York, Tokyo, Zurich, Frankfurt, Hong
Kong, Paris and Sydney. The trading week starts in Sydney and finishes in New York on the latter’s Friday
session close. This system has a huge advantage over the stock market because it allows you to trade
after hours, when you’re away from the office.
The Forex trading platform also differs from the stock markets in that it doesn’t operate through physical
“central stock exchanges,” but, instead, trades through a non-centralized “interbank” computerized
network. The network started around 1971, when most of the world’s largest currencies floated their
exchange rates, and trading was conducted predominately between banks as an OTC (over the counter)
product. Now, with the advent of computers and technologies, Forex trading has become accessible
to the average investor anywhere worldwide, fuelling the explosion to the point that the market is now
made up of 95% speculation and hedging. An interesting point to note is that 80% of the foreign exchange
transactions are held for under seven days, and 40% are held for less than two days!
oday, the Foreign Exchange goes by many names: Forex, Currencies, 4X and FX. It transacts over 8
The History of Forex – Summary
The major Economic influences that affect Forex are:
• Gross Domestic Product (GDP)
• Inflation
• Interest Rates
• Consumption Index
TIP: only concentrate on economic news that directly affects the instruments you are trading – there
is no point in researching unrelated news!
REMEMBER: it’s not the news that moves the market; it’s the reaction of traders to a surprise in the
figures that moves market prices the most.
• The Forex industry can be traced back to the Bretton Woods Conference (July, 1944), when
the United States, France and Great Britain convened the United Nations Monetary and Financial
Conference.
The Bretton Woods conference established the rules for commercial and financial
relations among the world’s major industrial states in the mid-20th century.
• In 1971, the abandoning of the Breton Woods Agreement created the industry as we know it
today.
• In 1973, market deregulation opened the industry even further.
• In 1977, the Foreign Exchange was a 5 Billion Dollar Industry.
• In 1988, Forex was opened to smaller investors – this increased the market’s daily volume to
over 100 times the total market share.
• Today, Forex is a massive 3.2 Trillion Dollar – per day – industry!
www.markets.com
Explore these sections to establish a solid trading foundation.
has an in-depth Education and News section. 9
02.
Trading Forex T
This may seem confusing at first, for it differs from the stock market (where you simply buy a share
with the belief that it’s either going to go up or down). In the currency market, a specific currency may
go up or down relative to another currency. For example, the Dollar may strengthen (rise or go up in
value) against the Euro, but, at the same time, weaken (fall in value) against the British Pound. As we
discussed above, economic news from a specific country can influence its currency. Therefore, one
should never say that “The dollar strengthened,” but rather that “The dollar strengthened against
the Euro.” Remember, a currency does not simply go up or down but does so relative to another
currency. So, when you choose to trade a currency, you will trade a pair. These two currencies are
known as the “currency pair”.
rading Forex is a relatively simple process in which one currency is exchanged for another. Huh? Currency Pairs
As mentioned above, currencies are traded in pairs and are quoted in a shortened form such as EUR/
USD. The first currency displayed is referred to as the “base” currency (in this example it is the Euro),
while the second quoted currency is referred to as the “quote” currency (in this example it is the US
Dollar).
You don’t, as a new trader, need to worry about understanding the meaning of “base” and “quote”.
There is a much easier way to view currency pairs: you simply determine which currency you think is
going to go up or down (this currency precedes the “/”) and against which currency you think it will
move (this currency will follow the “/”). Remember, again, what we said earlier: a currency always
goes up or down relative to another currency. If you predict that the Euro will go up against the Dollar,
you would buy EUR/USD; if, however, you predict that the Euro will go down against the Dollar,
you would sell EUR/USD.
In trading terminology, buying something is referred to as going “long”. If a trader is trading long in
the EUR/USD, it means the trader is buying the Euro (base currency) and selling the US Dollar (counter
currency). The counter currency is the value of the price movement and the currency in which your
profit or loss will be quoted in. For example, if you bought EUR/USD, your profits or losses would be
displayed in US Dollars (not in Euros).
So, which currency pairs can you trade?
10
Majors
The most popular pairs -- those with the highest trading volume (85%) -- are commonly referred to
as the “majors”. It is advisable to stay within these pairs unless your particular strategy demands
otherwise. “Major” pairs are cheaper to trade and typically less volatile. All Forex brokers should offer
these sets of “major” pairs:
Pair Code Name Countries Nickname
EUR/USD
Euro-Dollar Eurozone/US ______
GBP/USD
Sterling-Dollar United Kingdom/US Cable or Sterling AUD/USD
Australian-Dollar Australia/US Oz or Aussie NZD/USD
New Zealand-Dollar New Zealand/US Kiwi USD/JPY
Dollar-Yen US/Japan ______
USD/CHF
Dollar-Swiss US/Switzerland Swissy USD/CAD
Dollar-Canada US/Canada Loonie 11
After studying the currency pairs listed above, you may think that due to U.S. economic circumstances,
the dollar will appreciate. The question is this: which currency do you think the dollar is going to appreciate
against? If you think the dollar will appreciate against the Japanese Yen, you would choose the
“USD/JPY” currency pair.
Some of the major pairs actually tend to move in the same direction most of the time: these are the
EUR/USD with the GBP/USD, the USD/JPY, the USD/CHF, and, finally, the NZD/USD and the AUD/USD.
Other pairs spend most of their time trading in completely opposite directions: these are the EUR/USD,
USD/CHF, GBP/USD, USD/JPY, AUD/USD and USD/CAD. Traders can trade more than one of these pairs
knowing that they are most likely to either move in the same or opposite directions.
Crosses and Exotics
Some traders prefer to trade currencies other than the US Dollar, and the “cross currencies or crosses”
allow them to do so. However, the “cross” markets are generally less liquid than the “majors”. The
three most active non- USD currencies are EUR, JPY and GBP.
There are other currency pairs you could choose to trade, sometimes referred to as “exotic” currencies.
If you feel that the South African Rand is going to appreciate against the dollar, you could buy ZAR/USD.
However, these “exotic” currencies are not only very volatile but tend to cost more to trade.
Pair Code Name Countries
NZD/JPY
Kiwi-yen New Zealand/Japan AUD/JPY
Australia/Japan
Aussie-yen GBP/JPY
United Kingdom/Japan
Sterling-yen EUR/JPY
Eurozone/Japan
Euro-yen EUR/GBP
Eurozone/United Kingdom
Euro-sterling EUR/CHF
Euro-Swiss
Eurozone/Switzerland
12
Trading Zones and Market Hours
The major trading centres are located in London, New York, and Tokyo, and it is in these cities, during
office hours, where the majority of the market activity occurs. The 24 hour Forex market follows the
sunlight around the globe – each country’s trading centre is open from 8:00 a.m. – 4:00 p.m. (local time).
For example, when the market closes in the U.S., it is opening elsewhere. This is convenient for you as it
means you can continue to trade.
If you happen to live in Tokyo, the following time frames would apply to you: Europe would open when
it is 3:00 p.m.; London when it is 4:00 p.m.; and New York when it is 9:00 p.m.
Centre Time Zone
Opens
Asia/Tokyo
Closes
Asia/Tokyo
Germany
11 June 2008
11:00 p.m.
11-June 2008
Europe/Berlin 03:00 p.m. Great Britain
11 June 2008
12:00 a.m.
12-June 2008
Europe/London 04:00 p.m. United States
11 June 2008
05:00 a.m.
12 June 2008
When working out the timeframe that suits your location best, make sure it is a session with heavy volume.
These sessions usually occur when multiple countries’ markets are trading at the same time, for
this allows the greatest price fluctuations which thereby present the best opportunity for you to make a
good return on your investment.
The best multiple trading sessions are noted below:
• Trade the EUR/USD, USD/CHF, or GBP/USD between 8:00 a.m. EST and 12:00 p.m. EST. This is
when the U.S. market just opens (at 8:00 a.m. EST) and the European market closes for the day.
• 1:00 a.m. EST to 3:00 a.m. EST is when the Asian markets close and the European markets
open. The Australian and Asian markets overlap between 7:00 p.m. and 10:00 p.m. EST, which
also offers good trade opportunities.
• Around 4:00 p.m. - 6:00 p.m. EST, the U.S. markets close. There are no overlapping markets during
this time. Volume is much lower and bigger movements occur less often during this period. It
is better to avoid this timeframe.
U.S./New York 09:00 p.m. Time Zones EST (Eastern Standard Time)
• 7:30 a.m. to 5:00 p.m. – New York
• 3:00 p.m. to 11:00 p.m. – Auckland, Sydney and Wellington
• 6:00 p.m. to 11:00 p.m. – Tokyo
• 7:00 p.m. to 3:00 a.m. – Hong Kong and Singapore
Best Trading Hours (EST)
• Slowest times are between 1:30 p.m. to 4:00 p.m.
• System is closed from 4:30 p.m. – 5:30 p.m.
• Do not trade between 5:30 p.m. – 7:30 p.m.
• You can start trading at 7:30 p.m.
• Best time is between 8:00 p.m. to 9:00 a.m.
Trading Forex – Summary
The major Economic influences that affect Forex are:
• A currency does not simply go up or down but does so relative to another currency.
Therefore, the instruments you trade are known as “currency pairs”.
• Currency Pairs are presented as follows: BASE/ QUOTE
TIP: an easy way to consider currency pairs is to decide which currency is going to go up or down –
If you predict that the Euro will go up against the Dollar (prices on the chart rising) you would
buy EUR/USD. In trading terminology, buying is referred to as going “long”. If, however, you predict that
the Euro will go down against the Dollar (prices on the chart falling) you would
is referred to as going “short”.
TIP: When choosing which currency pairs to trade it is advisable to stay within the “Majors” which
constitute roughly 85% of the total trading volume.
sell EUR/USD. Selling The “Major” currency pairs are:
EUR/USD GBP/USD AUD/USD NZD/USD USD/JPY USD/CHF USD/CAD
Trade with Markets.com and access major currency pairs! Visit
www.markets.com today!
13
03.
Why Trade Forex? T
dollar is not just a dollar, but a dimensional commodity that has many aspects – by trading forex you
can take advantage of, and use those aspects to make a profit at almost any time of day or night.
So, why trade the Forex market? The Forex market offers some significant advantages over the more
traditional trading markets you may be used to, such as a stock exchange. In this section we will look
at some of the unique advantages of the Forex market:
rading forex allows you to take advantage of all the possibilities global currencies really offer; a Accessibility and Flexibility
Unlike financial markets that are limited to the specific trading hours of the country, Forex is open
24 hours a day, 5 days a week. This allows traders to be flexible in choosing a timeframe that fits in with
their daily lifestyle. For those of us who hold full-time jobs, “day-trading” is not realistic.
Highly Liquid Market
The key to success is trading highly liquid markets of any sort. Highly liquid markets offer more control
and reliability when trading. A market which is highly liquid means you are able to instantly enter and
exit markets at, generally, the price you want. Less liquid markets, because they can be extremely volatile
and unpredictable, can limit the trader’s options as regards entrance, exit, and desired price (this is
similar to the predicament of a shareholder who needs to liquidate large holdings). Forex is the most
liquid market available and therefore has great integrity in its prices, particularly because it is virtually
impossible for any individual or company to manipulate the market for any length of time.
Leverage (Margin Trading)
Most people are familiar with the concept of going to a local banker with a 5%-20% deposit and the
excitement and anticipation of hoping to obtain a home loan to purchase your very own piece of real
estate. After thoroughly scrutinizing your financial information, the bankers size you up and gauge your
ability to meet repayment obligations over a significant chunk of your lifetime. Of course, as the great
credit market bust of 2008 proved, scrutiny of repayment ability and down payment requirements were
severely lacking!
If you have $50,000 to use as a security deposit for a property, and the bank requires a 10% deposit for
the particular property you intend to buy, then the property value can be up to $500,000 (you provide
$50,000 and borrow the remaining $450,000).
14
This is called
assets or money with a smaller amount of capital. You can purchase larger assets without funding the
entire amount; instead, you borrow most of the money and pay interest on it. Leveraging is utilised by
all wealthy people inside and outside the financial markets. It is a great way to fast-track your wealth
creation, but must be used with extreme caution, for you can, by not managing and minimizing risk, experience
serious downside. A significant benefit of leveraging within the Forex is that the risk is limited,
and this means you cannot lose more than the balance of your trading account. This can actually happen
with some other trading instruments; some traders of other trading instruments wake up to find that
they owe more than the money in their trading account – a devastating discovery.
Leverage in the Forex market can be lower than 50:1, as high as 100:1, or even as high as 400:1. This
means that if you are trading at 100:1 and use $10,000 dollars of your investment capital for a particular
trade, then your exposure is a massive $1 million dollars of which you are free to trade in any way you
choose. Earning one percent on $10,000 is not that much, but by utilizing leverage you are able to earn
1% on $1 million dollars, for a net investment of $10,000. The Forex market offers much higher leverage
than stocks or futures. This translates into a huge responsibility for traders: they must know what
they are doing and how to implement safe risk and money management strategies.
Forex is also referred to as “Margin Trading” because it can only be traded on a margin. The margin (deposit)
is the collateral or security deposit for your leveraged position, which is normally a fraction of the
total leveraged risk exposure. However, the amount of money or margin that you have in your trading
account determines the size of the positions you can take. A leverage of 200:1 means you are trading
on 0.5% leverage and must have 0.5% of the position’s size available as margin within your trading account
(one divided by 200 equals 0.005, or 0.5 %).
Huh? This can seem a little confusing at first, but it will become second nature to you as you learn more
about Forex trading. The key point to take home is this: you can control far more money in the Forex
market than your actual capital (much as when buying a house). The amount you can control depends
on the leverage given to you by your broker. If you are given 100:1 leverage, for every dollar you trade
you control $100 in the market. However, you should know that leverage can work against you, too:
when the price moves against you, you need to maintain the leverage ratio by having sufficient capital
in your account. Let’s walk through an example, for while I realize that you haven’t been exposed to an
actual Forex trade yet, the theory will help you when you start to practice.
For example, let’s assume you open a Forex account with $1,000 and 100:1 leverage. You place a trade
to buy EUR/USD for a hypothetical cost of $500 (later, we will explore the actual costs of trades). You
have now invested $500 in the market, leaving $500 in your margin account. Due to the 100:1 leverage,
you now “control” $50,000 dollars of currency in the market … for $500! If the price moves 10% in
your favour, the position is now worth $55,000. You can sell, repay the $50,000 of “borrowed” money,
and net $5,000 in your pocket.
So what is the downside? Let’s assume that instead of moving up 10%, it moves down 1.5%, or $750.
That means the position is worth $49,250. Because of your 100:1 leverage ratio, you need to maintain
this ratio at all times. In other words, you now need to pay another $250 from the remaining $500 in
your trading account, leaving you with $250 in your account. So, as the price moves against you, the
money keeps getting taken out of your trading account to maintain the ratio.
LEVERAGING, and is a powerful strategy that allows investors to control larger valued 15
What happens when it keeps moving against you and you end up with $0 in your trading account? The
broker will automatically close out the position. That means you have lost all your money, but you cannot
lose more than the total in your account. Later, we will explore the various techniques that allow you
to limit such losses, but it is important, for now, that you understand this concept of risk when trading.
Short Trading – Profit from Falling Prices
This has to be one of the greatest trading benefits regardless if you are a Forex, Equities, Futures,
or Derivatives Trader, for short trading allows traders to take advantage of falling prices.
Trading the market “short” is just as easy as trading “long” (although doing so on the equities
market is more difficult when compared to the other instruments mentioned). Profit is
simply made from the fluctuations in price-- the difference between the opening price and
the closing price. Therefore, a trader can profit from falling prices just as easily as rising prices.
• Trading Long = Profit from rising prices.
• Trading Short = Profit from falling price
s. For example, if a FX trader believes the Euro will increase against the USD, the trader would want to
trade the Euro “long” and BUY into the market. For her position to be profitable, the Euro would need
to rise. To close out the position, she would effectively SELL an equal position, and would then be back
to the same as before the trade – which is neutral in the market.
However, if the trader believes that the Euro will fall against the USD, she would want to trade “short”
and SELL into the market. For her position to be profitable, the Euro would need to fall (to close out
the position she would need to BUY back an equal position, and then would be neutral in the market).
A person who has never heard of the concept of short selling will often “freak out,” as this process
doesn’t fit into the “logical” order of things. How, after all, can you make a profit when the prices fall?
Short selling is nothing new. In fact, traders have been practicing it for hundreds of years. Short selling
was how Jesse Livermore made his millions, short selling the American market in one of its worst share
market crashes in 1929 – he was named the greatest “Bear Trader.” Unfortunately, we have been
taught from early childhood that money can only be made when prices rise, and this sort of thinking will
most likely result in missing powerful opportunities.
The important point is that you must be on the correct side of the market and open up your position
to profit from the correct market move. If you are trading “long” you will not profit
if prices are falling, just as you will not profit from rising prices if you are trading “short.”
To trade “short” (so you can profit from falling prices), all you need to do is click on the SELL button
rather than the BUY button. It seems a little contrary, for how can you “sell” something you don’t have?
For now, until the concept becomes clear in your head, think of the buttons as follows:
16
“Buy” becomes “I think the price is going up and I want to profit from that.”
“Sell” becomes “I think the price is going to go down and I want to profit from that.”
Volatility Intra-Day
Many Forex traders like to day-trade the major currencies, for this group regularly has large and volatile
intra-day movements that traders exploit for exceptionally quick profits. Later, I will discuss in detail the
difference between Day Trading, Intra-Day Trading, and Longer Term Momentum Trading by looking at
the pros and cons of each. Determining your individual investment style is of paramount importance--
something you need to take seriously and not do for thrills.
Low Spreads
Forex offers extremely low spreads, even when compared to the equities markets. The spread is the
difference between the “Bid” and the “Ask”. These two prices are quoted by the Forex Dealers and
are how they make their money, for dealers do not charge commission or brokerage fees. This will be
discussed in more detail in the following pages.
Margin Policy and Margin Calls
The beauty of the Forex market is that risk is limited and you can never lose more than the money in
your trading account; in other words, you will never find yourself needing to sell a major asset to fund
a large Forex loss. Most brokers have some sort of loss limit, like 60% of your trading account, where
they liquidate all your positions should they not be able to contact you. It is important that you research
the best offers at the time you open your account.
You can read Markets.com Margin Call Policy right here!
There are various margin ratios that differ depending on the trading platform, trading account, and even
currency pairs. The ratios are quoted 200:1 (which means that a 0.5% margin is required for the trade),
100:1 (one percent), 50:1 (two percent), and so on.
Let’s look at a few margin calculations:
A good risk management tool, one that will ensure that you will never totally empty your trading account,
is not to over leverage any position. If you have, for example, $10,000 in your trading account,
you shouldn’t use up the full 100:1 leverage (to total $1 million) in positions because, should a large position
move quickly against you, the brokers will close your account because of strict margin policy limits.
17
Therefore, your money management strategy needs to identify and factor in average market movements
so that your position is not unnecessarily closed out. As mentioned above, some market makers will
close out all your positions, regardless of profit or loss in those positions.
Your trading platform should have some sort of warning system that alerts you if your account is nearing
a margin call where your open position/s will be closed out. It is important to know that in a fast- moving
market, there may be little or no time to warn you about margin calls. It is your responsibility to monitor
your account and maintain the brokers’ margin policy.
To avoid a situation in which a broker closes your positions, it is important to remember the following points:
• You must continuously monitor the status of your account. This is only one of a few good reasons
why traders who are learning to trade should always be at their computer when they have
‘a trade’ open in the market.
• You must always limit your position’s risk by using a “stop loss” order (see below).
• If you are close to a margin call, you can close individual positions to reduce the amount of
margin used, or part of your positions if your trading platform allows you to do so.
• You can add additional money to your account, but remember that the transfer may arrive too
late if the market moves quickly against you.
Dealing Spread
The spread is the difference between the “Bid” and the “Ask” expressed in-- you guessed it-- pips.
Normally, trading platforms do not charge commission or brokerage, for they are compensated for their
services via the spread (this is different to the equity markets, in which a brokerage commission plus the
spread is charged). In other words, the “bid” or “buy” price may be 108.01 while the “ask” or “sell”
price is 107.98. Your trading platform will display the currency pair with the “bid” price, the “ask” price,
and the buttons to buy or sell that currency:
Therefore let’s say you bought currency at 108.01 and immediately sold it without the market moving:
your selling price would be 107.98. The broker made money on this transaction because of the
difference between the buying and selling prices. Most trading platforms, because regular spreads can
change at any time, offer the option of fixed spreads to investors who prefer to know the exact cost
of their position at all times. Make sure, then, that you factor in this cost when calculating the prof-
18
it and loss for your trades. Some platforms remove the spread and charge you a fixed commission
(for example, $0.60 for every $1,000 traded), which is only payable on winning trades.
Lot Sizes
Forex is traded in “lot” sizes. This differs, for example, from share trading, where you would
buy, say, 100 shares. In Forex, you would buy a number of “lots.” So, how big is a lot? That depends
on how the broker defines it. At Markets.com the standard lot is 5,000 units. This means
that if you buy 20 lots, you are effectively controlling as much as 100,000 in currency units. Recall
from the leverage discussion above that you don’t actually need $100,000 in your account.
Why Trade Forex – Summary
• Forex is open 24 hours a day, 5 days a week. Greater flexibility makes Forex available to a
variety of lifestyles and professions.
• Forex is the most liquid market available – generally, you can enter and exit the market at the
price you want.
• Forex is traded in “lot” sizes. The size of the lot is determined by the broker and is defined in
currency units.
• The Forex market enjoys great price integrity with virtually no individual or corporate manipulation.
• Leveraging (Margin Trading) is a powerful strategy used in the Forex market. This allows
investors to control a larger value of assets with a smaller amount of capital.
• Profit can be made from both rising prices (trading long), falling prices (trading short) or
range trading.
REMEMBER: You must be on the “correct” side of the market to earn a profit. If you are “trading
long” you will not profit if prices are falling, just as you will not profit from rising prices if you are
“trading short”.
• You should always limit your trading risk by using “Stop/Loss” orders.
Once you’re finished reading (and re-reading!) this eBook, visit
www.markets.com
Centre!
and explore our in-depth Forex and CFD Resource 19
04.
PIPS No, these are not the seeds found in fruit. 1 Pip is the smallest amount of a currency used in Forex trading
and is used to denote price movement. Unlike shares that may move up or down, say, 10 cents, a
Forex currency pair moves in pips. Your goal as a Forex trader is to make as many pips as you can. Pips
gained = profit; Pips lost = loss.
The price movement for the currency is measured in “PIPS” (Price in Points), and is sometimes also referred
to as “points.” The pip is the digit on the far right of 1.2345, so if the currency moved by 150
Pips the new figure would be 1.2495.
In the above EUR/USD quote, the price is quoted as 1.5672 (buying one Euro will cost $1.5672). What
would the new price be if the currency pair moved up 12 pips?
That’s right: 1.5684. As you can see, we don’t say it moved up X cents, but, instead, that it moved up
X pips, which translates into fractions of a cent.
It is important to note that the YEN, Japan’s currency, only has 2 places to the right of the decimal point,
rather than 4 places to the right as the other currencies do, e.g.108.01. So, if a Euro/Yen pair moves up
12 pips it would result in a different value when compared to a EUR/USD move up of 12 pips – the point
being that a pip can have a different value depending on the currency pair.
20
The value of a pip is dependent upon the quote currency (the currency on the right of the display. In the
illustration below, its the JPY).
At this point you could be forgiven for thinking that earning 50 pips on EUR/USD is not very substantial,
for that isn’t even worth one cent! You will be surprised, however, to learn that these tiny increments
in the currency movements are enhanced by the enormous advantage of leverage available. While in
everyday life we don’t look past two digits, in Forex trading we do just that. In the example above, it’s
not simply $1.23 but, rather, $1.2345. You’re probably wondering how one can make money on a 90
pip movement (less than one cent). Well, remember our leverage discussion. For $1,000, you can control
$100,000 and earn the return on that sum of money! So let’s say 50 pips represents a 1% price increase:
that’s $1,000 of profit (1% of $100,000)!
Pips will become second nature to you as you get more experience in the Forex market. One pip is the
smallest unit of measurement by which a currency pair can move. Some currency pairs have four digits
to the right of the decimal point while some only have two. Regardless, they still move in pips. For a
“4 digit” currency pair to move one pip, the digit on the far right will move (e.g. 1.2345 to 1.2346). In
the case of a “2 digit” currency, it is still the digit on the far right that moves: 108.01 to 108.02. In other
words, both have moved a PIP.
Calculating Pips
Four Decimal Place Currencies:
zeros to determine how much each pip is worth. So, if you are trading 20 standard lots of 100,000, the
value per pip would be 10. If the USD is the quoted currency, one pip will equal $10.
If you are trading 100,000 currency units, you simply remove four Two Decimal Place Currencies:
zeros to determine how much each pip is worth. So, if you are trading 20 standard lots of 100,000, the
value per pip would be 1,000. In this case, the quoted currency would be the YEN, and each pip would
represent ¥1,000. To calculate the value, simply divide ¥1,000 by the current rate for the Yen (e.g.
¥1,000 divided by 108.50 = 9.21 USD per pip).
If you are trading 100,000 currency units, you simply remove two 21
Pips – Summary
• PIPS are the measures used in Forex to denote price movement.
• In Forex, price movement is not referred to as X cents but rather as X pips
• Pips gained = profit
• Pips lost = loss
• Remember that a small increase in pips can translate into a substantial increase in account
balance percentage! It depends on how much currency is actually controlled.
• Some currencies have two decimal places (the Yen) and others have four (the Dollar)
• Four decimal place currencies: When trading 100,000 currency units, remove four
zeros to determine how much each pip is worth.
• Two decimal place currencies: When trading 100,000 currency units, remove two zeros
to determine how much each pip is worth.
Questions? Markets.com offers unlimited access to Trading
Specialists who can help you better understand the market.
22
05.
Order Types There are many different types of orders that traders can utilize and combine with their trading tools
and strategies – especially “risk management” strategies. The two most popular orders that can assist in
risk management are “Stop Loss/Limit” orders and “Entry Limit/Stop” orders. A “stop loss” order stops
your loss from getting any worse than it already is by closing your open position at the level that you set.
And an “Entry” order gets you into the market at the price you require. Now, please repeat after me:
I WILL ALWAYS ENTER A TRADE WITH A PREDEFINED “STOP LOSS” ORDER.
If there is anything we hope you remember and use, it is this one message. Your primary goal, as a new
Forex trader, is to avoid losing large amounts of money. It’s perfectly normal for an experienced trader to
make occasional small losses... this is a good system performing correctly. To avoid making large losses,
please protect all your orders with a correctly placed “stop loss”.
Stop Loss Orders
Traders should ALWAYS place trades with a “stop loss” order. This is the price where your position
will automatically close should the market move against the trade. Your “stop loss” is your protection
against a “worst case” scenario. In other words, it allows you to minimize your risk to a massive loss. If
you view this as your “worst case” you will understand why you must always place a “stop loss” order.
Let’s say you are placing a trade that is costing you $1,000. The reality is that you will lose money on
some trades, for not every trade can be a winner. So, when you place this $1,000 trade, you should
decide the maximum amount you are prepared to lose before deciding that the trade is not going your
way and exiting. Let’s assume that you’re down to $200 and decide to exit if the trade moves against
you (that is, when your position is worth $800). This situation illustrates the usefulness of a “stop loss”
order—or, more aptly, a “get the heck out of this trade” order. Various risk strategies provide guidance
on how much you should risk based on your account size. We will explore these later.
Now, you may be wondering why you should place a “stop loss” order when you can, in the event that
the market moves against you, manually get out of your trade. Sadly, many traders have found themselves
blowing through their trading accounts using this strategy. For one, you may not be glued to your
PC (you may be at lunch) when the ever-changing market moves rapidly and wipes out 50% of your
trading account. Trust me-- this happens. The other major reason for using “stop loss” has to do with
the emotions that come into play when trading live.
Believe me it takes an incredible amount of discipline to close out a losing order, because always want
to wait just another minute to see if the trade turns around. Slowly, your account is totally wiped out. By
going in with a predetermined “stop loss,” you limit your risk and remove the emotion. When a “stop
loss” is triggered, you have lost a little, but u still have funds in your account and you get to fight another
day. Do not follow a trade all the way to zero your account balance.
We will talk more extensively about money management later, but for now remember this: always place
“stop loss” orders at the same time you enter you trade in an intuitively good place. And learn to love
23
your regular small losses, as they are an indication that your trading system is working properly. Any
large loss is the indication that your psychology and or your trading system is not working well enough.
The two types of “stop loss” orders are “sell stops” and “buy stops”. “Sell stops” are used to exit a
long position while “buy stops” are used to exit a short position. Usually, “stop losses” are triggered at
the order price; however, should
next best available price on offer.
the market gap over the stop, the position will be closed at the Limit Orders
A trader would use a limit order to exit a position once it reaches a certain price level. For example, if a
trader is “long“ in the GBP/USD (at 1.7750), she may place a limit order to automatically close out the
position at 1.7800, capturing 50 pips of profit. This wonderful tool enables you to avoid the tedium of
sitting, watching, and waiting for the market to maybe, just maybe, reach your profit objective. Similarly
to the emotions involved in the “stop losses” discussed above, it is important to behave unemotionally
when dealing with profits. Far too many traders have seen profitable positions turn around and result in
a net loss. Greed overcomes many of us, as does anguish: sometimes, you take your profit only to see
the price continue to go up, leaving you to anguish over your winnings. You must overcome this mental
barrier. Yes, maybe you could have made more, but as they say, nobody ever lost by taking a profit.
In the example below, a trade was opened at the market price of
1.2402 (buying order). According to the stop-loss order, the position
will be closed if and when the price falls to 1.2391. According
to the limit order, the position will be closed if and when the price
hits 1.2407.
24
Entry Limit Order
Entry limit orders are orders that are placed by traders when they
expect exchange rates to bounce back after reaching the level at
which the entry limit order was placed. For example:
The USD/CAD trades at 1.2399/1.2402. Here, you expect the pair to
trend higher, but prefer going long at a better price – you expect
the price to go down to 1.2394 before it continues going up. You
then place an entry limit buy order of 20 lots (100,000) USD/CAD
at 1.2394. When the bid price reaches 1.2394, the limit order will
be executed and 20 lots of USD/CAD will be bought at 1.2394.
Entry Stop Order
Entry stop orders are orders that are being placed by traders who expect exchange rates to breakaway
after reaching the level at which the entry stop order was placed.
For example:
25
The USD/CAD trades at 1.2396/1.2399. You estimate that the USD/
CAD, which is currently traded at 1.2396/1.2399, will continue
trending higher. You also believe that should the pair break above
1.2407, it will rise by at least 50 pips.
Thus, you place your entry stop order at 1.2407.
The following illustration might help you understand how to use
the different types of orders:
OCO Order (One Cancels Other)
OCO orders are combined orders with both a stop price and a limit price. When one of the orders is
executed, the other is automatically cancelled. OCO orders can be applied to open positions or they can
be used to open a new position.
Say, for example, a trader believes that the USD/CAD, currently
traded at 1.2380/1.2383, will continue trending higher; you believe
that should the pair break above 1.2391, it will rise to at
least 50 pips. Nevertheless, you expect that prior to this major
incline, the pair will retrace to 1.2375. You can place an entry limit
at 1.2375, but in case the pair does not hit 1.2375 before climbing
higher, you would miss the trade. You then place an OCO order to
buy the USD/CAD if it reaches 1.2375 or 1.2391.
26
Of the two, the first bid price to exist in the market will trigger
the order:
Stop and limit orders entered on an existing position are also types
of OCO orders. When either the stop or the limit is executed, the
other is automatically cancelled.
Trailing Stop
A Trailing Stop is a fantastic method to capture profits should there be a significant correction or a
change in trend in the market. We already spoke about stop losses--the point where your trade is automatically
closed out. The beauty of a “trailing stop” is that if the prices continue to move in the direction
of your open position, the “trailing stop” will follow the prices (it “trails” by an amount that you set).
This allows you to lock in more profit. When the prices finally do reverse the trailing stop will not reverse,
and the prices will hit your “trailing stop” and close out your position. The “trailing stop” follows the
market prices at a predetermined pip distance that you set. Remember not to have the trailing stop too
close, for you could be unnecessarily stopped out by natural market fluctuations.
As an example, you may be trading a weekly chart where most of your decisions
are based on weekly information; your “trailing stop” follows the market just
below the Weekly Swing Low, as shown in the following image:
27
Order Types – Summary
• The two most popular orders that can assist in risk management are “Stop Loss/Limit” orders
and “Entry Limit/Stop” orders.
• An “entry” order gets you into the position while a “stop loss” order gets you out of the
position.
TIP: Traders new to Forex should ALWAYS enter a trade with a “stop loss” order. This is the
price where your position will be automatically closed should the market move against your open
trade
• Limit orders are used to enter or exit a certain position when it reaches a certain price level.
• OCO (One Cancels Other) orders are combined orders with a stop price and a limit price. This
type of order ensures that the trader will not miss the trade, yet also allows for the trader to
buy or sell at a better price.
• The trailing stop follows the market prices at a pip distance that you can set. The trailing stop
will not reverse, when the market prices move against your open trade. This type of order allows
for the trader to lock in more profit while limiting losses.
Questions? Markets.com offers unlimited access to Trading
Specialists who can help you better understand the market.
28
06.
Exit Rules Knowing precisely when you will exit the market before you enter is very important, and is a critical component
of every trading plan; you do not have an option as to whether you want to include a strategy
for this or not. Thus it does not necessarily mean that you must know the exact price at which you will
exit or the profit you will make on the trade, but, rather, that you have a defined ‘rule’ about when is
the right time to exit. Your very first exit rule, your “Entry Stop Loss,” must be covered within your Risk
Management rules.
Secondly, you need to know the exact exit criteria that will tell you when and how to finally exit your
profitable position. This final exit might occur when you close your full position out automatically with a
“trailing stop” exit, or it might be a manual signal which, once it appears, allows you to close out your
position manually.
Your criteria may be similar to the following examples. These examples are basic concepts and are not
detailed exit rules, but they will give you a general understanding of how to formulate a rule:
• Exit full position should the market fall below the previous week’s swing low.
• Exit full position should the market have two closes below a longer-term moving average.
Exit Rules – Summary
• Always define your exit rules.
• You must know when to get out of the market before you begin trading.
• Define criteria that will tell you when and how to exit your profitable position.
• Some examples of exit rules:
• Exit full position should the market fall below the previous week’s swing low.
• Exit full position should the market have two closes below a longer-term moving
average.
29
07.
Psychology Rules Psychology rules are also critical, but the majority of traders, because they fail to understand that these rules have
a massive influence on their trading success, do not have anything along these lines written into their Trading Plan.
These rules could be based on the following, but are not limited to:
• Do not trade under emotional stress. Close out all trades or bring up “stop losses” as close to the general
market movement in order to protect as much capital as possible.
• Learn to avoid extreme emotions: do not get over excited about your wins or depressed over your losses.
Otherwise, you are reacting to emotions rather than logic.
• Back-Test and Forward-Test to develop competence and confidence in your system and trading plan methods.
• Should you find that you have an area of weakness that you cannot turn into a strength, give the task to
an independent person who is skilled in that area.
• Do not take on other traders’ opinions or strategies until you have filtered out what is conducive to your
trading plan, or have back-tested to see if their opinions and strategies improve your current system. Remember:
not all techniques or strategies that work well in a certain time-frame, or on a certain instrument,
will transfer successfully across to a different time-frame or instrument. Back testing is essential.
Psychology Rules – Summary
Many traders do not pay attention to how psychological habits influence their trading, so
remember to include these rules in your overall trading plan:
• Don’t trade under emotional stress.
• Learn to avoid extreme emotions relating to your trades. When trading, logic should
always come before emotion.
• Do not hesitate turn to a skilled professional trader when faced with an area of weakness
in your own trading strategy.
Do not take on other traders’ opinions or strategies unless you have tested them and
they actually work in your trading plan.
30
F
orex Trading Terms 08.
and Definitions A
Account
- Record of all transactions. Account Balance
- Same as balance. Agent
- An individual employed to act on behalf of another (the principal). Aggregate Demand
expenditures, and business expenditures.
- The sum of government spending, personal consumption All or None
order at the stated price or not at all.
- A limit price order that instructs the broker to fill the whole Appreciation
to market demand; an increase in the value of an asset.
- A currency is said to appreciate when price rises in response Arbitrage
by purchasing or selling an instrument and simultaneously taking an equal
and opposite position in a related market in order to profit from small price
differentials.
- Taking advantage of countervailing prices in different markets Ask Size
- The amount of shares being offered for sale at the ask rate. Ask Rate
(as in bid/ask spread).
- The lowest price at which a financial instrument is offered for sale Asset Allocation
markets (Forex, stocks, bonds, commodity, real estate) to achieve diversification
for risk management purposes and/or expected returns consistent
- Investment practice that distributes funds among different 31
with the outlook of the investor, or investment manager.
Attorney in Fact
documents on behalf of another person because he/she holds power of attorney.
- A Person who is allowed to transact business and execute B
Back Office
financial transactions (e.g. written confirmations, settlement of trades, and
record keeping).
- The departments and processes related to the settlement of Balance
- Amount of money in an account. Balance of Payments
the rest of the world over a particular time period. These include merchandise,
services, and capital flows.
- A record of a country’s claims of transactions with Base Currency
her book of accounts; the currency that other currencies are quoted against.
In the Forex market, the US Dollar is normally considered the “base” currency
for quotes, meaning that quotes are expressed as a unit of $1 USD per the
other currency quoted in the pair.
- The currency in which an investor or issuer maintains his/ Basis
- The difference between the spot price and the futures price. Basis Point
- One hundredth of a percent. Bear
- An investor who believes that prices in the market will decline. Bear Market
prices accompanied by widespread pessimism.
- A market distinguished by a prolonged period of declining Bid
a currency.
- The price that a buyer is prepared to purchase at; the price offered for 32
Bid/Ask Spread
- See spread. Big Figure
rate. These digits rarely change in normal market fluctuations, and
therefore are omitted in dealer quotes, especially in times of high market
activity. For example, a USD/Yen rate might be 107.30/107.35, but would be
quoted verbally without the first three digits as “30/35”.
- A dealer’s phrase that refers to the first few digits of an exchange Bonds
a borrower in order to raise capital. They pay either fixed or floating interest,
known as the coupon. As interest rates fall, bond prices rise and vice versa.
- Bonds are tradable instruments (debt securities) which are issued by Book
trader’s or a desk’s total positions.
- In a professional trading environment, a book is the summary of a Bretton Woods Accord of 1944
exchange rates for major currencies, provided for central bank intervention
in the currency markets, and set the price of gold at US $35 per ounce.
The agreement lasted until 1971. See More on Bretton Woods.
- An agreement that established fixed foreign Broker
and sellers, usually for a fee or commission. In contrast, a “dealer” commits
capital and takes one side of a position, hoping to earn a spread (profit) by
closing out the position in a subsequent trade with another party.
- An individual, or firm, that acts as an intermediary between buyers Bull
- An investor who believes that prices and the market will rise. Bull Market
(opposite of bear market).
- A market distinguished by a prolonged period of rising prices Bundesbank
- The central bank of Germany. 33
C
Cable
US Dollar exchange rate. The term was coined because originally, starting in
the mid nineteenth century, the rate was transmitted via a transatlantic cable.
- Trader jargon for the British Pound Sterling that refers to the Sterling/ Candlestick Charts
opening and closing price. If the close price is lower than the open price, the
rectangle is shaded or filled. If the open price is higher than the close price,
the rectangle is not filled.
- A chart that indicates the day’s trading ranges and the Capital Markets
over one year). These tradable instruments are more international than the
“money market” (e.g. government bonds and Eurobonds).
- Markets for medium to long term investment (usually Central Bank
a country’s monetary policy and prints a nation’s currency. For example,
the U.S. central bank is the Federal Reserve. Others include the ECB, the BOE,
and the BOJ.
- A government or quasi-governmental organization that manages Chartist
aids in technical analysis by using charts, graphs, and historical data.
- An individual who finds trends, predicts future movements, and Clearing
- The process of settling a trade. Close a Position (Position Squaring
one’s portfolio by either buying back a short position or selling a long position.
) - To eliminate an investment from Commission
- Fee broker charges for a transaction. Confirmation
that confirms the terms of said transaction.
- A document exchanged by counterparts to a transaction Contagion
another. In 1997, financial instability in Thailand caused high volatility in its domes-
- The tendency of an economic crisis to spread from one market to 34
tic currency, the Baht, which triggered a contagion in other East Asian emerging
currencies, and then in Latin America. It is now referred to as the Asian Contagion.
Contract (Unit or Lot)
- The standard unit of trading on certain exchanges. Convertible Currency
currencies at market rates, or gold.
- A currency which can be exchanged freely for other Cost of Carry
a position. It is based on the interest parity, which determines the forward
price.
- The cost associated with borrowing money in order to maintain Counterparty
financial transaction is made.
- The participant, either a bank or customer, with whom the Country Risk
include central bank intervention). Examples are legal and political events
such as war and civil unrest.
- The risk associated with government intervention (does not Credit Checking
change hands, it is essential to check that the counter parties have room for
the trade. Once the price has been agreed upon, the credit is checked. If the
credit is bad no trade takes place. Credit is very important when trading, both
in the Inter-bank market and between banks and their customers.
- Due to the large size of certain financial transactions that Credit Netting
up the dealing process by reducing the need to constantly re-check credit.
Large banks and trading institutions may have agreements to net outstanding
deals.
- Arrangements that exist to maximize free credit and speed Cross Rates
said to be non-standard in the country where the currency pair is quoted.
For example, in the U.S., a GBP/CHF quote would be considered a cross rate,
whereas in the UK or Switzerland it would be one of the primary currency
pairs traded.
- An exchange rate between two currencies. The cross rate is 35
Currency
bank. This unit is the basis for trade.
- A unit of exchange issued by a country’s government or central Currency Risk
- The probability of an adverse change in exchange rates. D
Day Trading
same trading session.
- Opening and closing the same position or positions within the Dealer
places the order to buy or sell.
- One who acts as a principal or counterpart to a transaction, or Deficit
than income/revenue.
- A negative balance of trade (or payments); expenditures are greater Delivery
traded currencies.
- An actual delivery where both sides transfer possession of the Deposit
lent at is known as the deposit rate (or depo rate). Certificates of
Deposit (CD`S) are also tradable instruments.
- The borrowing and lending of cash. The rate that money is borrowed/ Depreciation
- A decline in the value of a currency due to market forces. Derivatives
(stock, bond, currency, or commodity). Derivatives can be both exchange
and non-exchange traded (known as Over the Counter, or OTC). Examples
of derivative instruments include Options, Interest Rate Swaps, Forward Rate
Agreements, Caps, Floors, and Swap options.
- Trades that are constructed or derived from another security Devaluation
versus the value of another currency normally caused by official announcement.
- The deliberate downward adjustment of a currency’s value 36
E
Economic Indicator
and stability issued by the government or a non-government institution (e.g.
Gross Domestic Product, Employment Rates, Trade Deficits, Industrial Production,
and Business Inventories).
- A statistic that indicates current economic growth Efficient Market
information from past prices and volumes.
- A market in which the current price reflects all available End of Day (or Mark to Market)
ways: accrual or mark-to-market. An accrual system accounts only for cash
flows when they occur-- hence, it only shows a realized profit or loss. The
mark-to-market method values the trader`s book at the end of each working
day using the closing market rates or revaluation rates. Any profit or loss is
booked and the trader will start the next day with a net position.
-- Traders account for their positions in two Estimated Annual Income
- Projected yearly earnings. Euro
the European Currency Unit (ECU).
- The currency of the European Monetary Union (EMU) which replaced European Central Bank
Union.
- The Central Bank for the European Monetary European Monetary Unit
a single European currency called the Euro, which will officially replace the
national currencies of the member EU countries in 2002. Currently, the Euro
exists only as a banking currency and for paper financial transactions and
foreign exchange. The current members of the EMU are Germany, France,
Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain,
and Portugal.
- The principal goal of the EMU is to establish Exchange Rate Risk
- See Currency Risk. Economic Exposure
- The risk on a company’s cash flow stemming from 37
foreign exchange fluctuations.
F
Federal Deposit Insurance Corporation (FDIC)
responsible for administering bank depository insurance in the U.S.
- The regulatory agency Federal Reserve (Fed)
- The Central Bank of the United States. Fixed Exchange Rate
for one or more currencies. In practice, even fixed exchange rates fluctuate
between definite upper and lower bands, leading to intervention.
- An official exchange rate set by monetary authorities Fixed Interest
remains constant for the term of the deal. Fixed interests are often found in
bonds and fixed rate mortgages.
- This type of transaction pays an agreed interest rate that Flat (or Square)
square. One would have a flat book if he has no positions or if all the positions
cancel each other out.
- To be neither long nor short is the same as to be flat or Floating Rate Interest
type of deal will fluctuate with market or benchmark rates. One example of a
floating rate interest is a standard mortgage.
- As opposed to a fixed rate, the interest rate on this Foreign Exchange (or Forex or FX)
and selling of another in an over-the-counter market. Most major FX is
quoted against the US Dollar.
- The simultaneous buying of one currency Foreign Exchange Risk
- See Currency Risk. Forward
trades in FX are usually expressed as a margin above (premium) or below
(discount) the spot rate. To obtain the actual forward FX price, one adds
the margin to the spot rate. The rate will reflect what the FX rate has to be
- A deal that will commence at an agreed date in the future. Forward 38
at the forward date so that if funds were re-exchanged at that rate there
would be no profit or loss (i.e. a neutral trade). The rate is calculated from the
relevant deposit rates in the two underlying currencies and the spot FX rate.
Unlike in the futures market, forward trading can be customized according
to the needs of the two parties and involves more flexibility. Also, there is no
centralized exchange..
Forward Points
rate to calculate a forward price.
- The PIPs added to or subtracted from the current exchange Forward Rate Agreements (FRA`s)
to borrow/lend at a stated interest rate over a specific time period in the future.
- FRA`s are transactions that allow one Front Office
other main business activities.
- The front office usually comprises of the trading room and Fundamental Analysis
data that aims to determine future movements in a financial market.
– This is a thorough analysis of economic and political Futures
for a specific price on a specific date in the future. Unlike options, futures give
the obligation (not the option) to buy or sell instruments at a later date. They
can be used to both protect and to speculate against the future value of the
underlying product.
- A way of trading financial instruments, currencies, or commodities G
GTC (Good-Till-Cancelled)
fixed price. The GTC will remain in place until executed or cancelled.
- An order left with a Dealer to buy or sell at a 39
H
Hedge
the volatility of your portfolio value. One can take an offsetting position in a
related security. Instruments used are varied and include forwards, futures,
options, and combinations of these.
- An investment position or combination of positions that reduces High/Low
the underlying instrument for the current trading day.
- Usually the highest traded price and the lowest traded price of I
Inflation
consumer goods, thereby eroding purchasing power.
- An economic condition where there is an increase in the price of Initial Margin
on future performance, to enter into a position.
- The required initial deposit of collateral, used as a guarantee Interbank Rates
banks quote other large international banks.
- The Foreign Exchange rates which large international Interest Rate Swaps (IRS)
different payment streams. The transaction usually exchanges two parallel
loans: one fixed and the other floating.
- An exchange of two debt obligations that have Interest Rate Swap Points
rule using the bid and offer spread on an fx rate. If the rate quoted is in foreign
(non U.S.) terms and the offered price is higher than the bid, then the
interest rate in that nation is higher than the rate in the base nation for the
particular time in question. If quoted in American terms, the opposite is true.
Example: USD/ JPY quoted 105.75 to 105.65. Because the offered price is
lower than the bid, then you know that rates are lower in Japan than in the
U.S.
- Interest rates may be determined by a simple 40
ISDA (The International Swaps and Derivatives Association)
that sets terms and conditions for derivative trades.
- The body L
Leading Indicators
(e.g. Unemployment, Consumer Price Index, Producer Price Index, Retail
Sales, Personal Income, Prime Rate, Discount Rate, and Federal Funds Rate).
- Economic variables that predict future economic activity LIBOR (London Interbank Offer Rate)
international banks will lend to each other.
- The interest rate at which the largest LIFFE (The London International Financial Futures Exchange)
of the three largest UK futures markets.
- Consists Limit Order
above a specified price.
- An order to buy at or below a specified price or to sell at or Liquid and Illiquid Markets
with no impact on price stability. A market is described as liquid if the spread
between the bid and the offer is small. Another measure of liquidity is the
presence of buyers and sellers, with more players creating tighter spreads. Illiquid
markets have few players, and, hence, wider dealing spreads.
- The ability of a market to buy and sell at ease Liquidation
transaction.
- To close an open position through the execution of an offsetting Liquid Assets
market fund shares, US Treasury Bills, bank deposits, etc.
- Assets that can be easily converted into cash. Examples: money Long
appreciation in value if market prices increase.
- A position to purchase more of an instrument than is sold, hence, an 41
M
Margin
losses from adverse movements in prices.
- Customers must deposit funds as collateral to cover any potential Margin Call
other collateral to bring the margin up to a required level-- thereby guaranteeing
performance on a position that has moved against the customer.
- A requirement from a broker or dealer for additional funds or Mark to Market (or End Of Day)
ways: accrual or mark-to-market. An accrual system accounts only for cash
flows when they occur, and only shows a profit or loss when realized. The
mark-to-market method values the trader`s book at the end of each working
day using the closing market rates or revaluation rates. Any profit or loss is
booked and the trader will start the next day with a net position.
- Traders account for their positions in two Market Maker
at those stated bid and ask prices. A market maker runs a trading book.
- A dealer who supplies prices and is prepared to buy or sell