Stoploss Forex

Open account in Marketiva

2008-09-26T23:07:00.021+07:00

Before you open a new account, you must to check marketiva price list and payment option and to read and understand the following policies marketiva adheres to regarding payment and anti money laundering processes.

Price List

Payment Option

Payment Policy

Anti Money Laundering

One person can open one account only. In case marketiva administration system detects there are multiple accounts registered by the same person, such account will be suspended an the account holders will be required to provide supporting documentation. This policy was introduced as a response to many related misuses maketiva experienced in the past.

Open a new account in Marketiva

1. Click the banner first.

The front page of Marketiva

2. Click the tab "Open Account" and then a register form will be apear.
Please fill out the registration form.

After you finish fill out the registration form, click "Continue". Please fill out form below.

"User Template", choose Standard Setup.
"Coupon", we have some coupon here. You must only choose one.

PKHRCX5FO5,YUILCPJ79R,L51OEZSMUQ,NWKFOGVC0B,13UFB4IR5D,2FULJ5LDCM,
8QXUKEJUT7,EVCSKJJ67S,LHA5SQWA0Q,QEB1WEHS3K,K97H6NJAZD,V7XMZOBNJK, SNTJJ0L99C,W5R4MTWA9D,O99GL5FWKS,5FVKD2EQLR,WFDKM02Z07,A9USK79BJH, LT91P9TY1C,FFPO1Y0MS1,4AW54SQR32,IJWDKV80UD,GOIIKI76YB,NU4VD48TFV, K8DKKDQGWI,1OMOZB7MUY,L4M4OW98RY,U53LG32431,MXSCRWCRKW,
NW2BWD0YOS

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check box service aggreement, and then click Finish

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Click tab "service", and then click "Identify Yourself"

4. Download software streamster marketiva. Click here

Marketiva

2008-09-26T13:30:00.024+07:00

What is Marketiva ?

With more than 520,000 serviced users, 310,000 unique and live trading accounts, and more than 3.7 million live orders executed each month, Marketiva is one of the most popular over the counter market makers in the world.
You Receive $5.00 FREE Money to Try Live Forex Trading today. Marketiva Start Trading Forex Today With as Little as $1 Dollar. If you ever thought about Forex Trading you will never find a better place to learn than right here at Marketiva plus they pay you $5.00 real money just to open your account and another $10.000 virtual money to practice with.Marketiva are a Swiss company based in Lausanne and have recently launched their Forex Trading Platform fully integrated with e-currencies. It is a state of the art platform with many advanced features but really user friendly for beginners with 24 hour live support via their onboard chat room.

So join marketiva , you got nothing to loose and lots to gain. Spend some time on the website and you just might surprise yourself by how much you learn and in six months or a year from now you could be trading for a living.Enjoy Forex Trading in Marketiva, doing Trade from Home or Office. Earn income Us $ 50 - $ 100 per day from Easy Trading, It’s Fun !Download Streamster Software now, be successful trader in the forex market. Visit Maketiva website, Open Account Today !

Forex online trading a trade system according to online that is via internet technology ware, where with this system unnecessary investor again come or busy phone broker office, because enough with internet access now can easily you can, you can sit at home while enjoy coffee dish and fiddle around with family, at warnet or cafe that has internet service hotspot and other . All price informations and investment execution can be done, where and any time whilst you can relate to the this illusion world. Thereby forex online trading this have come to trend alternative easy investment and cheap at this information technology century.

Excess other from forex online trading that is leverage and two ways opportunity, where with existence leverage investor only need investasi capital equal 4 – 10 % from investment total that need, and two ways opportunity that is possibility that can get advantage when strong currency exchange rate and or weakens, besides investor also earns actively controls x'self its (the invesment risk becomes as minimum as possible).

next surplus explanation from forex online trading:

Small capital laverage. With system existence margin make possible investors to do in big volume with little relative capital.

Two ways opportunity.
Transaction can be done with two directions, buy or will sell beforehand based on predictions rates will rise or go down (trend).
for example moment that is you take position buy and obvious currency price movement show trend rise significant, so you can take profit from price difference buy with close position buy you with sell (take profit), so also on the contrary when do you take position sell formerly and then currency price movement experience trend depreciation, so you also can take profit with close position sell you with (take profit).

buy at low price, sell at a stiff price = profit
sell at a stiff price, buy at low price = profit

High liquidity
capital which in planting at the times can easily be liquefied to return, a lot of fund liquefaction method and fund increasing dependings from company forex.

Flexible and no time management constribution necessary
24 clocks a day begin from monday until friday, where and any time you can do transaction provided you are connections with internet.

• 04.30 wib: new zealant exchange
• 05.30 wib: sydney stock exchange
• 07.00 wib: tokyo stock exchange (market open)
• 08.45 wib: hong kong stock exchange
• 09.00 wib: singapore stock exchange
• 09.30 wib: jakarta stock exchange
• 14.30 wib: european exchange and london exchange
• 19.30 wib: new york stock exchange
• 04.00 wib: new york stock exchange (market close)
this investment is bot many sizes time for the management is compared with other effort.

Risk management and limited risk
You can manage self existing risk. Some ways to restrain your finances at the time of does trading at marketiva, among others:

• averaging
• stoploss and limit
• cut loss
• switching

No man power cost and no taxation
Doesn't need cost for labour.
This trade is done globally between world finance centre with involve world principal bank as principal executor from this transaction. This effort blooms in such a way fast in period lately with growth level around 30 percents per year it. This currency trade is one of [the] trade effort rotation volume and biggest the money circulation at world and in this time number around usd 1.5 trilliun every the day. Rotation volume magnitude form a market has perfect rivalry for no one even also participant in this trade has function as price determinant.

About Forex online trading

Marketiva company service forex trading online from switzerland, europe. The services enough popular fast at internet. Every member can direct do trading with beginning capital enough 1 or even cost less, even to begin at marketiva this you be be given capital as big as 5 (real money) that can direct you use to live trading. After you get profit enough so you can interesting it to your bill.

Besides 5 as beginning capital, you also get virtual money as big as us$10,000. This virtual money is tool for you to learn simulation trading, so that you easier realizes manner analyzes price movement, sales manner (transaction), read chart, and everything that trading forex. After you have felted self confidence so you can direct use money 5 that you have got according to free that to do live trading.

As a member marketiva, you also will get software trading, that is streamster according to free and can at download a moment after you are registered as member. Software streamster this platform trading online marketiva that used to transaction currency sales according to online, observe price movement according to realtime and economic news update at internet

Superiority marketiva:

bonuses 5 cash, can direct be used to live trading
spread begin from 3 pips for pair eur/usd
trading begin from 1% margin
virtual demo and live trading with 1 account
latest economic news
alerts on market events
there is no trade commitee
24-hour customer support
process deposit and withdrawl (money withdrawal) easy
chat channels
charting tools easy used

Superiority besides the at mention on, marketiva give to chance to all little investor that wants to do currency trade. Apart from capital usd 5 that given by marketiva, also can their capital increase self with little relative total .

One click Trading

Buy and sell financial instruments with one mouse click
No Commissions or exchange fees on your trades, you can trade as much as you like
You can start trading with as little as $1
Open your account for free an get $5 cash reward so you can start trading right away

Diversification and Practise

Trade $10,000 with only $100 in your account using 1% margin on forex, index, and commodity desks.
If you look for long term profits, you can invest in funds and reduce your investment risk.
No interest charged on your open margin position.
You don't need to start on live market right away practise with your virtual money first.

News, chat, alerts and support

Real time economic news and forecasts about global economy and markets.
Get alerts narrated aloud prior to major scheduled market events.
Chat with order traders about market events, exchange trading ideas and learn.
Get help from maketiva support proffesionals available 24h on support channels

Advanced Personalized Charting

The most sophisticated and easy to use charting tool with build in advanced technical indicators.
You can trade, view and modify open positions directly on your charts.
Modify parameters of technical indicators in real time and see how they appear immediatelly.
Build your chart collection by adding your saved chart configurations.

Simple and powerful

Easy to use and understand even if you are a beginner.
Streamster trading software gives you the best trading experience available.
Arrange trading windows according to your preference, set advanced option, and much more.
You only 5 minutes to open your account, and it's FREE.

Download Streamster Software now, be successful trader in the forex market. Visit Maketiva website, Open Account Today !

Supplemental Site Day

2008-09-25T18:22:00.003+07:00

A. Double Top and Double Bottom

The Double Top and Double Bottom Charting Patterns
One of the charting patterns commonly used by FX traders is that of the double top and double bottom. The double bottom is a pattern where the currency pair touches a low point twice without being able to sustain a break through that point. The double bottom is a charting pattern that suggests where the market may find support.

Conversely, a double top pattern shows a currency pair reaching resistance twice and failing to break through. The chart below offers some insight into how traders can incorporate the double bottom and double top patterns into their trading strategies.

B. Strength of Trends: ADX/DMI
Strength of Trends: A Look at ADX/DMI

Two commonly used indicators in technical analysis -- especially in the futures and equities markets -- are ADX and DMI. Both essentially allow traders to gauge the strength of a trend in the market, thereby helping them to determine if the market is rangebound or trending.
When ADX and DMI are displayed on a chart, three lines will appear. Those lines are as follows:

Positive Directional Index (+DI): Measures the strength of the trend for an upward movement in price.
Negative Directional Index (-DI): Measures the strength of the trend for a downward movement in price.
Average Directional Line (ADX): Measures the strength of the overall trend in the market, regardless of direction.

Those three lines can be used as follows:

If ADX is strong -- such as above 25 -- the market is trending strongly. Rangebound strategies may not work well.
If Positive DI is above Negative DI, the market is considered to be bullish; if the opposite is true, the market is deemed to be bearish.
ADX can be used to determine the strength of the directional trend, as suggested by Positive and Negative DI.

C. JPY Overview
Japanese Yen (JPY)
Japan is the third largest economy in the world with GDP valued at over US$4Trl in 2002 (behind the US and the entire Eurozone or EMU). The country is also one of the world's largest exporters and is responsible for over $400bln in exports per year. Manufacturing and exports account for nearly 20% of GDP. This has resulted in a consistent trade surplus, which creates an inherent demand for the JPY, despite severe structural deficiencies. Aside from being an exporter, Japan is also a large importer of raw materials for the production of their goods. The primary trade partners for Japan in terms of both imports and exports are the US and China. China is becoming an increasingly important trade partner, as China's inexpensive goods have allowed it to gain a larger share of Japan's import market.

Japanese Banking Crisis
In the 1980s, Japan's capital market was one of the most attractive markets for international investors seeking investment opportunities in Asia. They had the most developed capital markets in the region and their banking system was considered to be the one of strongest in the world. The country was experiencing above-trend economic growth and near-zero inflation. This resulted in rapid growth expectations, boosted asset prices and rapid credit expansion, leading to the development of an asset bubble. Between 1990-97, the asset bubble collapsed, inducing a USD$10trl fall in asset prices, with the fall in real estate prices accounting for nearly 65% of the total decline, which is worth two years of national output. This fall in asset prices sparked the banking crisis in Japan. It began in the early 1990s and then developed into a full blown systemic crisis in 1997 following the failure of a number of high profile financial institutions. Many of these banks and financial institutions extended loans to the builders and real estate developers at the height of the asset bubble in the 1980s, with the land as the collateral. A number of these developers defaulted after the asset bubble collapse, leaving the country's banks saddled with bad debt and collateral worth sometimes 60-80% less than when the loans were taken out. Due to the large size of these banking institutions and their role in corporate funding, the crisis had profound effects on both the Japanese and global economy. As a result, enormous bad debts, falling stock prices and a collapsing real estate sector have crippled the Japanese economy for almost two decades.

With Japan experiencing deflationary conditions, each succeeding month of deflation raises the real burden of the banks' outstanding debt. To date, the Japanese Ministry of Finance and Bank of Japan is still grappling with this problem and has only injected capital into these ailing banks as a solution to prevent bankruptcies. Since the beginning of the crisis, they have hoped that the banks would grow their way back to health.

In addition to the banking crisis, Japan has the highest debt level of all of the industrialized countries, at over 140% of GDP. The chart below shows the country's deteriorating fiscal positions, with public debt continuing to rise, which has resulted in the country experiencing over 10 years of stagnation. With this high debt burden, Japan stands at risk of a liquidity crisis.

The banking sector has become highly dependent on a government bailout. As a result, the JPY is very sensitive to political developments such as speeches by government officials with rhetoric that may indicate potential changes in monetary and fiscal policy, attempted bailout proposals, and any other rumors.

Key Indicators for JPY

Balance of Payments, Trade Surplus
These two indicators measure the capital flows and trade flows in and out of Yen. Because Japan is so sensitive to exports and is also a major investor in foreign markets, these two pieces of data are important in tracking the overall flow in and out of Yen. If the Yen strengthens significantly below the 100 level to the dollar, the possibility of trade being affected is very real, and Trade Surplus releases could become significant. The Bank of Japan’s goal in keeping USDJPY artificially inflated is to keep Japanese exports competitive, so trade surplus data that does not meet expectations may give the BoJ new resolve to intervene in USDJPY.

Tankan Survey
The Tankan is a short-term survey of Japanese businesses—divided according to size—that gives an overall outlook of the business climate in the coming months. Published four times per year, the Tankan is watched as a leading indicator, because it summarizes confidence in the future of the economy.

Trading JPY

USDJPY

USDJPY is the most heavily traded of all Yen crosses, as the US is the most significant trading partnerfor Japan.
In the past this pair has been characterized by frequent and decisive intervention by the Bank of Japan,who has actively bought US dollars for years in the interest of keeping the Yen weak and makingJapanese exports attractive in the US. If USDJPY approaches 100, then there may again be intervention.
Unlike ECB intervention, which may occur at certain times due to market conditions, BoJ interventionshould be considered an intrinsic part of trading UDSJPY.
Intervention creates strong support levels, which the BoJ defends rigorously. If the market pressure downwards makes a certain price level untenable for the BoJ, it will usually retreat to a slightly lower level and repeat the process of defending it as long as possible.
The goal of intervention is to eliminate speculators from the market. Banks and corporations that must physically exchange dollars for Yen can not be removed from the market by intervention, but the BoJ can scare speculative short sellers out of the market by making it too risky for them to hold positions.

EURJPY
Although volume of the Euro against the Franc and the Pound has surpassed that of the dollar, EURJPY remains less heavily traded than USDJPY. Trading in EURJPY is technically more stable than USDJPY for the reason that the Bank of Japan is more interested in the price of the Yen vs. the dollar, and USDJPY is where most intervention occurs. Because USDJPY exchange rates are often driven mainly by USD strength and weakness, EURJPY is a more reliable measure of JPY strength relative to other currencies.

GBPJPY
Like EURJPY, GBPJPY has less volume than USDJPY, but it trades more smoothly because BoJ intervention almost always occurs in USDJPY. GBPJPY can be used as a more reliable measure of JPY strength than USDJPY, since often pairs involving the dollar move based on USD weakness or strength rather than the strength of other currencies. Because there is less trading volume in this cross, spreads are typically wider than the major pairs, but it is still a relevant cross.

Psychology of Trading

2008-09-25T18:10:00.002+07:00

A. The Psychology of a Good Trader
Being a good trader involves more than just being able to analyze the market technically and/or fundamentally. One of the most crucial yet overlooked elements of successful trading is maintaining a healthy psychological outlook. At the end of the day, a trader who is unable to cope with the stress of market fluctuations will not stand the test of time – no matter how skilled they may be at the more scientific elements of trading.

Emotional Detachment

Traders must make trading decisions based on strategies independent of fear and greed.

One of the premiere attributes of a good trader is that of emotional detachment: while they are dedicated and fully involved in their trades, they are not emotionally married to them; they accept losing, and make their investment decisions on a mental level. Traders who are emotionally involved in trading often make substantial errors, as they tend to whimsically change their strategy after a few losing trades, or become overly carefree after a few winning trades. A good trader must be emotionally balanced, and must base all trading decisions on strategy – not fear or greed.

Know When to Take a Break

In the midst of a losing streak, consider taking a break from trading before fear and greed dominate your strategy.

As noted in the money management section of the course, losing is an inevitable part of trading. Not every trade can be successful. As a result, traders must be psychologically capable of coping with losses. Most traders, even successful ones, will go through a stretch of losing trades. The key to being a successful trader, though, is being able to come through a losing stretch unfazed and undeterred.

If you are going through a bad stretch, it may be time to take a break from trading. Often, taking a few days off from watching the market to clear your mind can be the best remedy for a losing streak. Continuing to trade relentlessly during tough market conditions can breed greater losses as well as damaging your psychological trading condition. Ultimately, it’s always better to acknowledge your losses rather than continue to fight through them and pretend that they don’t exist.

B. GBP Overview
The British Pound (GBP)
The United Kingdom is the world's fourth largest economy with GDP valued at over USD$2.9 trillion in 2002. At this writing the UK is economically strong, with low unemployment, expanding output, and resilient consumption. The strength of consumer consumption has in large part been due to a strong housing market, which some feel has expanded too far and too fast and may be due for a correction.

The UK has a service-oriented economy, with manufacturing representing an increasingly smaller portion of GDP, equivalent to only one fifth of national output. Britain boast one of the most developed capital market systems in the world, and as a result insurance and banking have become the strongest contributors to GDP.
Although the majority of the UK's GDP is from services, it is important to know that they are also one of the largest producers and exporters of natural gas in the EU. The energy production industry accounts for 10% of GDP, one of the highest shares of any industrialized nation. This is particularly important, as increases in energy prices (such as oil), will significantly benefit the large number of UK oil exporters.

Overall, the UK is a net importer of goods and runs a consistent trade deficit. Its largest trading partner is the EU, with trade between the two constituencies accounting for over 50% of all of the country's import and export activities. The US, on an individual basis, still remains the UK's largest trading partner.

A long-term issue that the UK is grappling with is whether or not to adopt the Euro. The decision on Euro entry has significant ramifications for the UK economy. Currently, this is the key political and economic issue on the government's agenda. The Treasury has specified five economic tests that must be met prior to Euro entry.

These tests are:
UK's Five Economic Tests for Euro

Is there sustainable convergence in business cycles and economic structures between the UK and other EMU members, so that the UK citizens could live comfortably with euro interest rates on a permanent basis?
Is there enough flexibility to cope with economic change?
Would joining the EMU create an environment that would encourage firms to invest in the UK?
Would joining the EMU have a positive impact on the competitiveness of the UK's financial services industry?
Would joining the EMU be good for promoting stability and growth in employment?

Key Economic Indicators for GBP

Housing Starts
Housing has long been one of the strongest areas of the UK economy, and this periodically creates concern that the housing market may be in the midst of a bubble. A second concern is that a runaway housing market could cause inflationary pressures. For these two reasons, stronger than expected housing numbers can be a preliminary sign that a hike in interest rates is on the way.

Retail Price Index (RPI-X)
The RPI-X is an inflation indicator that measures the prices of consumer goods. The market follows the RPI-X that excludes mortgages, and the target set by the BoE for inflation is a 2.0% annual growth in RPI-X. A sharp rise in the RPI-X could be seen as an indicator of future interest rate hikes in GBP, as the Bank of England attempts to curb inflation. The BoE has recently started using the Harmonized Index of Consumer Prices or HICP as an indicator of inflation rather than RPI. HICP excludes housing as a measure of inflation, so there is a greater separation between housing prices and other consumer prices as measures of inflation, but both certainly weigh on the BoE's interest rate decisions.

Energy Prices
Because the UK is a large exporter of crude oil, higher energy prices can affect the demand for the GBP and, in turn, its exchange rates. There is an energy component in the HICP, but large swings in energy prices can occur in real time, while the HICP data is not compiled until a later date. This means that swings in energy prices can be a very early sign of inflationary pressures, which can then affect interest rates.

Trading GBP
GBPUSD
Like other major USD crosses, GBPUSD often moves more on dollar weakness than it does on GBP strength. Trading volume remains higher in GBPUSD than any other GBP pair, but it often reacts to moves in EURUSD and EURGBP. When the market is moving on GBP strength rather than on USD weakness that ties GBPUSD to other USD crosses, GBPUSD can move in large daily ranges over several hundred pips. It often trades in a range for several days or even weeks before breaking out to a new level and trading in a range again. This means that both the range trade and the breakout strategy can be profitable, as long as traders are willing to quickly cover losses if the market conditions seem to be changing.

EURGBP
Trading volume is comparatively higher in GBPUSD, but major moves in EURGBP that show GBP strength or weakness will typically influence the movement of GBPUSD. Often the strength of the pound against the dollar will closely mirror that of the Euro, and there will be little in the way of decisive movement between the Euro and Sterling. If the market starts to trade on GBP or EUR strength, though, rather than on USD weakness or strength, there can be decisive movement in EURGBP.

Money Management

2008-09-25T17:24:00.006+07:00

A) Why Do Most Traders Lose Money?

The fact is that most traders, regardless of how intelligent and knowledgeable they may be about the markets, lose money. What could be the cause of this? Are the markets really so enigmatic that few can profit, or are there a series of common mistakes that befall many traders? The answer is the latter, and the good news is that the problem, while it can be emotionally and psychologically challenging, can be solved by using solid money management techniques.Most traders lose money simply because they do not understand or adhere to good money management practices.. Part of money management is essentially determining your risk before placing a trade. Without a sense of money management, many traders hold on to losing positions far too long, but take profits on winning positions prematurely. The result is a seemingly paradoxical scenario that in reality is all too common: the trader ends up having more winning trades than losing trades, but still loses money.

Money Management is the Key
Key Money Management Practices
So, what can traders do to ensure they have solid money management habits?
There are a few key guidelines that every trader, regardless of their strategy or what instrument they are trading, should keep in mind:

Risk-Reward Ratio. Traders should establish a risk-reward ratio for every trade they place. In other words, they should know much they are willing to lose, and how much they are seeking to gain. Generally, the risk-reward ratio should be 1:2, if not more. This means risk should equal no more than one-half of the potential reward. Having a solid risk-reward ratio can prevent traders from entering positions that ultimately are not worth the risk.
Stop Loss Orders. Traders should also employ stop-loss orders as a way of specifying the maximum loss they are willing to accept. By using stop-loss orders, traders can avoid the common scenario where they have many winning trades but a single loss large enough to eliminate any trace of profitability in the account.

B. Using Stop-Loss Orders to Manage Risk
Due to the importance of money management to long-term successful trading, the use of a stop-loss order is imperative for any trader who wishes to succeed in the currency market. The stop-loss order allows traders to specify the maximum loss they are willing to accept on any given trade. If the market reaches the rate the trader specifies in his/her stop-loss order, then the trade will be closed immediately. As a result, the use of stop-loss orders allows you to quantify your risk every time you enter a trade.

There are two parts to successfully using a stop-loss order: (1) initially placing the stop at a reasonable level and (2) trailing the stop – meaning moving it forward towards profitability – as the trade progresses in your favor.

Placing the Stop-Loss
Here are two recommended ways of placing and trailing a stop-loss order:

Two-Day Low. This technique involves placing your stop-loss order approximately 10 pips below the 2 day low of the pair. The idea behind this technique is that if the price breaks to new lows, the trader does not want to hold the position. For example, if the low on the EUR/USD’s most recent candle was 1.2900, and the previous candle’s low was 1.2800, then the stop should be placed around 1.2790 – 10 pips below the 2 day low – if a trader wishes to enter. As another day passes, the trader can raise the stop to 10 pips below the new two-day low.
Parabolic SAR. One type of volatility-based stop is the Parabolic SAR, an indicator that is found on many currency trading charting applications. Parabolic SAR is a volatility-based indicator that graphically displays a small dot at the point on the chart where the stop should be placed. Below is an example of a chart using Parabolic SAR.

C. EUR Overview
The European Monetary Union (EUR)
The European Union (EU) was developed as an institutional framework for the construction of a united Europe. The EU consists of 25 member countries; Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia and the United Kingdom. Twelve of these countries use the euro as a common currency. They are known as the European Monetary Union (EMU). Aside from a common currency, these countries also share a single monetary policy dictated by the European Central Bank or (ECB).

The EMU Today
The EMU is the world's second largest economic power, with GDP valued at over US$11Trl in 2003. With a highly developed fixed income, equity and futures market, the EMU is the second most attractive investment market for domestic and international investors. The EMU is primarily a service-oriented economy; services account for approximately 70% of GDP, while manufacturing, mining and utilities only account for 22% of GDP.

The EMU is both a trade and capital flow driven economy, and it has emerged as a legitimate competitor for the US in terms of capital investments. German bonds are a common alternative to US Treasuries. Unlike most major economies, the EMU does not have a large trade deficit or surplus. In fact, the EMU went from a small trade deficit in 2001 to a small trade surplus in 2002. EU exports comprise approximately 19% of world trade, while EU imports account for roughly 20% of total world imports. Because of the size of the EMU's trade with the rest of the world, it has significant power in the international trade arena. International clout is one of the primary goals in the formation of the EU, because it allows the individual countries to group as one entity and negotiate on an equal playing field with the US, who is their largest trading partner.

The Future of the EUR
The EU's growing role in international investment and trade has important implications for the role of the Euro as a reserve currency. It is important for countries to have a large reserve of currencies to reduce exchange risk and transaction costs. Traditionally, most international transactions involved the British Pound, the Japanese Yen, and/or the US Dollar. Before the establishment of the Euro, it was unreasonable to hold large amounts of every individual EU national currency. As a result, currency reserves were weighted heavily toward the dollar. At the end of the 1990s, approximately 65% of all world reserves were held in US dollars, but now with the introduction of the a single European currency, foreign reserve assets are shifting in favor of the euro. This trend is expected to continue, as the EU becomes one of the major trading partners for most countries around the world.

Economic Indicators for EUR
GDP for Germany, France, Italy
Germany has the largest economy in Europe, and German economic data moves the EUR price more than any other nation’s economic releases. French and Italian GDP is less important than German data, but it is still relevant to the EUR. GDP is the central measure of economic growth in a nation, and if the GDP of a given country exceeds or fails to meet expectations by a significant amount, currency markets often become volatile as a result. Because German data is more heavily weighted than French or Italian, a small difference between German expectations and releases would have the same effect as a much larger gap in French or Italian data.

Unemployment
Because of the political environment in Europe, unemployment data is an even more important indicator than it is in most other nations. Organized labor is politically more powerful in Europe than it is in the US, and Europe is much more sensitive to changes in employment. German, French, and Italian unemployment data can affect the level of the EUR, aside from having political implications as well. Unlike unemployment in the US, unemployment in Europe is an important indicator at all times.

Ten Year German Bund
German ten year bonds are the closest equivalent to the US 10 Year Treasury, and the difference in these 10 year rates can be an indication of where capital investments are likely to go as investors seek the highest return. This in turn will drive up the value of the currency in which the bonds are held.

Money Supply (M3)
One of the mandates of the ECB is to maintain low inflation, and one of the tools it uses to this end is control of the money supply. In order to maintain a target inflation rate of 2%, the ECB looks for an increase of roughly 4.5% in M3. If M3 is much higher than expected, it can be a sign that inflation is increasing and that a rate hike might be coming. Inflation is of much greater concern in Europe than it is in the US, and it usually comes much earlier in the economic cycle. This means that the ECB is more likely to aggressively raise interest rates than the FOMC, and the market may react to early signs of rate hikes.

Trading EUR
The Euro has emerged as a competitor to the dollar as a destination of foreign investment, and because the Eurozone is a major trading partner with many other countries, most crosses in EUR have high trading volume. EURUSD is the most heavily traded currency pair, while EURCHF and EURGBP have emerged as the dominant crosses for both CHF and the GBP.

EURUSD

Most heavily traded of all currency pairs, with the narrowest spread on the interbank market as buyers and sellers compete over the inside market.
Most active beginning 8:00 GMT (3 am EST) at the beginning of London trading hours. London is the dominant FX market in the world, especially for EUR, CHF and GBP pairs.
Often has little activity after the middle of the US session (roughly 1700 GMT).
Follows technical analysis extremely well, and is well suited to breakout or trend trades. The pair is poorly suited to range trades most of the time because of the large number of speculative traders.
Follows movement in capital markets: bond markets or equities, depending on which is most active at the time. When equities are experiencing a strong bull market, the S&P 500 can act as a leading indicator for USD strength against the Euro. When bond markets are dominant, the difference in yields on a 10 year German Bund and the US 10 year Treasury can identify movement of capital in the pair.
Open interest on the Euro Futures market on the Chicago Mercantile Exchange can be used as a rough indicator of market interest and positioning, although it is not a perfect volume indicator.
Reacts to data out of a variety of countries, sometimes focusing heavily on US releases, other times focusing on data out of Germany, France, and Italy. Because it trades more often in trends than in a range, indicators like moving averages or crossovers are more often useful than Bollinger bands or RSI.

Look Back- Fundamental Analysis

2008-09-25T17:05:00.008+07:00

A. Fundamental Analysis

The true movements of currencies are based upon fundamentals – capital flows, trade flows, economic numbers, rumours and news. Technical analysis, on the other hand, is a strategy that calls for focusing upon historical price patterns, all of which are very subjective -- there are a million different technical analysis patterns, any of which a trader can use to argue his/her bias. At any one time, it will be easy for technical analysts to find indicators offering conflicting signals, with some pointing to an upward bias and others indicating a negative bias.
Fundamental analysis on the other hand, is based upon finding the intrinsic value of a currency pair. Fundamentalists focus on the forces that move currencies and how they impact its intrinsic value. Below are some theories as to why fundamental analysis may be superior to technical analysis:

Using Fundamental Analysis to Forecast Long-Term Directional Trends
One of the key advantages of fundamental analysis is the ability to forecast long-term directional trends. Fundamental analysis serves as a guide to gauge whether currencies are undervalued or overvalued. Over the long run, currencies rarely trade in ranges and instead develop strong trends. Therefore it is important to use fundamental analysis to gage the direction of the trend. A classic example is the EURUSD, which has been trending upwards since 2002. This trend can be easily explained by the ballooning US current account deficit, the US government’s waning commitment to a strong dollar, as well as the prospects of a jobless recovery. Big money can be made using fundamental analysis, as traders can take advantage of long-term fundamental shifts
in the markets.

Fundamentals Can Cause Short-term Movements
Besides being able to forecast the long-term directional trend of a currency pair, fundamental analysis can also be used to forecast sudden short-term movements. Economic data, rumors and news all have the potential to impact currency movements. For example, potential intervention by the Bank of Japan kept USDJPY well supported between late May and early July of 2003. Comments from central bankers also move markets - ECB Duisenberg’s comment that a fall in the dollar is “unavoidable” explains the bulk of the 200-pip EURUSD rally on October 6, 2003. Surprises in economic data also move markets – economic data that consistently beat expectations in Australia recently propelled the currency to five-year highs.

B. Technical Analysis
Coinciding with the increasing popularity of computerized trading across all investment arenas is the ability for traders to employ technical analysis. As markets tend to become inundated with information, and as charting applications are able to provide traders with an increasing array of data, technical analysis has become both practical and relevant. Below are some theories as to why traders need to develop an understanding of technical-based trading.

Determine Precise Entry/Exit Points
Fundamental analysis’ most glaring weakness is its lack of precise entry, exit and stop points. Fundamental traders tend to have more of a spontaneous process regarding when they should enter trades. In theory this may not prove too harmful, but in reality it increases the likelihood of a trader becoming more erratic in their style, and more prone to classic money management and psychology mistakes. On the other hand, technical analysis demystifies the market; traders have certain rules and concepts that allow them to determine precise points at which they should place their orders. This facilitates the employment of a disciplined strategy.

The chart below illustrates how a technical trader can determine when to get in and out of the market.

Analyzing Instead of Forecasting
One of the most common complaints about technical analysis is that it fails to consider the very factors that result in the movement of exchange rates; it only looks at statistics and patterns, which are derivatives of market activity, not causes of it. Accordingly, the rationale is that technical analysis is an ineffective tool at forecasting:
it does not look at the causes of exchange rate movement, and hence cannot justifiably determine the future effects of exchange rates.

This is undeniably true. It is, however, misleading. The reason why technical analysis works well is precisely because it does not involve forecasting or predicting – it considers only what is actually going on in the market regarding who is buying and who is selling. This is the true information in the market, and for some traders it is the only information that really matters. The market is simply a battle between buyers and sellers – and thus, technical analysis reasons that looking at the statistics behind this “battle” is all that is really needed to determine what really is going on in the market, and how to profit accordingly.

Error On the Chart
In the first month that the course existed, we noticed that there several errors in the chart. One deals with Fib retracement levels plotted above and how they were used as a trading signal, the other deals with a candlestick. Rather than correct the chart I decided to leave it in and see if anyone noticed the error. So the question is:
What is wrong with the way that we used the Fib retracement level as a trading signal in the above chart? Also, what error deals with a candlestick pattern?

C. Short Term Trading
Many new forex traders find it difficult to determine whether they want to be a long-term or short-term trader. While there are justifiable reasons to be either type, in the end traders are looking for the trading style that is most profitable. Short term trading is one possible means to that end. Here are some of the advantages of short-term trading.

Prices are driven by order flow, which is more predictable over the short term
Long term trading is subject to greater volatility

Easier to Predict Order Flow in the Short Term
Due to greater leverage and lower transaction costs, short-term active traders have flocked to the FX market due to its benefits. Since many of these short-term traders review the same technical analysis patterns to base their trading decisions, many of the moves seen in this market are self-fulfilling prophecies. The reason for this is because if you have knowledge of where the most significant technical levels are located at any point in time and also realize that the majority of the other traders in this market base their trading decisions on the same technical analysis, this provides a trader with a strong idea of where order flow lies at any given price.
Therefore, one can predict with a good degree of precision the real factor that drives market prices, namely order flow. With longer time frames – such as daily, weekly, and monthly charts – the flow of orders is harder to predict; more technical patterns and interpretations are possible, as well as input from a greater number of fundamental factors that will affect the market in the long-term. Because of this, order flow – and hence exchange rate movement – becomes more difficult to predict in the long run.

Long Term Trading is More Volatile
With long-term trading, there are many factors that drive currency prices which are extremely difficult to predict. In addition to long-term technical patterns, there is the increased importance of long-term fundamental factors, such as capital flows and trade flows. In addition to the increased number of factors that need to be considered is the fact that currency pairs are more volatile over longer periods of time – meaning that long-term traders may in fact lose more than their short-term counterparts. For example, a trader looking to get in and out of positions within a single day is most likely dealing with a range of no more than 100 pips; a long-term trader, however, must be prepared to cope with the fact that currency pairs can easily move several hundred pips or more. If a trader is on the wrong side of a long-term trade, the loss could potentially be devastating.

Long-term traders typically rely on fundamental factors to base their trades, such as economic data releases and interest rate differentials seen over time. While such fundamental factors in fact cause movements in the market, the problem is that such fundamental factors are too difficult to predict over the long term and leave long term traders overly exposed to adverse market movements, which often cannot be seen or predicted until it is too late.

The above chart depicts three profitable entry points on three separate trading days by putting short term technical analysis to work. Substantial profits could be reaped from these three opportunities alone.

D. Long Term Trading
Many new forex traders find it difficult to determine whether they want to be a long-term or short-term trader. While there are justifiable reasons to be either type, in the end traders are looking for the trading style that makes them the most profitable. Long term trading is one means to that end.

Short term trading is subject to excessive volatility
Short term trading patterns can change in seconds or minutes. It is very difficult to trade and subject to too many external factors such as breaking news releases or large flow. In short term trading there are frequently false breakouts that can throw many traders off. Why deal with this excess stress when large profits can be made with long-term trading? Yes, there is also volatility in long-term trading – however, as long as stops are placed at the proper levels, the overall trend tends to remain intact, and the significance of day-to-day fluctuations is largely minimized.

Large profits are made with long-term trading
Forex markets are trending markets. This means that traders do not need to be glued to their trading screens 24/7 in order to make money. Too much stress is involved in short-term trading, as the market must be constantly watched and each small move becomes a major event. Since most traders do not trade full time, and certainly are not watching the markets 24 hours a day, short-term trading simply too demanding and quiteunfeasible. With most traders, the psychological difficulties of short-term trading get the best of them, and the traders may end up taking profits too early or cutting losses too late. If traders pre-commit to a long-term target and stop, they can make money while erasing the need to know where the EURUSD is trading at every minute. In fact, substantial profits can be made with long term trading. It is highly unlikely for short-term traders to ever claim that they can make 1907% in 10 months of 3296% in 18 months. Below are examples of how large profits could have been made if traders held their positions long-term.

USDCHF
Hold short position from 1/2002 to 6/2003 = 4395 pips in profit = approx $32960 on 1 lot of 100,000 units, using $1000 in margin = 3296% in 18 months

USDCAD
Hold short position from 1/2003 to 10/2003 = 2543 pips in profit = approx $19070 on 1 lot of 100,000 units, using $1000 in margin = 1907% in 10 months

Short Term Fundamental Analysis

2008-09-25T15:44:00.006+07:00

A. Event-Driven Trading

The Importance of News

Exchange rate fluctuations are highly correlated with news.
News that is unexpected tends to have a major impact on the market.

The most important aspect of interpreting news and its impact on the foreign exchange markets is the determination of the market's expectations for that news. In the financial world, this is commonly referred to as the "market discount mechanism". The correlation between currency markets and news is pretty clear. Expected news has little impact on exchange rates while unexpected news, especially when pertaining to potential changes in monetary policy, may have an immense impact. Short-term traders need to closely monitor financial publications like The Financial Times and The Wall Street Journal, as they are excellent gauges of current sentiment towards potential news events. Being aware of events and expectations allows traders to be fully prepared for, and profit from, the discounting of potential market moving events.

Event-Driven Trading

It is difficult to determine the effect of news on currency movements.
Traders need to avoid analyst bias and take special care when trading during economic releases.

Event-driven trading is a fundamental based methodology that attempts to exploit the volatility associated with economic releases and political announcements. Often times it is quite difficult to determine the effect of news on currency movements, and because of this traders need to avoid biased analysis and adopt a defensive posture during these events. Generally, as fundamental news becomes available, the market as a whole will assimilate the news and move the exchange rates to more appropriate levels as market perceptions adjust accordingly. The event driven trader seeks to profit from this ensuing shift in price. Timing of event driven trades is obviously a key factor to success as positions entered prematurely or belatedly can have significant adverse impacts on P&L. For this reason, profitable event-driven traders usually incorporate some form of technical analysis that helps to validate the merit of the fundamental catalyst.

A Common Error

News releases can lead to sharp volatility in FX, but this volatility can begin well in advance of the actual announcement.
Much of this volatility occurs in the days leading up to the announcement.

Economic releases can lead to sharp increases in volatility in the currency markets. This rise in volatility can begin days in advance of an announcement and end days later. The most common mistake made by most novice traders is to enter positions after a particular announcement hits the new wires in an attempt to profit from the perceived good or bad news. What they fail to realize is that if an economic release meets expectations, there will likely be no reaction to the news because it is already 'priced in' to the market. The reaction of the market is based on the market's expectations, not on whether the news was intrinsically good or bad.

Buy the Rumour, Sell the News
Rather than trade on the announcement itself, some participants prefer to trade on the rumors that circulate before its release.
Bank dealers and institutional traders often adhere to the old Wall Street adage of “buy the rumor, sell thenews”. Rumors of a positive report will typically begin to circulate among trading desks and hedge funds days before an expected release date. The institutions will then use this information to position themselves on the long side. When the news comes out as expected, they then sell their positions to a frantic public, profiting from the run-up to the announcement as opposed to guessing the reaction to it.

USD/JPY is a good example of an event driven trade where technicals and fundamentals were in clear alignment. Notice how the pair breaks the neckline of a bearish Head & Shoulders pattern the week before the crucial G-7 Meeting in Dubai.

B. Key Economic Terms
A number of economic terms are particularly relevant to the FX market. The following is a list of economic indicators that are released on a scheduled basis and are observed by traders and analysts. Analysts project their estimates for results of these economic statistics, and the market's reaction to this news is usually based on these estimates.

Unemployment
The unemployment rate is a measure of the strength of the labor market. One of the ways analysts gauge the strength of an economy is by the number of jobs created, and the percentage of workers unable to find jobs. Strong job creation is indicative of economic growth, as companies must increase their work force in order to meet demand.

CPI (Consumer Price Index)
The CPI is a key gauge of inflation, as it measures the price of a fixed basket of consumer goods. Higher prices are considered negative for an economy, but since central banks often respond to price inflation by raising interest rates, currencies sometimes respond positively to reports of higher inflation.

PPI (Producer Price Index)
The PPI is another gauge of inflation, but it differs from CPI as it measures inflation at the producer or wholesale level. Note that because food prices are seasonal and energy prices are frequently volatile, many analysts tend to focus on the core rate of inflation, which excludes food and energy prices. The PPI affects various markets in a similar respect to the CPI, because the prices producers receive ultimately affects the prices consumers pay.

GDP (Gross Domestic Product)
GDP measures the total production and consumption of goods and services, representing the total economic output of a nation. It is calculated by adding expenditures by households, businesses, governments and net foreign purchases.

Balance of Trade
The balance of trade measures the difference between the value of goods and services that a nation exports and the value of goods and services that it imports. A trade surplus results if the value of exported goods exceeds that of imported goods, whereas a trade deficit exists if imported goods exceed exported goods.

Manufacturing Indices (ISM, PMI)
Manufacturing indices measure manufacturing activity, usually in a particular region of the country. Since they are an indication as to whether the economy is expanding or contracting, FX participants place heavy emphasis on these figures.

Consumer Confidence (Michigan Index, Consumer Conference Board, etc.)
Consumer confidence is a measure of the level of confidence in economic performance. It is calculated via the results of a survey asking participants what they think of the economy relative to both the past and the future. These numbers can be a precursor to the level of future consumer spending.

Retail Sales
Retail sales is a measure of the total goods sold by a sampling of retail stores. It is used as a gauge of consumer activity and confidence as higher sales figures would indicate increased economic activity.

Industrial Production
Industrial production measures the change in the physical output of factories, mines, gas and electric utilities. A rise in the IP value signals economic growth. Note that unlike sales value, which incorporates both quantity and price, IP solely refers to the physical quantity of items produced.

Long Term Fundamental Analysis

2008-09-24T23:14:00.010+07:00

A. What is Fundamental Analysis?

There are two major schools of thought to analyzing financial markets: fundamental analysis and technical analysis. Fundamental analysis focuses on underlying economic conditions and indicators-for example economic growth rates, interest rates, inflation, and unemployment-, while technical analysis uses historical prices-through charts for example-to predict future movements. Though there exists debate over which school of thought is more accurate, short-term traders prefer to use technical analysis, focusing their strategies primarily on price action; while fundamental traders tend to be more long term focusing their efforts on determining a currency's proper current as well as future valuation.

While the majority of the course will cover technical analysis, an explanation of fundamental analysis is appropriate here as a backdrop to understanding what actually drives currency values and maintaining a big picture perspective.

Fundamental analysis focuses on the economic, social and political forces that drive supply and demand. There are two main factors that impact exchange rate movements from a fundamental perspective: capital flows and trade flows.

Capital Flows
Capital flows measure the net amount of a currency that is being purchased or sold due to capital
investments. A positive capital flow balance implies that foreign inflows of physical or portfolio
investments into a country exceed outflows. As inflows exceed outflows for a specific country, demand for that country’s currency will increase thus increasing that country’s currency value. Conversely, a negative capital flow balance indicates that there are more physical or portfolio investments bought by domestic investors than foreign investors. Therefore, there will be more capital outflows than inflows into the domestic country decreasing demand for that country’s currency and thus that country’s currency value. Generally, global capital will flow to whichever country offers the highest return on investment through high interest rates, economic growth, or growing domestic financial markets for example. So if a country’s stock market is doing well and/or interest rates are high, capital will flow into that country increasing the demand for the country’s currency and causing its value to appreciate.

To clearly explain this, suppose for example that the UK economy is booming, and that its stock market is rallying as well. Meanwhile, in the United States, a lackluster economy is creating a shortage of investment opportunities. In such a scenario, the natural result would be for US residents to sell their dollars and buy GBP to allow for participation in the rallying UK economy. This would result in an outflow of capital for the US and inflow of capital for the UK. From an exchange rate perspective, this would induce a fall in the USD coupled with a rise in the GBP as demand for USD declines and the demand for GBP increases; in other words, the GBP/USD would rise.

Capital flows measure the net amount of a currency that is being purchased or sold due to capital
investments and thus affects the value of exchange rates. As capital flows into a country, international investors must change their “capital” into the domestic currency of the country where it is being deposited. This in turn increases the demand for the country’s currency to where capital is flowing and causes the value of that country’s currency to appreciate. Conversely, capital flowing out of a country will cause that country’s currency to depreciate. Generally, global capital will flow to whichever location or country offers the highest returns. To put this in perspective, imagine you had $100 to deposit anywhere in the world. In the US, you could buy a short term treasury earning 3% or you could change your US dollars into pounds and earn 7%. Clearly you would chose to change your money into GBP (assuming there was no change in the exchange rate). Now think about this occurring on a massive scale as largeinvestors, mutual funds, hedge fuds, corporations, etc deposit their funds in Britain to earn 7%. As investors change their money into GBP, this will increase the demand for GBP and, in turn, cause the GBP to appreciate vs the USD. In sum, GBP/USD will rise.

In later lessons, we will further explain how to incorporate fundamentals into your trading strategy.

Trade Flows
Trade flows are the basis of all international transactions and represent a country's net trade balance of exported goods minus imported goods. Countries that are net exporters - meaning they export more to international clients than they import from international producers, will experience a net trade surplus. This net trade surplus pressures the exporting country’s currency to rise. More specifically, international clients interested in buying the exported product/service must first buy the appropriate currency, thus creating demand for the currency of the exporter. Japan is an example of an export driven economy with a trade surplus. Japan's trade surplus is the major reason that the JPY has not depreciated sharply as a result of their severe economic weakness. They are a net exporter with a current account surplus representing 3% of their GDP. This is the highest of the G-7 countries, and creates a strong inherent demand for the currency for trade purposes, regardless of economic conditions.

Countries that are net importers - meaning they make more international purchases than international sales – experience what is known as a trade deficit, which in turn has the potential to drive the value of the currency down. In order to engage in international purchases, importers must sell their currency to purchase that of the retailer of the good or service; accordingly, this could have the effect of driving the currency down. For example, the US is a net importer, with a very high trade deficit that requires $1.9 billion in daily inflow to prevent a further trade-based depreciation of the USD. Clearly a change in the balance of payments has a direct effect on currency levels. Therefore, it is important for traders to keep abreast of economic data relating to this balance and understand the implications of changes in the balance of payments.

Trade Flows vs Capital Flows:
Because international trade of goods and services is relatively slow, it takes time to affect the FX market. Therefore, traders should generally consider economic data to analyze trade flows when considering the more long term fundamental backdrop for the market. Conversely, traders should consider information on growing equity or bond markets in a country as direct and more immediate indications that capital is flowing in and could have an effect on the currency in the shorter term.

B. Capital Flows
• Capital flows represent money sent from overseas in order to invest in foreign markets. Capital flows measure the net amount of a currency that is purchased or sold for capital investments. The key concept behind capital flows is balance. For instance, a country can have either a positive or negative capital flow.

• A positive capital flow balance implies that investments coming into a country from foreign sources exceed the investments that are leaving that country for foreign sources.
As inflows exceed outflows for any given country, there is a natural demand for more of that country's currency. This demand causes the value of that currency to increase because a foreign investor must change his currency into the domestic currency where he is depositing his money.

• A negative capital flow balance indicates that investments leaving a country for foreign sources exceed investments coming into a country from foreign sources.

When there is a negative capital flow, there is less demand for that country's currency, which causes it to lose value. This is because the investor must sell his local currency to buy the domestic currency where he is depositing his money.

Countries that offer the highest return on investment through high interest rates, economic growth, and growth in domestic financial markets tend to attract the most foreign capital. These countries maintain a positive capital flow. If a country's stock market is doing well, and they offer a high interest rate, foreign sources are likely to send capital to that country. This increases the demand for this currency, and causes it's value to appreciate.

As an example, let us take a booming economy in the United Kingdom and a sluggish economy in the United States. In the UK, the stock market is performing very well, while in the United States there is a shortage of investment opportunities.
In this scenario:

US residents sell their US dollars and buy British Pounds to take advantage of a booming economy.
Capital flows out of the United States into the United Kingdom.
Demand for GBP increases and demand for USD decreases.
The value of USD decreases in relation to the value of the GBP.

C. Trade Flows

Trade flows are the buying and selling of goods and services between countries.Trade flows measure the balance of trade (exports – imports). This is the amount of goods that one country sells to other countries minus the amount of goods that a country buys from other countries. This calculation includes all international transactions and represents a country's trade balance.
Countries that are net exporters export more to international clients than they import from international producers. Net exporters run a trade surplus. This is due to the fact that they sell more goods to the international market than they purchase from the international market. Demand for that country's currency then increases because international clients must buy this currency in order to buy these goods. This causes the value of a country's currency to rise.
Countries that are net importers import more from international producers than they export to international clients. Net importers run a trade deficit. This is due to the fact that they purchase more foreign goods than they sell to the international market. In order to purchase these international goods, importers must sell their domestic currency and buy a foreign currency. This causes the value of the domestic currency to fall. As an example, let us look at Japan, which is an export driven economy with a trade surplus. Japan exports more goods to international clients than they import from international producers.
Japan's trade surplus is the major reason why the JPY has not depreciated sharply despite severe economic weakness.
Japan is a net exporter with a current account surplus of 3% of GDP.
This creates international demand to buy JPY in order for international clients to purchase Japanese products.

Clearly a change in the balance of payments from one country to another has a direct effect on currency levels. Therefore, it is important for traders to keep abreast of economic data relating to this balance and understand the implications of changes in the balance of payments.

JPY appreciates despite economic weakness. From 8/2003 – 12/2003 USD/JPY went from 121.00 to 107.00.

D. Capital Flows vs. Trade Flows
What is Fundamental Analysis?

Fundamental analysis focuses on underlying economic conditions and indicators - for example economic growth rates, interest rates, inflation, and unemployment. It is more accurate when used in long term trading strategies.
Technical analysis uses historical prices and charts to predict future movements in prices. It is more accurate when used in short term trading strategies.

Two major schools of thought exist in regard to the analysis of financial markets: fundamental analysis and technical analysis.
Though a debate exists over which school of thought is more accurate, accuracy is really a function of the trader's time horizon. Short-term traders prefer to use technical analysis because these traders focus their strategies primarily on historical price action. Long term trading is more suited to fundamental traders as they analyze a currency's proper current value as well as future value.
While the majority of the course covers technical analysis, it is necessary to understand what truly drives currency values. Fundamental analysis will allow us to see the big picture and will serve as a backdrop for the rest of the course.

Fundamental analysis is based in pure economics. It looks at the social and political forces that drive supply and demand. To this end, there are two main factors that impact exchange rate movements from a fundamental perspective:

Trade Flows
Capital Flows

Capital Flows

Capital Flows are the amount of currency that is bought or sold in order to invest in foreign markets. Capital flows measure the net amount of a currency that is purchased or sold for capital investments. The key concept behind capital flows is balance. For instance, a country can have either a positive or negative capital flow.
A positive capital flow balance implies that investments coming into a country from foreign sources exceed the investments that are leaving that country for foreign sources. As inflows exceed outflows for any given country, there is a natural demand for more of that country's currency. This demand causes the value of that currency to increase because a foreign investor must change his currency into the domestic currency where he is depositing his money.
A negative capital flow balance indicates that investments leaving a country for foreign sources exceed investments coming into a country from foreign sources.

When there is a negative capital flow, there is less demand for that country's currency, which causes it to lose value. This is because the investor must sell his local currency to buy the domestic currency where he is depositing his money.

Countries that offer the highest return on investment through high interest rates, economic growth, and growth in domestic financial markets tend to attract the most foreign capital. These countries maintain a positive capital flow. If a country's stock market is doing well, and they offer a high interest rate, foreign sources are likely to send capital to that country. This increases the demand for this currency, and causes it's value to appreciate.
As an example, let us take a booming economy in the United Kingdom and a sluggish economy in the United States. In the UK, the stock market is performing very well, while in the United States there is a shortage of investment opportunities.

In this scenario:

US residents sell their US dollars and buy British Pounds to take advantage of a booming economy.
Capital flows out of the United States into the United Kingdom.
Demand for GBP increases and demand for USD decreases.
The value of USD decreases and the value of GBP increases.

Trade Flows

Trade flows are the buying and selling of goods and services between foreign producers and foreign buyers. Trade flows measure net exports (exports – imports). This is the amount of goods that one country sellsto other countries minus the amount of goods that a country buys from other countries. This calculationincludes all international transactions and represents a country's trade balance.
Countries that are net exporters export more to international clients than they import from international producers. Net exporters run a trade surplus. This is due to the fact that they sell more goods to the international market than they purchase from the international market. Demand for that country's currency then increases because international clients must buy this currency in order to buy these goods. This causes the value of a country's currency to rise.
Countries that are net importers import more from international producers than they export to international clients. Net importers run a trade deficit. This is due to the fact that they purchase more foreign goods than they sell to the international market. In order to purchase these international goods, importers must sell their domestic currency and buy a foreign currency. This causes the value of the domestic currency to fall. As an example, let us look at Japan, which is an export driven economy with a trade surplus. Japan exports more goods to international clients than they import from international producers.
Japan's trade surplus is the major reason why the JYP has not depreciated sharply despite severe economic weakness.
They are a net exporter with a current account surplus of 3% of GDP.
This creates international demand to buy JPY in order for international clients to purchase Japanese products.

Trade flows occur at a relatively slow pace.
Capital flows occur almost instantaneously.

Because the international purchase and sale of goods and services is a slow process, the effects that trade has on the FX market takes a much longer time to manifest. Therefore, economic data that involves trade flows should generally be considered for long term trading because it provides a more fundamental…

Capital, on the other hand, is highly mobile. A transfer from your bank account to a bank account in a foreign country can take place with the click of a button. Because of the speed at which these transfers take place, capital flows have a much more direct and explicit effect on the FX market. Traders should consider information concerning growth in equity and bond markets of a country as immediately applicable to the FX market. Success in other markets indicates whether or not capital will flow in or out of a country, which has an effect on domestic currency in a shorter term.

E. The Carry Trade
Carry Trades: An Opportunity to Profit from International Changes in Supply and Demand
The carry trade, also known as interest rate arbitrage, is popular method for trading foreign exchange. However, as with all transactions, carry trades do entail some risk. The chances of losses are great if you do not understand how, why, and when carry trades work best.

How Do Carry Trades Work?

A carry trade involves buying a currency that offers a high interest rate while selling a currency that offers a low interest rate.
The trader is able to profit from the discrepancy in interest rates by holding the higher interest bearing currency.

Carry trades can be profitable because an investor is able to earn the difference in interest between two currencies when long the higher interest bearing currency of a pair.
Assume that the Australian dollar offers an interest rate of 4.75%, while the Swiss franc offers an interest rate of 0.25%. In this scenario, a trader would buy AUD and sell the CHF. In doing so, he can earn a profit of 4.50% (4.75% - 0.25%), provided the exchange rate between AUD and CHF does not change.

Why Do Carry Trades Work?

Interest rates are one of the main ways countries attract foreign investment. Carry trades work because of the constant movement of capital into and out of countries. Interest rates are one of the primary attractions to certain currencies and elicit significant foreign investment. If a country's economy is doing well (high growth, high productivity, low unemployment, rising incomes, etc.), it will be able to offer those who invest in the country a higher return.
Profit seeking investors are naturally attracted to the highest rate of returns.
Rate of returns in foreign exchange are directly tied to the interest rate on currencies. When making a decision to invest in a particular currency, an investor is more likely than not to choose the one that offers the highest rate of return, or interest rate. If many investors make this exact same decision, the country will experience an inflow of capital.
This difference between countries that offer high interest rates and countries that offer low interest rates is what makes carry trades possible.
Imagine an investor in Switzerland who is earning an interest rate of 0.25% per year on her bank deposit of Swiss francs. At the same time, a bank in Australia is offering 4.75% per year on a deposit of Australian dollars. Seeing that interest rates are much higher with the Australian bank, this investor would like to find a way to earn this higher rate of interest on her money.

Now imagine that the investor could somehow trade her deposit of Swiss francs paying 0.25% for a deposit of Australian dollars paying 4.75%. What she has effectively done is “sold” her Swiss francs deposit, and “bought” Australian dollars. After this transaction she now owns an Australian dollar deposit that pays her 4.75% in interest per year, 4.50% more than she was earning with her Swiss franc deposit. In essence, this investor has just done a carry trade by “buying” an Australian dollar deposit and “selling” a Swiss franc deposit.

In this scenario:

Many investors make the same transaction, exchanging CHF for AUD.
Capital flows out of Switzerland and into Australia.
Australia attracts more capital because it offers a higher interest rate.
This inflow of capital increases the value of AUD.

When Will a Carry Trade Work Best?

Carry Trades are most successful when the majority of investors are willing to take on risk.
When investors are willing to take on risk, capital flows into high interest bearing currencies.

Things to Bear in Mind When Considering a Carry Trade

A carry trade allows an investor to profit from interest rate differentials.
Carry trades also involve assuming the risk of the appreciation of the currency the investor has sold.

By entering into a carry trade, an investor is able to earn a profit from the interest rate difference, or spread, between a high interest rate currency and a low interest rate currency. However, the carry trade can turn unprofitable if for some reason the lower interest rate currency appreciates by a large amount.

An ideal carry trade will involve a low interest currency whose economy is weak and has low expectations for growth. However, if the economy were to improve, the country might be able to offer investors a higher rate of return through increased interest rates.

Taking the previous example of Switzerland, investors would take advantage of increasing interest rates by buying Swiss francs.
This would cause the Swiss franc to appreciate, and would negatively affect the profitability of success of the AUD/CHF carry trade.
The higher interest rates in Switzerland would decrease the interest rate spread.

This same sequence of events may currently be unfolding for the Japanese yen. Given its nearly zero interest rates, the Japanese yen has, for quite some time, been an ideal low interest rate currency to use in yen carry trades. However, this situation may be changing as increased optimism about the Japanese economy has recently led to an increase in the Japanese stock market. Increased investor demand for Japanese stocks and currency has caused the yen to appreciate, and this yen appreciation negatively affects the profitability of carry trades like AUD/JPY.

Trade balances

Trade balances affect the profitability of the carry trade.
Even if a country has a low interest rate, it can still attract investment for the purposes of debt financing.
This investment can cause the low interest rate currency to appreciate.

Country trade balances, or the difference between imports and exports, can also affect the profitability of a carry trade. We have shown above that when investors have low risk aversion, capital will flow from the low interest rate paying currency to the high interest rate paying currency. However, this does not always happen.

For example, think about the situation in the United States. The US currently pays historically low interest rates, yet it attracts investment from other countries, even when investors have low risk aversion. This occurs because the US runs a huge trade deficit, meaning the value of its imports are greater than the value if its exports, and this deficit must be financed by other countries. Regardless of the interest rates it offers, the US attracts capital flows for this purpose of deficit financing.

Time-horizon:
Carry trades are long-term commitments.
Before entering into a carry trade, an investor should be willing to commit to a time-horizon of at least six months. This commitment helps to make sure that the trade will not be affected by the “noise” of shorter-term currency price movements.
Summing up, carry trade investors should be aware of relevant factors such as currency appreciation, trade balances, and time-horizon before placing a trade. Any or all of these factors can cause a seemingly profitable carry trade to be unprofitable.

F. Sample Carry Trades
A carry trade is a strategy involving borrowing a currency with a lower interest rate in order to purchase another currency with a higher interest rate. The trader will pay interest at a lower rate for the borrowed currency than he/she will earn on the currency being purchased. This results in the client earning funds due to a positive interest rate differential between the two currencies in the trade.

AUD/USD Monthly
On 09/01/01, the situation in the United States is worrisome. The economy is officially in a recession and geopolitical pressures threaten to weaken the economy even further. The Fed decides to spur growth by aggressively cutting rates. Rates in the US will then decrease from above 4% to 1%. The spread between Australian rates and US rates widens. International bond investors shift their funds to the highest yields and accumulate in Australian Bonds. They need to buy Australian dollars and the AUD/USD increases from the 0.5000 level to the current 0.7000 level. They pocket the 3% interest differential on the bonds for 2 years and the 40% increase in the currency over the same period.

USD/CAD Monthly
Let's look at the same situation, this time using the USD/CAD pair as an example. The Fed decides to spur growth by aggressively cutting rates. Rates in the US then decrease from above 4% to 1%. The spread between Canadian rates and US rates goes from negative to positive. Canadian investors repatriate their funds from the US since they can invest at home and get better returns. Soon enough, US investors realize that they can simply invest across the border and get higher returns. The Loonie rallies and the USDCAD pair falls from 1.6000 to 1.3000. Carry trade investors profit from the interest rate differential, as well as the ensuing downtrend in USDCAD.

Intervention - the Bank of Japan

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What is intervention? An attempt by a central bank to intentionally move the exchange rate. Essentially, interventions are attempts by central banks -- banks that govern the value of respective currencies -- to manipulate the currency's value. Interventions serve as a prime example of how key market participants -- like central banks -- need to be watched by all traders, as their actions can substantially affect exchange rate movement.

The most prolific example of interventions can be seen in the actions of the Bank of Japan. Japan's economy is dependent upon exports -- meaning its economy relies on selling its products internationally. Because of this, Japan's economy benefits from a weaker yen, as a lowly valued yen easily allows other nations to purchase Japanese products (and hence facilitates exports).

Since Japan's economy benefits from a weak yen, the central bank has a vested interest in ensuring that the value of the yen remains low. As a result, the Bank of Japan has intervened on numerous occassions in the currency markets, selling literally trillions of yen to drive the exchange rate down. For savvy traders, this presents an interesting and lucrative opportunity.
Let's take a closer look at how the Bank of Japan has recently intervened in the FX markets to drive the exchange rates downward.

Bank of Japan Attempts to Put a Floor Under USDJPY

The Bank of Japan (BoJ) intervened numerous times throughout 2003, in an attempt to ensure that the USDJPY rate would fall as little as possible. The pair had been falling rapidly, as U.S. dollar weakness coupled with yen strength led to a sliding USDJPY exchange rate. As a result, emergency meetings were held at all major export firms to assess their plans for handling the rapid appreciation in the JPY. By the end of the year, the Bank of Japan would spend over Y13 trillion (or $115bn) to sell the yen in the FX market to prevent its value from rising excessively.
The Bank of Japan started its new intervention policy in 2003 by intervening between the 115 and 116 levels. While their attempts at keeping the USDJPY above 115 were successful for some time, market forces eventually won out, and the pair made a sustained break through the 115 level in September of 2003. With the "invisible floor" of 115 cleared, traders felt comfortable that the Bank of Japan could not maintain a weak yen, and hence entered the market as buyers of yen and sellers of USD (or sellers of the USDJPY pair). The result was a sharp fall: the USDJPY pair fell about 600 pips in less than two weeks.

Prior to the sustained break below 115, participants experienced a few months of trading where they could legitimately expect the BoJ to intervene in the market around that level. As a result, many traders purchased USDJPY around the 115 level -- and reaped profits in doing so.

More recently, in early 2004 the Bank of Japan intervened in the currency market to keep the exchange rate of USDJPY above 105.00. This massive intervention pushed the USDJPY from just above 105.00 to above 112.00, a 700 pip gain in just a few weeks. The intervention coincided with the end of the Japanese fiscal year. The Bank of Japan drew a "line in the sand" just above 105.00, and intervened on a masssive scale.

Risks to Intervention-Based Trades
Clearly, intervention, or even failed interventions, can have a big impact on the FX market -- and hence should be something that traders keep an eye out for. Before seeing intervention as a quick way to easily profit, though, there are certain factors that traders should bear in mind before placing trades focusing on interventions.

Timing
The biggest risk of intervention-based trades is the timing of when intervention will occur. In the past year, the BoJ has intervened between 116-118. Although this level is known, 200 pips can be significant risk. Also, the exact timing is always unknown, so traders will typically need to hold their position for weeks -- with potentially large floating losses -- as they wait for intervention. Therefore unless traders have sufficient margin in their accounts to sustain losses, they could easily get a margin call prior to the BoJ stepping into market.

Sustainability
An additional risk is that, as we've seen, the BOJ cannot sustain intervention indefinitely. At some point, the artificial level the intervention is meant to uphold will have to fall. When exactly this will happen, though, is anyone's guess. A trader who had expected the intervention level to hold strong on September 17 of 2003, and thus had bought USDJPY, clearly would have experienced the downside of unsustainable interventions; the market fell strongly in the opposite direction, falling through the level and creating enormous potential losses for any trader who was counting on an intervention.

Key Points for Traders
There is no denying that intervention-based trades worked very well in 2003, as the Bank of Japan has spent over Y13trln to aggressively combat Yen strength. However, as we have seen, traders cannot take their presence for granted and assume that interventions will last indefinitely, nor can they know precisely when they will occur. Ultimately, traders will have to follow the news to help them determine whether or not an intervention will occur, and need to react accordingly based on their analysis.

Bank of Japan Intervention: How Traders Reacted
On May 19, 2003, USD/JPY reached a low of 115.07. The Bank of Japan, knowing that there was a "head and shoulders" formation with a neckline at 115, intervened to support the exchange rate. The BoJ knew that 115 was a signficant level, and that a break of that level may have induced traders to sell USD/JPY. Traders, using both the fundamental knowledge and technical levels, may have had a very profitable trade.

The head and shoulders formation is a chart pattern that includes a peak that returns to support (the shoulder), followed by a higher peak, which again returns to support (the head). The second shoulder occurs when the exchange rate fails to reach the peak of the head, and instead reaches the approximate peak of the left shoulder before falling once again to support.
The neckline is established as the common level of support, the low point reached by the exchange rate after the creation of each part of the formation. Once the price breaks below the neckline on the right side of the second shoulder, this is a signal to sell.

Who Moves the Market

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A. FX Market Structure

The FX market is an over-the-counter market with no centralized exchange.
Traders have a choice between firms that offer trade-clearing services.

Unlike many major equities and futures markets, the structure of the FX market is highly decentralized. This means that there is no central location where trades occur. The New York Stock Exchange, for example, is a totally centralized exchange. All orders pertaining to the purchase or sale of a stock listed on the NYSE are routed to the same dealer and pass through the hands of a single clearing firm. This structure requires buyers and sellers to meet at the NYSE in order to trade a stock that is listed on this exchange. It is for this reason that there is one universally quoted price for a stock at any given time.

In the FX market there are multiple dealers whose business is to unite buyers and sellers. Each dealer has the ability and the authority to execute trades independently of each other. This structure is inherently competitive as traders are faced with a choice between a variety of firms with an equal ability to execute their trades. The firm that offers the best services and execution will capitalize on this market efficiency by attracting the most traders. In the equities markets, the execution of trades is monopolized and there is no incentive for a clearing firm to offer competitive prices, to innovate, or to improve the quality of their service.

B. Key Market Participants
While the foreign exchange market was traditionally exclusive to all but a select group of large banks, advances in technology and reductions to capital flow barriers have brought in a variety of new participants. Because all of these participants affect the supply of and demand for currencies, it is important to understand the role each plays in the market.

Commercial and Investment Banks

Commercial and Investment banks make up the "Interbank" market and trade on electronic brokerage systems (EBS).
These banks trade among themselves via strong credit relationships, and account for the largest portion of FX trading.
These banks trade on a proprietary basis (they trade for themselves) and through customer flow (they fill orders for clients outside of the Interbank market).

The Interbank market consists of the world's largest Commercial and Investment banks and caters to the majority of commercial turnover as well as enormous amounts of speculative day-trading volume. These banks will trade among themselves via credit relationships they have established with one another as part of a system of balancing accounts.

Large Corporations, Hedge Funds, Central Banks are all customers on the Interbank market.

Aside from trading exclusively amongst themselves, these banks also trade with large corporations, hedge funds, central banks, or specialized dealers that cater to smaller retail traders. For example, when a large international corporation based in Japan needs to pay its employees in the United States, they must buy USD with JPY. To buy USD, this corporation will go to a bank to make the transaction.

This trading amounts to billions of dollars daily, or about ¾ of daily FX volume.

Due to their size and the large volume that they trade, these banks have unique access to:

Important information on direction and size of capital flows. This means they may be able to make reasonable short-term predictions on FX movements based on the large positions they hold and trade.
Significant capital power they might use to defend their proprietary positions at significant technical levels. This is often what creates support and resistance.
Large research departments that offer fundamental and technical analysis to prop traders.

Central banks

Central banks have access to huge capital reserves.
Central banks have specific economic goals.
Central banks regulate money supply and interest rates.

Central banks are large players with access to significant capital reserves. They enter the FX market primarily in a supervisory capacity in order to stabilize money supply and interest rates. Central banks closely monitor economic activity, and have many options available to them to regulate their economies. Many of these options relate to specific policies that greatly impact the FX market.

Central banks set the overnight lending rates to change the rate of interest paid on their domestic currency.
They buy and sell government securities to increase or reduce the supply of money.
They buy and sell their domestic currency in the open market to influence exchange rates.

Knowing the policy of a central bank and its opinion of the domestic economy will allow a trader to anticipate what actions the central bank is most likely to take in future policy meetings.

Corporations

Corporations primarily use FX to hedge against currency depreciation.
Corporations also buy and sell currencies in order to meet payroll for international offices.

Foreign exchange plays an increasingly important role in the daily business of corporations as globalization forces them to make and receive payments in foreign currencies. When international transactions of goods are made, a transaction of currency is also necessary. Whether it is to pay employees abroad or to pay for products coming from a foreign nation, corporations must exchange their local currency for the domestic currency of the nation they are trading with.

Global Managed Funds

Many profit-seeking managed funds invest in foreign financial instruments.
When they purchase and sell these instruments, an FX conversion is always necessary.

Global fund managers (large mutual, pension, and arbitrage funds) invest in foreign securities and other foreign financial instruments. These investments can have substantial impacts on spot price movements because these firms constantly re-balance and adjust their international equity and fixed income portfolios. These portfolio decisions can be influential because they often involve sizable capital transactions.

Major changes in equity or bond markets of respective countries dictate the roles of Global Managed Funds in the FX market.
When equity markets are performing well they will attract substantial global capital, which will drive a domestic currency higher.
To purchase stocks or bonds in a foreign nation, managed funds must exchange their local currency for the domestic currency of the country in which they are purchasing financial instruments.

Many of these funds implement currency-hedging strategies. When they wish to hedge existing
investments so they don't incur the risks of depreciating currencies, they can also generate significant selling flows.
Under the umbrella of Global Managed Funds are pure FX funds (Global Macro Funds).

FX Funds trade in FX for speculative purposes.
Many large funds tend to take large carry trade positions exploiting global interest rate differentials (see next lesson).
They also watch for misguided economic policy and over/undervalued currencies to take large spot positions (assuming a natural return to equilibrium).

Ultimately, these funds gauge global events and take a longer-term view on which currencies will
strengthen/weaken in the next six to eight months. Fund participation in the FX market has risen sharply in recent years and its total trading market share is now around 20%. While relatively small compared to other market participants, they can have a profound effect on the currency spot movements when acting together.

Individuals

With the advent of online currency trading, retail investors now have total access to the spot FX market.
Retail clients trade in FX for both speculative and hedging purposes.
Retail participation is growing rapidly and is having a tremedous impact on the foreign exchange market.

Retail spot currency trading is the new frontier of the trading around the world. Up until 1996, foreign exchange trading was only available to banks, institutions and extremely high net-worth individuals. Prior to online retail FX dealers, individuals could not realistically participate in the foreign exchange market from a speculative standpoint. The Interbank market operated as a tight circle and it managed transactions with Corporations and Managed Funds to accommodate its own needs. Online foreign exchange trading offers retail clients access to trading functionalities similar to those of the Interbank market. Spreads are slightly wider - 5 pips on most currency pairs as opposed to the Interbank standard of 3 - but execution is unsurpassed; additionally, many of these firms maintain fixed spreads, as opposed to fluctuating spreads in the interbank market. Now retail clients and multinational institutions can participate in the FX market on a highly equitable playing field.

Technical Analysis Wrap Up

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A. Range-Bound Market

When the market is in an established range and the price approaches one extreme of the range, there are only two things that can happen: the price can reverse and move back to the other end of the range, or the price can break out of the range. These two possible outcomes determine the two main strategies for the range-bound market. A trader can either trade within the range or attempt to take advantage of the price moving outside of the range. When done using proper setups, either setup can result in a trade with a good risk: reward ratio and a high chance of success.

Determining if the Market is Range-Bound or Trending

Do not make this process more difficult than it really is. From a first impression you should be able to determine if the market is in an up, down, or sideways trend. An uptrend would consist of a series of higher highs and higher lows. A downtrend would be lower highs and lower lows. And a sideways market would be one that has no clear pattern of either of these. If relative high and low points are near the same level, the market is said to be range bound. The following would be a sideways or range-bound market for most of the chart.

Indicators to use in a Range-Bound Market

Oscillators (RSI, MACD, Stochastic)— Divergence is not likely to be a factor in a range-bound market, since it depends on the price making new highs or lows while the oscillator does not. Far more likely will be overbought/oversold readings on the oscillators and crossovers on MACD and stochastic. Since MACD can be several candles too slow to provide for a good entry point, always compare the price to support/resistance before placing the trade.

Bollinger Bands— Bollinger Bands can signal whether the trade is going to reverse or break out of a range. If the bands start to widen at one extreme of the trading range, it is a signal that volatility is increasing and a breakout is more likely. If they remain narrow or horizontal, the price is more likely to touch the bands and move back within the range.

Support/Resistance from Relative Highs/Lows— Relative high and low points are critical to success in a range-bound market. Relative highs form resistance and relative lows create support. If there are a great many of these points on the same line, support or resistance can become extremely strong. Taking a short below resistance or buying above support can result in a low risk trade, since you know where the market is likely to reverse. If it does not reverse at that point, then you have a precise level where you should exit the trade.

Candlestick Patterns— There are three main types of short-term candlestick patterns: bearish, bullish and indecisive. It only makes sense that a bearish signal below resistance is a good sign to take a short. An indecisive pattern like a doji that appears below resistance would not be as strong. In fact, if the price moved above the high of the doji and through resistance, the doji would help encourage a long position.

Breakout vs. Range-Bound

The following chart shows two points, A and B, where the market first reversed at the top of the range and then broke out with very similar signals. Let’s examine how you might determine to take a short position at A and buy at B. First there are the Bollinger Bands. At A they are essentially horizontal, while at B they have started to expand. Second is the MACD. At A, there is a negative divergence (rare in a range-bound market, but not unheard of), while at B MACD is making new highs. Most important though, is the fact that at A, the price moved above the resistance line and fell back down, while at B, the daily candle closed above resistance. Once the price moved above the red line and closed there, this was a signal to buy once the price moved above the high for the blue candle. Though it took several days for the trade to develop, it eventually did so and the price rose higher.

B. Trending Markets
Trending markets can be trickier to trade than range-bound markets, even though the price seems to be moving in a clear direction. If the price is in a range, it is often easy to identify the extremes of the range and trade accordingly. With a trending market, it is often easy to identify the trend, but it is difficult to determine entry points within the trend or determine whether the trend is over. As stated previously, a trending market would be identified by a series of higher highs and higher lows or lower highs and lower lows.

The relative highs create horizontal resistance levels in this uptrend, and the relative lows can often be connected to form support levels.

Just like in a range-bound market, the price can do only one of two things as it approaches one of these support or resistance levels: breakthrough or reverse. This should be at the center of how to plan trades in a trending market.

Indicators to use in a Trending Market
Trend lines that support the trend—Just as is illustrated above, trend lines can provide excellent
opportunities to buy on a pullback in the trend or to sell against the trend if the price breaks through a significant trend line such as this one.

Fib Retracement Levels—If the market is starting to pullback from its trend (retracing lower in an uptrend for example), Fib levels can show where to reenter the market on the side of the original trend. As discussed in Lesson 5, the price should retrace slightly below the Fib level, move back above it, and then the trader should enter on the side of the trend.

Moving Averages as Support or Resistance—Just as trend lines and Fib levels can be used to gauge where pullbacks should end and opportunities to buy on a bounce will exist, moving averages that trail behind a trend are excellent points to reenter the market on the side of the trend. The longer the MA, the more significant Support/Resistance it will offer, so a price retracing past a 50 day EMA, for example, would be a strong sign of a reversal in the trend.

Oscillators for Divergence—Though overbought/oversold readings are less important during a trending market than they would be during a range-bound one, oscillators that diverge from the trend are an early warning signal that the trend may be about to reverse. Traders in such cases should look for the failure of such signals as trend lines, MA’s, and Fib levels that should support the trend.

When to Follow or Abandon the Trend
Compare Points A and B on the following chart. Let’s look at why A was a good buy and B was a good sell (aside from the fact that the price went up following A and went down following B). This chart is a perfect example of the 20 day EMA acting as support. Note how many times the price bounces off the support lineand continues the trend. At A, the price is still above the 20 day EMA, so this is a buy signal. At A as well, the price is just above the trend line connecting the relative low points. By the time the price reaches A, the trend line has held at least 5 or 6 different times, so it should be considered very strong. The price has not retraced significantly at all at this point, though, so Fib levels are not relevant to the trade. It could be argued that RSI is showing divergence at A, but this is only a vague heads up to look for places to short.
All other signals are strong buys.

At B, RSI shows a clear divergence. More importantly, though, the price has closed below both the 20 EMA and the trend line. This has happened once before B, but if we use the standard entry point in case of a breakout, we could have avoided selling too soon. Once a candle closes below the trend line, the entry point would be to sell on the following day if the price goes below the low of the breakthrough candle. This does not happen before B, but it does happen just after B. By using a stop sell order to enter the market, a trader can ensure that the momentum is on the same side of the trade at the entry point. B turns into a real break of the support line.

Stochastics

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A. Trading With Stochastics

What is stochastic?
Stochastic is an oscillator that works well in range-bound markets.

What it does. Stochastic is an oscillator – meaning it offers a measurement of the deviance of currency pair’s rate (price) from its normal levels. Like all oscillators, stochastic offers indications of when a currency pair is overbought/oversold. Accordingly, it works well in markets that are not trending, but rather just fluctuating back and forth between an upper level (resistance) and a lower level (support).
Parameters. Stochastic typically has three parameters that users must specify: %K, %D, and number of periods. Here is one commonly used setting for those parameters:
· 5 for %K
· 5 for %D
· 3 for number of periods
%K is the fast moving line; it measures the relative strength of the asset, like RSI. %D is a moving average of %K, and hence is a much slower line.

Different Inputs. The fast stochastic only requires two inputs, which are normally 5 and 5. The slow stochastic requires a third input, which is the number of periods used in taking a moving average of the fast %D line. Unlike MACD (which commonly uses 12, 26, and 9) or RSI (which uses 14), Slow stochastic has a number of popular settings that can be used. 5, 3, and 8 is one commonly used setting. 15, 3, 3 is used by conservative traders who are interested in receiving less signals, while 8, 5, 5 and 5, 5, 3 are more aggressive settings for traders who are looking for fast signals. The tradeoff between accuracy and speed is something every trader must consider when choosing the inputs they will use in stochastics.
How to Use Stochastic in Currency Trading

· Can be used to determine overbought/oversold levels, like RSI
· Can be used in a crossover fashion like moving averages
· Used to spot divergences, which indicate potential weaknesses in trends

Crossover. When %K crosses %D (when fast crosses slow), it can be interpreted as a trade opportunity. Traders can enter positions following the direction of %K.

Overbought/Oversold. Look for both %K and %D to be above/below the 20/80 levels. If they are both above 80, it may be a good opportunity to sell, as the asset is overbought and expected to return back to a normal level. Alternatively, if it is below 20, the asset is oversold – and hence it may be a prime buying opportunity, as a range-bound market would imply that the currency pair will head back to a more “normal” asset price.

Divergence. Stochastic can also be used to determine when NOT to enter a position. For instance, if a trend looks strong, traders can look to stochastic to see if there is any divergence between the movement of the asset and the stochastic lines. If, for example, a currency pair is headed upwards sharply and is making new highs, but the stochastic is not making new highs or even heading downwards, then this suggests that the trend is weak, and the prices may come back down. Conservative traders can use look for divergence as a caution not to enter a trade based on momentum, while more aggressive traders can use divergence as a signal to enter a position before the trend actually starts retracing.

Slow versus Fast Stochastic. There are two types of stochastic, slow and fast. Both display the same two lines, and both can be interpreted in the same manner for crossovers, overbought/oversold conditions, and divergence. The difference is that the %D line of the slow stochastic is smoothed out by taking a moving average of the %D line of the fast stochastic. This makes the slow stochastic more accurate in the trade signals it provides but somewhat slower to react to the changing market price.

B. Stochastic: Historical Trades
Below are two examples of how stochastic could have been used to place a profitable trade. Note that the first chart uses crossovers for signals while the second chart uses divergence. Since divergence is not a precise indicator in terms of timing, the double top can be used for an entry point.

MACD

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A. Trading With MACD (often pronounced Mac-D)

What is MACD?
MACD is a commonly used technical indicator derived from exponential moving averages that can be used in both momentum and rangebound markets. Like RSI it is an oscillator plotted at the bottom of the chart, and it shows the momentum of the market relative to its recent history.

What it does: Can be used as an oscillator (indication that the asset will revert back to its mean
valuation) OR a momentum indicator (indication that the trend is strong and will continue).

Parameters: The MACD line is the difference between the 12 and 26 day EMA. The signal line is the 9 day EMA of the MACD.

Visually, the MACD consists of three elements:

MACD line. This is simply the difference between the 12 and 26 day EMA. It is a line plotted on the chart.
Signal line. The signal line is the 9 day EMA of the MACD line. Like the MACD, it is a line plotted on the bottom of the chart.
Histogram. The MACD histogram is simply a bar chart located at the bottom of the chart, where the MACD and signal lines are plotted. The histogram is simply a visual representation of the difference between the MACD and the signal line.

The “zero” point of the histogram – meaning the point where the bars cross above and below – is referred to as the centerline.

How to use it:

Trade Signal. When the MACD crosses the signal line, a trade signal is issued. Traders can enter positions following the direction of the MACD.
Overbought/Oversold. No specific numbers indicate whether it is overbought or oversold, but if it is relatively far from its mean compared to its recent history, this may suggest that it is due for a reversion.
Divergence. When the pair makes new highs/lows but the MACD does not, this suggests divergence, and that the trend may in fact be weakening with a reversal in store.
Consider the chart below for some examples as to how the MACD indicator can be used.

B. MACD: Historical Trades
Using the MACD Crossover
The MACD crossover is a straight-forward indicator that provides precise timing for entry points. The one drawback of it is that it is sometimes too slow to provide a signal. Sometimes it signals an entry several candles after the ideal entry point. The price has already moved far enough that the trade no longer has a favorable risk:reward ratio. Always consider support/resistance when entering a trade regardless of the crossovers.

This second chart shows that while MACD divergence can be an effective signal, like crossovers it should not be considered in a vacuum. This divergence on the daily chart lasted over a year before the pair finally broke support and fell lower.

Bollinger Bands

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What are Bollinger Bands?

Excellent range-bound indicator that measures standard deviation from the moving average.

Developed by John Bollinger, Bollinger Bands consist of three lines:

A moving average (Often omitted in most charting packages)
A upper band two standard deviations above the moving average
A lower band two standard deviations below the moving average

Bollinger bands are an excellent range-bound indicator – meaning they work best when the market is not strongly trending, but rather fluctuating between a high barrier (resistance) and a lower barrier (support). Bollinger bands operate under the logic that a currency pair’s price is most likely to gravitate towards its average, and hence when it strays too far – such as two standard deviations away – it is due to retrace back to its moving average.

Parameters: Standard deviation of 2; moving average of 20 (usually omitted).

How it can be used:

Range-bound market.
In range-bound markets, trading with Bollinger Bands is fairly simple: it essentially involves selling at the top band and buying at the bottom one. Note how the bands are nearly horizontal when the market is in an established range. This is when reversals at the bands are more effective.

Breakouts on Volatility.
When the Bollinger bands contract (meaning grow narrower), this suggests that volatility is contracting, and that the pair is trading in a tighter range. Typically, volatility contracts right before the market makes a big breakout. Accordingly, contracting volatility – symbolized by tight Bollinger Bands – should be a sign to traders that the market may be ready to make a big break.

The chart above shows the bands have contracted to a very narrow range, preceding a breakout. Once the bands start to expand outwards, this is a signal to enter in the direction that the price is moving. So, as the chart shows, if the price is at the top of the bands and the bands start to widen, it is a signal to go long.

B. Bollinger Bands: Historical Trades
Below are two charts showing how traders can use Bollinger Bands to effectively participate in range-bound markets. Note the importance of candlesticks in validating the reversal of the trend.

As the candlestick hits the lower Bollinger Band on this daily GBP/USD chart, we immediately see a rally back to the upper band. We also see a drop to the lower band as an Evening Star formation occurs at the upper band.

RSI - Relative Strength Index

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What is RSI?

RSI is an indicator that falls under the category of oscillators, and it is an extremely simple indicator to use. RSI works well in range-bound markets, but it has limited value in trending or breakout markets. RSI was created by Welles Wilder, who also created ATR, Parabolic SAR and other well-known indicators.

The Concept of Oscillators
Oscillators are chart studies that are designed to show the strength of the current price in relation to the recent price action. As such, they display the short term momentum of the market, giving signals that the bias of the market is shifting before the price actually changes directions.

The principle upon which oscillators are based is that of regression to a mean. Essentially, a large part of a statistical sample should be within a certain number of standard deviations from the mean of the sample, and if the price strays too far from this center, then it will likely revert back to the rest of the sample. In terms of trading, the price should not rise or fall too far in too short a time.

Oscillators are not usually displayed on the same graph as the price itself, but are most often placed at the bottom of the chart to show that the fluctuations do not occur on the same scale as the price movement.

What RSI Does
Like all oscillators, RSI offer indications of when a currency pair is overbought/oversold. RSI essentially calculates the strength of all upward candles (green) against the strength of all downward candles (red) over the course of the specified time frame.

Parameters
When pulling up RSI on a chart, the charting application will prompt you to select how many periods you would like to include in your study. The most commonly number used is 14, and most traders do not alter this default setting. Some traders do use 9 or 25 period RSI's instead of the standard 14. Of course, increasing the number of inputs will decrease the number of signals and increase the reliability of these signals. Decreasing the number of inputs would have the opposite effect.

How to Use RSI in Trading

Can be used to determine overbought/oversold levels
Used to spot divergences, which indicate potential weaknesses in trends

Overbought/Oversold
If RSI is above 70, the pair is considered to be overbought. Some traders enter short at this point, but this can be dangerous as the price may still be rising. Enter short when the RSI crosses back under 70, as this may indicate that the momentum has turned. If the RSI is below 30, the pair is considered to be oversold; enter when RSI crosses back above 30. Like most oscillators, RSI works best when the market is range-bound – in other words, when the market is expected to simply gravitate between an upper and lower level. In trending or momentum-driven markets, using the overbought/oversold levels offered by RSI is generally of limited value.

Divergence.
RSI can also be used to signal when a trend is weakening. If a currency pair makes new highs in its price but RSI does not – meaning there is divergence between the price movement and RSI – it may signal that the trend is not strong, and that a reversal may be imminent. If candlestick patterns confirm, a trader can use this as an opportunity to enter a position.

B. RSI: Historical Trades
Overbought/Oversold
The chart below offers an example of how RSI can be used to determine if a currency pair is overbought/oversold. Readings above 70 give an overbought indication, and readings below 30 give an oversold indication.

Moving Averages

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A. Using Moving Averages

What is a moving average?
Moving averages simply measure the average price or exchange rate of a currency pair over a specified time frame. For example, if we take the closing prices of the last 10 days, add them together and divide the result by 10, we have created a 10-day simple moving average (SMA).

There are also exponential moving averages (EMAs). They work the same as a simple moving average, except they place greater weight on the more recent closing prices. The mathematics of an exponential moving average are complex, but fortunately most charting packages calculate them automatically and instantaneously.

Parameters. The most commonly used time frames for moving averages are 10, 20, 50, and 200 periods on a daily chart. As always, the longer the time frame, the more reliable the study. However shorter term moving averages will react more quickly to the market's movements and will provide earlier trading signals.

How to Use Moving Averages in Trading

Enter when a strong trend pulls back to a moving average line
Enter on a moving average crossover

Gauge overall trend. Moving averages display a smoothed out line of the overall trend. The longer the term of the moving average, the smoother the line will be. In order to gauge the strength of a trend in a market, plot the 10, 20, 50 and 200 day SMA’s. In an uptrend, the shorter term averages should be above the longer term ones, and the current price should be above the 10 day SMA. A trader’s bias in this case should be to the upside, looking for opportunities to buy when the price moves lower rather than taking a short position.

Confirmation of price action. As always, traders should look at candlestick patterns and other indicators to see what is really going on in the market at the time. The chart above points out the Bullish Engulfing pattern that occurs just as the pair bounces off the 20 day SMA. Hitting the 20 day SMA, in conjunction with the candlestick pattern, suggests a bullish trend. Traders should enter once the Bullish Engulfing candle is cleared.

Crossovers. When a shorter moving average crosses a longer one (i.e. if the 20 day SMA crossed below the 200 day SMA), that is viewed by many as an indication that the pair will move in the direction of the shorter MA (so, in the aforementioned example, it would move down). Historically, moving average crossovers have not been accurate trade indicators, but they do offer insight into the market’s psychology.
Accordingly, should the pair move in the opposite direction of the shorter SMA and thus cross it, this should be viewed as an opportunity to enter a position.

B. Moving Averages: Historical Trades
The charts below show examples of how moving averages, when confirmed by price action, can signal trading opportunities.

In the above chart we see moving averages applied to the USD/CHF currency pair. Notice the Hammer candlestick pattern that penetrates the 200 moving average (Black Line). This reversal pattern and the fact that it bounces off of the 200 moving average shows that the downside momentum is lost, and signals that a rally may follow.

Fibonacci Retracements

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A. What are Fibonacci Retracements?

Fibonacci Retracements
What are Fibonacci retracements?
Levels at which the market is expected to retrace to after a strong trend.
Based on mathematical numbers that repeat themselves in all walks of life, Fibonacci retracements attempt to measure the likely points that a currency pair will retrace, or pull back to within a range. The key numbers in FX trading are 38.2%, 50%, and 61.8%.
Consider the following example to see how Fibonacci retracements work:
Suppose an asset is on an uptrend, going from 0 and 1000. After the asset reaches 1,000, how far will it retrace – meaning how far will it fall – before resuming its initial uptrend? We can do this by using the Fibonacci retracement numbers to gauge how deep of a pullback we could expect after the top “boundary” is reached.
So, mathematically, it works like this:

The 38.2% line. Calculate 38.2% of the size of the significant price move. The size of the significantprice move in this case is (1,000) minus the lower boundary (0). In this case, the size of the significantprice move is 1,000 pips. .382 x 1000 = 382 pips. It is expected that the asset will retrace 382 pointsfrom its peak. Assuming the asset is going up from 0 to 1,000, it would retrace 382 pips from 1,000.1,000 – 382 = 618. Accordingly, this is a key level to look out for; you may want to buy here (at 618), asit is expected the upward trend will resume after reaching this retracement level.
The 50.0% line. Same situation; 50% of the significant price move (1,000 pips) is 500. Take that off from top (1,000) since it is an the upward trend. 1,000 – 500 = 500. Look for the upward trend to resume at that point.
The 61.8% line. 61.8% of the significant price move is 618. 1,000 – 618 = 382. If the asset retraces to this point, it is viewed as an opportunity to buy.

If the asset were trending lower – meaning it had gone from 1,000 to 0 – then you would use the
Fibonacci numbers to calculate the retracement regarding how far the price may rise before resuming the downtrend again. You would calculate the Fibonacci retracements in the same manner, except you would draw from the high point of the significant price move to the low point of the move.

Parameters: 38.2%, 50.0%, and 61.8% are the most common Fibonacci Levels. The 38.2% level is considered the least significant of the three major Fibonacci levels. The larger the percentage line (i.e. 61.8%) the greater the likelihood that the price will find support.

Please keep in mind that other retracement levels exist in Fibonacci Studies that are not widely watched by the market. These levels include 21.4% and 78.6% as well as 127.2% and 161.8% extensions. Most charting packages do not even reference these levels and most traders would argue that if the market retraces 100% of a previous move, the original trend is no longer valid. Other Fibonacci studies called fans and arcs are quite mathematically complicated and are similarly ignored by most traders.

Key Concept: Look for Confirmation

Traders should enter when confirmation - for example key candlestick patterns – emerge at Fibonacci levels. Traders can also seek confirmation from a variety of other indicators, as we will see as the course continues.

B. How to Draw Fibonacci Lines
Fibonacci Retracements: How to Draw Them

Drawing Fibonacci lines is easy. It can be broken down into three easy steps:Identify the bottom and top of the overall trend. The bottom is referred to as support, and the top isreferred to as resistance. While they are subjective, support and resistance levels can easily bedetermined simply by looking at a chart.

Using a charting package you are comfortable with, draw Fibonacci lines from the support level to the resistance level. The three lines should appear: one at 38.2% of the difference from the top and the bottom; one at 50%; and another at 61.8%. These are the key Fibonacci levels around which you should look for potential opportunities to enter trades.

After that, simply look for price action to confirm an opportunity to enter a trade.

C. Fibonacci Retracements: Historical Trades
Below are two examples of how Fibonacci retracements, when used in conjunction with candlestick patterns, can be useful indicators for suggesting when a trend will reverse itself. Note how Fibonacci retracements work in both bullish (upwards trending) and bearish (downwards trending) markets.

Look at a Poor Fibonacci Trade
In order to learn how best to use Fibonacci retracements when trading the FX market, it is worth examining examples of traders often use them poorly.
The following example shows how being over eager can cause a trader to enter the market without justification.
In the chart below, see that price comes very close to touching the fib level (by 13 pips) but does not quite break it. While many traders may take that as a positive sign (they may rationalize that the level was so strong that traders did not wait for it to touch the fib level), you ideally want to see the level being breached. The reason for it is because breakout traders may come into the market, thinking that price will go lower, maybe even down to a lower fib level. When the market reverses and starts to go back into the trend, these short traders will now have to eventually cover their trades at a loss. Short traders who need to cover their positions will add to the buying pressure, thereby increasing the probability of your trade going in your favor.

Candlestick Patterns

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A. Identifying Reversals when Trading

Using Candlesticks to Identify Reversals
What are candlesticks?
Candlestick charts convey information pertaining to price action, or the movement of a currency pair’s price over the specified amount of time. Each candlestick contains four attributes:

the opening price of the currency pair at the time the candle opened
the closing price
the high of the time frame
the low of the time frame

On a daily chart, each candle represents a 24 hour period; on an hourly chart each candle represents an hour, and so on.
A visual analysis of a candlestick is as follows:

Key Definitions
Body: The difference between the opening price and the closing price. This is the wide portion of the candle that is colored red or green.
Wick or Shadow: The thin portion of the candle that represents the extreme high and low points for the time period represented by that candle.

Key Concept: Candlesticks Signal Reversals
Candlesticks can be used to identify trend reversals in the market
So why are candlesticks so important in trading? Simply put, it is because they are the best gauge of what is going on in the market at the present time. Candlesticks give us insight into the emotions of the market participants. Although traders may come and go over time, human emotion remains constant. A certain series of events creates a candlestick pattern, and when we see that pattern we know exactly what has transpired.

Ultimately, candlesticks can easily be used to identify potential reversals of trends in the market – especially when used in conjunction with other indicators.

B. Key Candlestick Patterns
The following are key candlestick patterns to look for:

When these patterns appear in a chart, and when they appear at levels that coincide with other indicators – such as Fibonacci retracement levels, or moving averages – they create a potential trading opportunity.

Introduction to Technical Analysis

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A. The Logic of Technical Analysis

What is Technical Analysis?
Technical analysis involves the forecasting of exchange rate movement based solely upon statistics and price patterns.
Simply put, technical analysis is the analysis of the market based on price action. While fundamental analysis looks at economic factors and geopolitical conditions (such as economic numbers, capital flows, and key political events) in an attempt to forecast exchange rates, technical analysis relies on the statistics and patterns in price movement for its forecast. Technical analysis has gained great popularity in recent history, especially as trends in computerized trading continue to develop and active traders continue to refine their strategies to best assess what is going on in the market at all times. In today’s marketplace, technical analysis has become an essential tool for any aspiring trader.

Why Technical Analysis Works

Extremely popular, and hence offers insight into what many traders are doing
More clear-cut and less controversial than fundamental analysis
A simple way of making trading decisions

Many traders believe that technical analysis is a self-fulfilling prophecy – in other words, it works solely because it is popular and is used by many traders. For example, many technical traders put a 20 day moving average line on charts not because the moving average itself is statistically important, but rather because it is an extremely common indicator used by active traders of all sizes. The rationale is simple: if so many traders are basing their decisions off moving averages and other indicators, then those indicators must be watched closely, for they offer insight into what a vast majority of traders in the market are doing.
Because of this rationale, traders should focus on the most popular indicators in the trading community, and should use them in the most common way. This is the best way of tapping into the “psychology” of the market – in other words, it is a simple but highly effective way of understanding what other traders are up to, and how the market may move because of it. Contrary to popular belief, it is NOT a study that requires complex mathematics or computer algorithms. Rather, it is a study that requires looking at the same tools other traders use to understand what is happening in the market.
Below is a list of the most common indicators, all of which will be covered in the lessons that follow:

Key Candlestick Patterns
Fibonacci Retracements
Moving Averages
RSI
Stochastics
MACD
Bollinger Bands

While it may seem intimidating, technical analysis is actually fairly simple – often far simpler than fundamental analysis. It simply requires an abundance of the two traits that are most necessary to be a successful trader: discipline and patience.

Different Time Frames
Technical analysis tools will be valid on all time frames, but we strongly recommend using daily charts for most of your analysis. Medium term positions based on daily charts, using hourly charts for more precise entry points, have two advantages over short term positions based on 5 or 15 minute charts.

The spread is less significant for a longer term position. 5 pips out of a price target of 20 is a huge obstacle to overcome on trade after trade. 5 pips out of a 100 pip target is manageable.
Longer term charts are statistically much more reliable, since they are based on more data. Indicatorshave a higher degree of reliability on a daily chart than on an hourly chart or 15 minute chart.

Trading on a weekly or monthly chart would likely be more accurate from a technical standpoint than a daily chart would be, but a slower time frame also means less precise entry points, and the wider stops necessary to trade a monthly chart are often beyond the capacity for many accounts. We recommend as a general rule risking no more than 2% of your account balance on a single trade, and this is sometimes difficult with a monthly or weekly chart.

B.Technical Analysis Theory: Range-bound vs. Momentum

Support and Resistance
Support and Resistance are the basis of most technical analysis chart patterns. Identification of key support and resistance levels is an essential ingredient to successful technical analysis. Even though it is sometimes difficult to establish exact support and resistance levels, being aware of their existence and location can greatly enhance analysis and forecasting abilities. If a pair is approaching an important support level, it can serve as an alert to be extra vigilant in looking for signs of increased buying pressure and a potential reversal. If a pair is approaching a resistance level, it can act as an alert to look for signs of increased selling pressure and a potential reversal. If a support or resistance level is broken, it signals that the relationship between supply and demand has changed. A resistance breakout signals that demand (bulls) has gained the upper hand and a support break signals that supply (bears) has won the battle.

Support
Support and resistance represent key turning points where the forces of Sellers (supply) and buyers (Demand) meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying. Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support. Support is the price level at which demand is thought to be strong enough to prevent the price from declining further and the logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.

In all markets the excessive supply will drive prices down, while demand will drive the markets up. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.
The market has a memory. When price falls to a new low and then rallies, buyers who missed out on the first trough will be inclined to buy if price returns to that level. Afraid of missing out for a second time, they may enter the market in sufficient numbers to take away from sellers. The result will be a rally, reinforcing perceptions that price is unlikely to fall further and creating a support level.
A decline below support indicates a new willingness to sell and/or a lack of incentive to buy. A break of support and making new lows signal that sellers have reduced their expectations and are willing sell at even lower prices. In addition, buyers could not be tempted into buying until prices declined below support or below the previous low. Once support is broken, another support level will have to be established at a lower level

Resistance
Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further and the logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.

The market has a memory. When price makes a new High and then retreats, sellers who missed the previous peak will be inclined to sell when price returns to that level. Afraid of missing out a second time, they may enter the market in numbers sufficient to overwhelm buyers. The resulting correction will reinforce market perceptions that price is unlikely to move higher and establish a resistance level.

Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears. A break above resistance shows a new willingness to buy and/or a lack of incentive to sell. Resistance breaks through and new highs are made that would indicate that buyers have increased their expectations and are willing to buy at even higher prices. In addition, sellers could not be tempted into selling until prices have rallied above resistance or above the previous high. Once resistance is broken, another resistance level will have to be established at a higher level.

Another principle of technical analysis stipulates that support can turn into resistance and visa versa. Once the price breaks below a support level, the broken support level can turn into resistance. The break of support signals that the forces of supply have overcome the forces of demand. Therefore, if the price returns to this level, there is likely to be an increase in supply, and hence resistance.

The other side is resistance turning into support. As the price advances above resistance, it signals changes in supply and demand. The breakout above resistance proves that the forces of demand have overwhelmed the forces of supply. If the price returns to this level, there is likely to be an increase in demand and support will be found.
Therefore we first plot long-term charts and begin by analyzing the daily and weekly charts going back for a couple of years. This provides more visibility and a better long-term perspective on a market. Once the long-term has been has been established then review the daily and the intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you're trading in the same direction as the intermediate and longer-term trends. Take in the general view of the chart to determine the direction of the trend, and follow it. We need to try to identify support and resistance levels, the best place to buy a market is near support levels that support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old "high" becomes the new "low." In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies -- the old "low" can become the new "high."

It is very important to make sure that we trade in the direction of that trend. We “Buy dips if the trend is up” and “Sell rallies if the trend is down” But in each case, let the bigger time frame chart determine the trend, and then use the shorter-term chart for timing entry. Find support and resistance levels; the best place to buy a market is near a support level, and that support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old "high" becomes the new "low."
In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies -- the old "low" can become the new "high." Stops are best placed after we first identify support and resistance on the charts and you place yours stop beyond those levels and at that time you decide if the risk reward on the trade is acceptable to you.

When price makes a new High and then retreats, sellers who missed the previous peak will be inclined to sell when price returns to that level. Afraid of missing out a second time, they may enter the market in numbers sufficient to overwhelm buyers. The resulting correction will reinforce market perceptions that price is unlikely to move higher and establish a resistance level.

Trading Range
Trading ranges can play an important role in determining support and resistance as turning points or as continuation patterns. A trading range is a period of time when prices move within a relatively tight range, between support and resistance. This signals that the forces of supply and demand are evenly balanced. When the price breaks out of the trading range, above or below, it signals that a winner has emerged. A break above is a victory for the bulls (demand or Buyers) and a break below is a victory for the bears (supply or sellers).

The simplest way of using support and resistance in trading is to simply trade the range: in other words, traders can simply buy at support, and sell at resistance. A key advantage of this is that the market is range-bound approximately 80% of the time, making it a very viable strategy for most market conditions.

The downside of range-bound trading, though, is twofold:

Range-bound trading generally does not yield substantial gains on a per-trade basis.
When the market breaks out of the range, it often will make big moves. As a result, traders using range-boundstrategies can suffer overwhelmingly large losses when the market breaks out of the range. The chart below illustrates the concept of range-bound trading.

Note how this pair repeatedly fails to cross beyond certain support and resistance levels, and simply fluctuates between an upper and lower band.

Support and Resistance Zones
Because technical analysis is not an exact science, it is sometimes useful to create support and resistance zones. Each pair has its own characteristics and the analysis should reflect the intricacies of the pair. Sometimes exact support and resistance levels are best and sometimes zones work better. Generally, the tighter the range, the more exact the level. If the trading range spans less than 2 months and the price range is relatively tight, then more exact support and resistance levels are probably best suited. If a trading range spans many months and the price range is relatively large, then it is probably best to use support and resistance zones. These are only meant as general guidelines and each trading range should be judged on its own merits.

Support and Resistance in Momentum Markets
Another way to use support and resistance is to trade outside of the range; in other words, to anticipate a breakout. This involves placing orders to buy above resistance and to sell below support. The rationale is that the market will gain momentum once it breaks out of the range, and thus by placing orders just below/above support/resistance, traders will be able to make big gains when the market moves out of the range. Momentum trading is a bit counter-intuitive, as it involves buying at a higher price and selling at a lower price.
Below is a chart that illustrates the concept of momentum trading. Note how the pair accelerates once it breaks out of a narrow range:

Risk-Reward Ratios
Is the estimated potential loss of a trade (risk) to the estimated potential gain (reward).
Before entering into any trade, good traders first think about how much risk to take on any particular trade. We try to apply the 1:3 risk/ reward, for example if your average gain on winning trades is $1000 and you have consistently risked $300 per trade then your risk-reward ratio would be 3.3 to 1 (i.e. $1000 / $300). Since no one can win on every trade therefore your profits would cover your losses and at the end of the day you will be a winner.

C.Price Channels
Support and Resistance do not have to be horizontal lines, and often in a market that is moving higher or lower, trend lines effectively connect the high points or the low points to create a price channel that acts similarly to a horizontal range. Support and resistance levels function in the same manner in a trending market as in a rangebound one. However the line that is following the trend--support in an uptrend or resistance in a downtrend) should be considered by far the stronger of the two. Only when there is a trade with minimal risk involved should you enter a position based only on the resistance line above the price in an uptrend.

Trading characteristics

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There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitregeus instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago mercantile exchange and Reuters, called FX market space opened in 2007 and aspires to the role of a central market clearing mechanism.

The main trading center is London, but New york, Tokyo, Hongkong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.

There is little or no' inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficit or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.

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 Letter Code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US Dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.

The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.

On the spot market, according to the BIS study, the most heavily traded products were:

EUR/USD: 27 %
USD/JPY: 13 %
GBP/USD (also called sterling or cable): 12 %

and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (16.5%), and sterling (15.0%) . Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the buyers.

Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EUR/USD and USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.

Factors affecting currency trading

Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.

Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.

Economic factors

These include economic policy, disseminated by government agencies and centarl banks, economic conditions, generally revealed through economic reports, and other economic indicator.

Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rate).

Economic conditions include:

Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.

Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.

Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.

Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.

Political Condition

Internal, regional, and international political conditions and events can have a profound effect on currency markets.

For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.

Market Psychology

Market Psychology and trader perceptions influence the foreign exchange market in a variety of ways:

Flights to quality: Unsettling international events can lead to a "flight to quality",with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The Swiss franc has been a traditional safe haven during times of political or economic uncertainty.

Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.

"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.

Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

Technical trading condition: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns.

Market participants

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Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex-metal market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.

Banks

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.

Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

Commercial Companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

Central Bank

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty fload currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.

Hedge Funds
Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

Investment management firms

Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.

Some investment management firms also have more speculative specialist currency overlays operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.

Retail forex brokers
There are two types of retail brokers offering the opportunity for speculative trading. Retail Forex brokers or Market makers. Retail Traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks. Retail forex brokers, while largely controlled and regulated by the CFTC and NFA might be subject to forex scam. At present, the NFA and CFTC are imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone. It is not widely understood that retail brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. A move toward NDD (No Dealing Desk) and STP (Straight Through Processing) has helped to resolve some of these concerns and restore trader confidence, but caution is still advised in ensuring that all is as it is presented.

Other

Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as Foreign Exchange Brokers but are distinct from Forex Brokers as they do not offer speculative trading but currency exchange with payments. i.e. there is usually a physical delivery of currency to a bank account.

It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.

Money Transfer/Remittance Companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally.

source :wikipedia

Foreign exchange market

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The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is the largest and most liquid financial market in the world, and includes trading between large banks, central bank, currency speculator, multinational corporation, goverments, and other financial market and institutions. The average daily trade in the global forex and related markets is continously growing and was last reported to be over US$4 trillion in April 2007 by the Bank for International Settlement.

Market size and liquidity

The foreign exchange market is unique because of

its trading volumes,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours: 24 hours a day except on weekends (from 5pm EST on Sunday until 4pm EST Friday),
the variety of factors that affect exchange rates.
the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
the use of leverage

As such, it has been referred to as the market closest to the ideal perfect competition not with standing market manipulation by central bank. According to the BIS average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this.

This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:

$1.005 trillion in spot transactions
$362 billion in outright forwads
$1.714 trillion in forex swaps
$129 billion estimated gaps in reporting

Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.

In addition to "traditional" turnover, $2.1 trillion was traded in derivates.

Exchange-traded forex future contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe.

Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms offered by companies such as First Prudential Markets and Saxo Bank have made it easier for retail traders to trade in the foreign exchange market.

Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 34.1% in April 2007. RPP

The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe. These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of currency, which is a standard "lot".

These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips.

Nuts and Bolts of Trading

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A. How Speculators Can Profit from FX Trading ?
What the Exchange Rate Means The base currency is the term for the first currency in the pair.The counter currency is the term for the second currency in the pair. The exchange rate represents the number of units of the counter currency that one unit of the base currency can purchase. In a foreign exchange trade, clients are speculating on the exchange rate between two currencies. The exchange rate measures the relative value of a currency -- meaning it measures how much one currency is worth in terms of another currency.

For example, let’s suppose the exchange rate for the GBP/USD (Great British pound/United States dollar) is 1.8455. This means that 1 British pound (the first currency in the pair, also known as the base currency) is the equivalent of 1.8455 US dollars (the second member of the pair, known as the counter currency). This is the standard quoting convention for exchange rates; the exchange rate represents how much 1 unit of the base currency (first currency in the pair) can purchase of the counter currency (second currency in the pair).
So, if the GBP/USD exchange rate were to rise from 1.8455 to 1.8555, that would mean that 1 GBP would have gone from being able to purchase 1.8455 US dollars to being able to purchase 1.8555 US dollars.

Measuring Exchange Rate Movement
A pip is the unit of measurement for exchange rate movement.
The number of pips a currency pair moves determines how much a trader will earn or lose on the position.
A pip is the last significant digit in an exchange rate, and is the term used to define the unit of
measurement for exchange rate movements. The number of pips that the exchange rate moves dictates how much a trader has gained or lost through an FX trade. In the example above, if the rate moves from 1.8455 to 1.8555, the pair has risen by a 100 points or pips.

How an FX Trade Works
Any foreign exchange transaction ultimately begins with two events:

One currency is being borrowed.
The proceeds from the borrowed currency are used to finance the currency that is being bought.
Currency pairs are typically traded in increments of 100,000 units of the base currency. A 100,000 unit increment in a currency trade is referred to as a lot. (For example, a trader who is trading 5 lots is trading 500,000 units of currency).

After gaining an intuitive understanding of how exchange rates move, one can begin FX trading, there by speculating on the exchange rate so as to potentially reap profits from the fluctuating value of currencies. Essentially, clients can borrow one currency and buy another, and profit from exchange rate movements.
This concept is most easily explained and understood through an example of an actual trade:
Trader A wishes to speculate on GBP/USD. Believing that the GBP will rise against the USD, or that the exchange rate will move upwards, the trader places an order to buy GBP/USD at a market rate of 1.8455. In terms of volume, let’s assume that Trader A is speculating on 100,000 units of the base currency – which is the standard lot size, or trading increment, used in the foreign exchange market. Since the base currency is the first currency in the pair, we know that Trader A is speculating on the value of 100,000 British pounds with respect to the US dollar.

In this example, Trader A is buying British pounds, since he believes the pound will rise in value with respect to the US dollar. Accordingly, he finances the transaction of buying 100,000 pounds by borrowing an equivalent amount of US dollars.
For Trader A, the value of the amount borrowed is a function of the exchange rate. Since the exchange rate at the time of the transaction was 1.8455, we know that the market cost for 1 British pound was 1.8455 US dollars. Hence, 100,000 pounds cost $184,550 (1.8455 * 100,000). This borrowed amount of 184,550 USD must be paid back when the transaction is closed.

Let’s assume that Trader A is correct in assuming that the British pound would rise in value with respect to the USD, and that the exchange rate moved to 1.8555 – 100 pips above the rate at which Trader A entered. If Trader A were to close his position now, the 100,000 pounds he purchased at the onset of the transaction would be sold, and his debt of 184,550 dollars would be paid off.

At an exchange rate of 1.8555, Trader A’s 100,000 pounds are now worth 185,550 US dollars (100,000 * 1.8555). After repaying the borrowed amount of 184,550, this leaves him with a profit of $1,000.
A summary of the transaction is as follows:
Initial transaction: Purchase of 100,000 pounds at a cost of 1.8455 US dollars per pound, or a total of 184,550 USD
Final transaction: Sale of 100,000 pounds at a price of 1.8555 US dollars per pound, or 185,550 USD .

Amount of pounds initially purchased: 100,000
Amount of pounds sold through the closing transaction: 100,000
Net number of pounds: 0

Amount of dollars initially borrowed: 184,550
Amount of dollars purchased upon close of trade: 185,550
Dollars remaining after borrowed dollars are paid off: 1,000

Selling a Currency Pair Short

Traders have equal opportunities to profit regardless of whether the exchange rate is rising or falling.
The number of pips a currency pair moves determines how much a trader will earn or lose on the position.
One of the premier advantages of the foreign exchange market is that profit opportunities are equally present in all market conditions; it is just as easy to profit when the exchange rate is declining as it is when the rate is rising. If, for example, Trader A believes the pound will fall against the value of the US dollar – meaning 1 pound will buy fewer US dollars – then he can simply place an order to sell GBP/USD.
This trade works in essentially the same manner as the trade to go long (buy) the pair, with the only difference being which currency is being bought and sold.

Let’s assume Trader A believes that the GBP will decline in value with respect to the USD -- in other words, that the exchange rate will fall from the 1.8455 level. Accordingly, he places an order to sell 1 lot of GBP/USD, thus borrowing 100,000 pounds and buying an equivalent amount of USD with the proceeds.

Since 1 pound can purchase 1.8455 US dollars at the time Trader A places his trade, he can purchase 184,550 US dollars with the 100,000 pounds he borrowed. As in the previous example, the borrowed amount will be repaid when the transaction is closed.

Let’s assume that Trader A is correct in his belief that the pound will fall in value against the USD, and that the GBP/USD reaches 1.8355 – a drop of 100 pips from Trader A’s entry point. Now, Trader A decides to take his profit and close out the trade. Accordingly, he must repay the 100,000 pounds that were borrowed. Since the cost of 1 pound has now dropped to 1.8355, this means that the cost of 100,000 pounds is 183,550 (100,000 * 1.8355). This amount is then subtracted from 184,550, which was the number of dollars that Trader A received when he initially placed the trade. The result is a profit of $1,000 (184,550 – 183,550).
A summary of the transaction is as follows:

Initial transaction: 100,000 pounds were borrowed and exchanged for US dollars at a rate of 1.8455 US dollars per pound, or a total of 184,550 USD

Final transaction: The borrowed amount of 100,000 pounds was repaid at a cost of 1.8355 US dollars per pound, or a total of 183,550 USD

Amount of pounds initially borrowed: 100,000
Amount of pounds repaid via close of trade: 100,000
Net number of pounds: 0

Amount of dollars initially purchased: 184,550
Amount of dollars used to pay off the 100,000 pounds that were borrowed: 183,550
Dollars remaining after borrowed pounds are paid off: 1,000

In the examples given above, Trader A had the potential to earn a profit of $1,000 when the exchange rate rose 100 pips and also when it fell 100 pips. For any currency pair in which the US dollar is the second in the pair – like the GBP/USD, EUR/USD, AUD/USD, and NZD/USD – the value of a pip is fixed at $10 per 100,000 unit lot. In the Mini account, where a mini lot is 1/10th the size of a 100k lot, the pip value is 1/10th that of the 100K account. Accordingly, the pip value for any pair in which the USD is the counter currency is fixed at $1.

B.What is the Spread?
On your trading station, you will notice that there are two prices for each currency pair. Similar to all financial products, FX quotes include a "bid' and "ask". The bid is the price at which a dealer, for example FXCM, is willing to buy and clients can sell the base currency in exchange for the counter currency. The ask is the price at which a dealer is willing to sell and a client can buy.

BID = The Price at which the Trader (You) Can Sell
ASK = The Price at which the Trader (You) Can Buy

For example, say the EUR/USD is trading at 1.2245 x 1.2248. In this case, the bid is 1.2245 and the ask is 1.2248.

The difference between the bid and ask constitutes the spread. In the above example, the spread is 3 pips, or points. This differential reflects the cost of the trade. Essentially, the market would have to move 3 pips in your favor for you to break even, and 4 pips for you to be in your profit zone.

For example, say you bought the above currency at 1.2248. If you immediately sold, you would be filled at 1.2245. This represents a loss of 3 pips. The market would have to move up 3 pips to 1.2248 x 1.2251 for you to break even, and up to at least 1.2249 x 1.2252 for you to make a profit. This is because you bought at 1.2248 and you would have to sell at 1.2249 or higher to profit.

This spread of 3 pips represents the main source of revenue for the market maker (e.g. the firm that executes your trade). Please note that there exists a spread for all tradable instruments in all markets, regardless of whether both prices are transparent. On the FX Trading Station, this cost is made visible. An easy way to think of it is that if you were trading stocks and bought stock XYZ at $50 and then wanted to sell right away, you would not be able to sell at $50. You would have to sell at a lower price. This is because of the spread, and thus represents a hidden cost of trading in many equities and futures markets.

C. What is the Margin?
Margin
If you have a standard cash stock account, you know that money should be deposited for the full amount of the position you are trading, or if you have a margin account, for at least half of the position. This is in contrast to the FX market, where only a small percentage of the actual position value needs to be deposited prior to taking on the entering the trade. This small deposit, known as the margin, is not a down payment, but rather a performance bond or good faith desposit to ensure against trading losses. The margin requirement allows traders to hold positions much larger than their account value.

Margin requirements are as low as 1% (and as low as 0.5% on the mini account), meaning for every standard lot size of 100,000 units, you must commit $1,000. However, if you wanted to control a $100,000 in the stock market, you would have to deposit at the very least, $50,000. Even in the futures market you would have to deposit at least $5,000 to control a $100,000 position.

On your trading station, you can see that there are two types of margin: usable and used. Your used margin is the amount of funds you have committed to existing positions, and your usable margin is the amount of money you have available to commit to new positions. Account equity is your account balance plus or minus any floating profit or loss.

For example, say you open an account with $10,000. At this point your account balance and equity are both $10,000, your usable margin is $10,000 and your used margin is $0, as you have yet to place a trade. Next, you buy 7 lots of USD/JPY, which requires you to maintain $7,000 in equity. Now your usedmargin is $7,000 and your usable margin is $3,000. Essentially, this means that you can sustain market losses totalling $3,000 before your account equity falls below the minimum margin requirement of $7,000, at which point the dealing desk will close all open positions. This automatic margin call feature prevents your account from ever reaching a negative account balance.

D. Types of Orders
The term "order" refers to how a trader can enter or exit a speculative position in the market. There are various ways of placing orders, and understanding the pros and cons of various order types is key to becoming a savvy trader.

To help make matters simple, let's divide orders into two categories: orders used to enter positions, and orders used to exit positions.

Orders Used to Enter Positions

Market Order

Advantage: Ensures trader that he/she will be in the position
Disadvantage: Far greater likelihood that trader is not getting the best price for the trade, or is assuming unnecessary risk.

A market order is an order to buy or sell a currency pair at the current market price. For example, the FX Trading Station will always show two prices for every currency pair -- the price you can buy at (also known as the ask), and the price you can sell at (also known as the bid). For instance, the market could be pricing the EUR/USD at 1.2200 - 1.2205 -- meaning traders can buy the EUR/USD at 1.2205, but would have to sell at 1.2200.

These prices represent the current market prices, and traders who choose to enter market orders would be filled at the rate they see. The key advantage of market orders is that they ensure the trader that he/she will be in the position. The key disadvantage, though, is that the trader may not get the best price he/she could have gotten had he/she used another order type. Another disadvantage -- and one that is often overlooked -- is that market orders are more conducive to being used recklessly and without discipline. Using other orders, like stop and limit orders, are better-suited for helping traders stay disciplined.

Entry Orders

Advantage: Greater likelihood that the trader will get the price he/she wants.
Disadvantage: Market may not reach the rate the trader specified, and hence the trader may miss out on the opportunity.

All entry orders are essentially contingent orders; they will only be filled if the market reaches the rate specified.
For example, suppose you are trading USD/JPY, and the current quote is 120.50-55. You can place an entry order to buy at 120.15, for example, so that your order will only be filled if the market reaches 120.15. This allows you to potentially recieve a better price.

There are two types of entry orders: limit entry orders and stop entry orders.
Limit Entry Orders
Limit entry orders are classified as entry orders whereby the rate specified by the trader is either
(1) below the current market rate if it is a buy order, or, alternatively,
(2) above the market rate if it is a sell order.
Essentially, limit entry orders should be used if the trader is expecting the market to reverse its direction at a certain rate. For example, if the USD/JPY is trading at 120.50 and the trader expects it to fall to 120.15 before reversing its direction, the trader would place a limit entry to buy at 120.15. Or, if the trader expected the rate to rise to 120.70 before falling, the trader would place a limit entry to sell at 120.70. In both cases, the trader is expecting a reversal at a certain level -- and hence is using a limit entry order.

Stop Entry Orders
Stop entry orders rely on rationale that is the opposite of limit entry orders; they involve either (1) placing orders to buy above the current market rate or
(2) placing orders to sell below the current market rate.
While limit entry orders can be used if a trader is expecting a reversal, stop entry orders should be used if the trader is expecting continuation of a trend beyond a certain point. As a result, stop entry orders are often safer; they allow a trader to enter positions only after the market has reached a certain rate and confirmed the strength of the trend.

Consider an example:
Suppose the current market rate for USD/JPY is at 117.04-09; in other words, traders can enter the market to sell at 117.04 or buy at 117.09. There are two types of stop entry orders that a trader could place in such a situation:

They could place an order to sell at a price below the current market rate -- i.e. they could place an order to sell at 116.75; if the sell rate in the spot market reaches 116.75, their sell order would be activated.
Alternatively, they can place an order to buy above the current market rate -- i.e. they could place an order to buy at 117.50, and their order would only be filled if the market reached that rate.

In either case, the trader expects that the market will reaches this level, it will break out and continue in this direction.

Orders Used to Exit Positions

The following are orders that can be used to exit positions:

Limit Orders (or take profit order)

Advantage: Helps trader maintain discipline, and is an effective way to lock-in profits.
Disadvantage: May lead to premature profit-taking, as traders may end up getting out of positions too soon with too little profit.

A limit order allows a client to specify the rate at which they will take profits and exit the market. Essentially, it defines the amount of profit that the trader is looking to capture on this particular trade.
Let's assume a trader has an open position where he is long (meaning he has bought) GBP/USD at 1.5800. In such a scenario, a trader can place a limit order to determine at what rate he will close his position and take his profits. So, for instance, if the aforementioned trader was looking to capture 100 pips on the GBP/USD, he would place a limit order at 1.5900; if the market reached that rate, he would be taken out of the market, and his profit from the trade would immediately be reflected in his balance.

Limit orders are great tools to help traders maintain discipline and lock-in profits. Still, though, they may result in premature profit-taking -- meaning they may cause traders to exit positions too early with profits that are too small relative to the risk involved in assuming the position. This is a common mistake made by novice traders, and often results in them blowing up their account.

Stop-Loss Order

Advantage: Allows trader to specify the maximum loss he/she is willing to take on a position.
Disadvantage: Stops placed too tight may result in the trader being taken out of the market only to see the market reverse its direction and head in the direction the trader originally forecasted.

It works like a limit order, but in an opposite fashion: it specifies the maximum loss that a trader is willing to accept on a given position.

For example, if a trader is long USD/JPY at 121.50 with a limit at 121.70, he may wish to maximize the loss he is willing to accept by placing a stop-loss order at 121.30. In such a case, if the market reached 121.30, he would be stopped out of the position and would suffer a loss no greater than 20 pips. Similarly, if a trader is short USD/JPY at 121.50 with a limit at 121.30 and only wants to suffer a loss of 20 pips, then he would place a stop loss order at 121.70. Accordingly, if the market reaches 121.70, the trader will be stopped out of the position and would have suffered a loss no greater than 20 pips.

Stop-loss orders are one of the most highly recommended tools for traders. They are crucial to ensuring that the trader does not blow up his/her account with a single trade, and can be vital when establishing risk-reward ratios to ensure that traders are not making foolish decisions. On the downside, stop-loss orders, if not placed at the appropriate level, can result in traders being taken out of positions at a loss -- when in fact the market may reverse itself.