Foreign exchange trading.doc

1 Common sense about Foreign exchange market
1.1 The foreign exchange market
1.1.1 The foreign exchange market
1.1.2 Market size and liquidity
1.1.3 Market participants
Read it again, because I want you can totally understand this market.
1.1.1 What is Forex?
1.1.2 Size of the Forex Market

1.1.3 Where are these currencies traded in the forex market?
1.1.4 How are currencies traded?
1.2 Factors That Affect the Foreign Exchange Market
1.3 Currencies
1.3.1Currencies Traded
1.3.2 Major currency pairs
1.3.3 when do they trade?
1.3.4 Trading Tips for The Major Currency Pairs

2 Meta Trader
2.1 Forex Spreads
2.2 Forex Trading Costs
2.3 High Leverage and Margin
2.4 Forex Order Types
2.5 Trading on Margin
2.6 Forex Micro Lots
3 Strategies
3.1 Which Term?
3.2 Indicators
3.2.1 Trends Indicators
3.2.2 Oscillators

1 Common sense about Foreign exchange market
1.1.1 The foreign exchange market (forex, FX, or currency market) is a global, worldwide-decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.[1]
A Foreign Exchange Market or Forex market is a place where international currencies are traded. It has emerged to be the largest and decentralized financial market operating globally. It does not have any central authority and hence it is called an "Over The Counter" (OTC) market. It allows the traders to buy, sell, exchange and speculate on currencies. The major determinant of the exchange rate is the monetary value of the currency
The foreign exchange market is unique because of
· its huge trading volume representing the largest asset class in the world leading to high liquidity;
· its geographical dispersion;
· its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
· the variety of factors that affect exchange rates;
· the low margins of relative profit compared with other markets of fixed income; and
· the use of leverage to enhance profit and loss margins and with respect to account size.
1. 1.2 Market size and liquidity
The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing.
1. 1.3 Market participants
Unlike a stock market, the foreign exchange market is divided into levels of access. At the top is the interbank market, which is made up of the largest commercial banks and securities dealers. Within the interbank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a currencies such as the EUR) as you go down the levels of access. 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 Forex market is different from stock market in the sense that the former follows a hierarchical order in its level of access. At the apex is the Inter-Bank market, consisting of commercial banks and security dealers. They account for 53 % of all transactions.

Following Inter-Banks are the Smaller Banks, then the Multi National Corporations, large Hedge Funds and some Retail Forex market makers. Hence, the main participants are:
· Banks
· Forex fixing
· Central banks
· Retail forex traders
· Commercial companies
· Hedge funds as speculator
· Non-banking forex companies
· Investment management firms
· Money transfer/Remittance companies
As the forex market follows OTC nature of market, the exchange rates (prices) of different currencies are not fixed. The price of a currency depends on the trading banks or market makers. The quoted price of any currency reflects London's market price, as it is the main trading centre in the world.
Read it again, because I want you can totally understand this market.
1. 1.1 What is Forex?
Forex stands for the foreign exchange market. This is also referred to as the FX, Spot FX or Currency market. All of these names are just several ways of describing the very same market.
This market has been around since the 1970’s when currencies started to fluctuate when President Nixon took the U.S. off of the gold standard. Formerly, the U.S. currency was backed by gold and now it’s just backed by the “faith” in the government’s ability to honor and back the currency.
However, even though this market has been around for such a long time, it hasn’t been open to the retail public until the 1990’s and many market makers didn’t even get well established until 2000 or after.
Formerly, only the “big boys” could play around in this market. They usually had a minimum of $10 million to $50 million to throw around in this market. It was reserved basically for banks and big institutions.
However, with the advent of the internet, later on it was able to be opened up to the retail public as they were allowed to trade in smaller sizes that would be feasible for the “average Joe” to be able to handle.
1. 1.2 Size of the Forex Market
The Spot Forex market is the largest financial market in the world, with a volume of $4 trillion average daily trading volume. Now let’s put that into perspective. The New York Stock Exchange (NYSE) trades about $25 billion a day. So not only does this dwarf the trading volume of America’s largest stock exchange but if you combined the volume of ALL stock markets around the world, you still haven’t equaled the daily volume in the forex market.
Forex trading is simply the trading (exchanging) of money. It involves the simultaneous buying of one currency and the selling of another. The “exchange rate” is what you will see quoted. This determines how much currency that another currency can buy.
You will find that there will be many factors that cause these exchange rates to go up and down. Ultimately, the exchange rate is determined by the confidence that the world collectively has in a particular currency. This will be made up of many facets: how their economy is doing, political stability, consumer sentiment, the trend direction of these exchange rates on the charts, etc.
1. 1.3 Where are these currencies traded in the forex market?
The good part about forex trading is that you don’t have to “literally” exchange money or set up foreign bank accounts or any of that nonsense. No, it’s as simple as opening up an account with a forex dealer (aka market maker…some even refer to them as brokers). They aren’t technically brokers and that’s why there’s not a commission in this market. It’s because you are dealing directly with the market maker. Market makers charge spreads (the difference between the buy and sell quote…which we’ll delve into more later) and brokers charge commissions.
In your stock brokerage account, you incur a buy commission from your stock broker, a spread cost from the market maker and a sell commission from your stock broker. So there are three fees by the time you’ve bought and sold a stock. However, in forex, you don’t have the commissions and even the spread you pay is less than that of stocks when you consider how much currency you are controlling.
1.1.4 How are currencies traded?
They are traded in pairs. Why? Because a currency can be strong vs. one currency but weak vs. another. Remember that currency values are the collective sentiment of investors around the world.
So if investors feel good about the U.K. economy and worse about the U.S. economy, then the British pound (GBP) will gain in strength to the U.S. dollar (USD). However, at the same time, investors could still feel better about the U.S. economy than that of Japan. If so, the USD would go up against the JPY (Japanese yen). So as you can see, it’s all relative to what it’s being compared to. In the first instance, the U.S. dollar is viewed as being weak (in comparison to the pound). In the second example the “buck” was viewed as being strong vs. the yen.
So these currencies are traded in the interbank market through these forex market makers. The market makers set the quotes based off of the buying and selling pressures that they see due to the demand for a currency vs. another.
Currencies trade in the spot forex market as OTC (over the counter). That simply means that they do not trade on a certain designated exchange around the world. An example that you might be more familiar with is the NYSE and the NASDAQ. The NYSE is an actual exchange that has a physical location where stocks are traded. The NASDAQ, on the other hand, is an OTC market where there is no physical place that you would see these traded. They are just two different ways that stocks are traded.
Generally, if you see a stock traded that has a 4 letter symbol, it’s traded on the NASDAQ. However, if it’s 3 letters or less, then it’s traded on an exchange such as the NYSE.
An advantage of an OTC market is that market makers have to compete for your business more than a specialist would have to on a physical exchange. Therefore, this ends up working in the actual trader’s favor.

1.2 Factors That Affect the Foreign Exchange Market

The changes in the forex market are a cumulative effect of economic factors, political conditions and market psychology.

Economic factors: The economic policies, balance of trade as well as inflation and growth rates of an economy influence the exchange rate of a currency. An economy's productivity also influences its exchange rates positively.

Political conditions: Political stability is one of the key factors operating behind forex market fluctuations. Also events in one country may affect the exchange rate of neighboring country's currency.

Market psychology: Forex markets are highly responsive to expectations and market perceptions. The participants often rely their decisions on long term trends of economic indicators

The Most Important Forex Trading Rules
The Role of Macroeconomics in Forex
The forex market is primarily driven by overarching macroeconomic factors that influence the decisions of the traders who ultimately decide the value of a currency at any given point in time. The economic health of a nation's economy is an important factor in the value of its currency. Overall economic health, however, is shaped by numerous economic events and information that may change on a daily basis, contributing to the (nearly) 24/7 nature of the international foreign exchange market. Let's take a closer look at some of the factors that influence an economy's standing and drive changes in the value of its currency.
Capital Markets
The global capital markets are perhaps the most visible indicators of an economy's health. Stock and bond markets are the most noticeable markets in the world. With constant media coverage and up-to-the-second information on the dealings of corporations, institutions and government entities, there is not much public information that the capital markets miss. A wide rally or sell-off of securities originating from one country or another should be a clear signal that the future outlook (short term or long term) for that economy has changed in investors' eyes.
Similarly, many economies are sector driven, such as Canada's heavily commodity-based market. In this case, the Canadian dollar is heavily correlated to the movements of commodities such as crude oil and metals. A rally in oil prices would likely lead to the appreciation of the loonie relative to other currencies. Commodity traders, like forex traders, rely heavily on economic data for their trades, so in many cases, the same economic data will have a direct affect on both markets. (For more on this correlation, see How To Trade Currency And Commodity Correlations.)
Moreover, the bond markets are critical to what is happening in the forex market, since both fixed income securities and currencies are rely heavily on interest rates. Movements in Treasuries are a first level factor in movements in currencies, meaning that a change in yields will directly affect currency values. Because of how closely tied the two markets are, it is important to understand how bonds - and government bonds especially - are valued in order to excel as a forex trader.
International Trade
Another key factor is balance of trade levels and trends between nations. The trade levels between nations serve as a proxy for the relative demand of goods from a nation. A nation with goods or services that are in high demand internationally will typically see an appreciation of its currency. For example, in order to purchase goods from Australia, buyers must convert their currency into Australian dollars (AUD) to make the purchase. The increased demand for the AUD will put upward pressure on it.
Trade surpluses and deficits exemplify a nation's competitive standing in international trade. Countries with a large trade deficit are net buyers/importers of international goods, resulting in more of their currency being sold to purchase other nations' currencies in order to pay for the international goods. This type of situation is likely to have a negative impact on the value of an importing country's currency.

Political Conditions
The political landscape of a nation plays a major role in the economic outlook for that country and, consequently, the perceived value of its currency. Forex traders are constantly monitoring political news and events to gauge what moves, if any, a country's government may take in the economy. These can include measures from  increasing government spending to tightening restrictions on a particular sector or industry.
An upcoming election is always a major event for currency markets, as exchange rates will often react more favorably to parties with fiscally responsible platforms and governments willing to pursue economic growth.
The fiscal and monetary policies of any government are the most important factors in its economic decision making. Central bank decisions that impact interest rates are keenly watched by the forex market for any changes in key rates or future outlooks. (For a closer look into monetary policy, see How The U.S. Government Formulates Monetary Policy.)
Economic Releases
Economic reports are the backbone of a forex trader's playbook. Maintaining an economic report calendar is crucial to staying current in this ultra-fast paced market