Why should I care about the Forex market?
|
Well, what's on your long-term to-do list?
|
Successfully trading on the Forex market can help you check any of these off your to-do list! Forex is simple to understand, simple to start from a laptop or PC, and we are here to help you and educate you along the way! |
What are the ten things about Forex that I'm about to learn on this page?
|
|
What is the Foreign Currency Exchange/Market (What is Forex)?
Wall Street Journal Sept. 2010
Great question! The Foreign Currency Market is the largest financial market in the world. Most people are familiar with the stock market, where the stocks of individual businesses are traded (NYSE, NASDAQ, Tokyo, London, etc.). The Foreign Currency Market or Foreign Currency Exchange (shortened to Forex, or FX) is where currencies are traded. In a sense, a currency is like a country’s stock. From all around the world, different countries, hedge funds, large and small banks, large and small companies and most importantly, Windsor Park FX members just like you trade currency and that causes the exchange rates to fluctuate. Because of this, every day the volume in the Forex market is over 25 times higher than the largest stock exchange in the world. That’s not just Billions, it's Trillions traded every day.
Because of the massive amount of volume traded in Forex, most savvy traders include currencies in their portfolio to help diversify and spread out their risk. Not only does the FX market allow significantly higher liquidity (due to the previously mentioned volume), but Forex brokers around the world offer higher leverage than any other financial market is able to provide.
Here Come the Currencies, Two-by-Two
Unlike stocks, currencies are traded in pairs (just like an exchange rate). So when you see the EURUSD currency pair, it represents the Euro Dollar value versus the U.S. Dollar value in the form of an exchange rate. When the rate goes up, the Euro is getting stronger in relation to the U.S. Dollar; and when the rate goes down, the Euro is getting weaker against the U.S. Dollar. If, for example, there is a crisis in Europe that causes people to lose faith in the Euro Dollar and shift their money into U.S. Dollars, then the EURUSD exchange rate will go down (U.S. Dollar gets stronger). And later, if the U.S. is experiencing a crisis of its own, that may cause people to lose faith in the U.S. Dollar and shift their money into Japanese Yen, or British Pounds, or Canadian Dollars. Then, those currencies would gain against the U.S. Dollar. It takes longer to explain it than it does to see it happen on a chart. In the time that it took you to read this paragraph, the exchange rates for each of those examples has changed about 27 times.
There are many currencies to trade (see Windsor Park FX’s Testing Results page for a short list), and they are combined with many others into pairs. The previous example of the Euro and the U.S. Dollar is written in the code EURUSD. Other currencies, like the Great British Pound and the Japanese Yen are coded GBPJPY. When the exchange rate goes up, the first currency in the pair is getting stronger and the second currency is getting weaker. When the exchange rate goes down, the first currency is getting weaker and the second is getting stronger, comparatively. Does it seem like you just read that? You’re correct; it was in the previous paragraph. But you’ll be amazed at how often repetition helps you learn. …repetition helps you learn.
Secret Codes…Shhh!
Just like each stock has its own symbol, each currency has its own symbol or code. The following chart includes the most commonly traded currencies. There are many more!
Because of the massive amount of volume traded in Forex, most savvy traders include currencies in their portfolio to help diversify and spread out their risk. Not only does the FX market allow significantly higher liquidity (due to the previously mentioned volume), but Forex brokers around the world offer higher leverage than any other financial market is able to provide.
Here Come the Currencies, Two-by-Two
Unlike stocks, currencies are traded in pairs (just like an exchange rate). So when you see the EURUSD currency pair, it represents the Euro Dollar value versus the U.S. Dollar value in the form of an exchange rate. When the rate goes up, the Euro is getting stronger in relation to the U.S. Dollar; and when the rate goes down, the Euro is getting weaker against the U.S. Dollar. If, for example, there is a crisis in Europe that causes people to lose faith in the Euro Dollar and shift their money into U.S. Dollars, then the EURUSD exchange rate will go down (U.S. Dollar gets stronger). And later, if the U.S. is experiencing a crisis of its own, that may cause people to lose faith in the U.S. Dollar and shift their money into Japanese Yen, or British Pounds, or Canadian Dollars. Then, those currencies would gain against the U.S. Dollar. It takes longer to explain it than it does to see it happen on a chart. In the time that it took you to read this paragraph, the exchange rates for each of those examples has changed about 27 times.
There are many currencies to trade (see Windsor Park FX’s Testing Results page for a short list), and they are combined with many others into pairs. The previous example of the Euro and the U.S. Dollar is written in the code EURUSD. Other currencies, like the Great British Pound and the Japanese Yen are coded GBPJPY. When the exchange rate goes up, the first currency in the pair is getting stronger and the second currency is getting weaker. When the exchange rate goes down, the first currency is getting weaker and the second is getting stronger, comparatively. Does it seem like you just read that? You’re correct; it was in the previous paragraph. But you’ll be amazed at how often repetition helps you learn. …repetition helps you learn.
Secret Codes…Shhh!
Just like each stock has its own symbol, each currency has its own symbol or code. The following chart includes the most commonly traded currencies. There are many more!
Currency Abbreviations
|
* Take notice that the Euro (EUR) doesn’t conform to the “first two letters for the country, last letter for the currency” format, and that’s okay. Also, one of those interesting things about the Swiss Franc (CHF) is that they use the Latin name for Switzerland: Confœderatio Helvetica (Latin for Swiss Confederation). That is such a long name for such a small country!
|
Within the Pair: Base Currency vs. Counter Currency
When currencies are arranged in pairs, there is a dominant currency and a counter currency. The dominant currency is always listed first and remains constant as the pair’s exchange rate fluctuates. The second currency is the counter currency and its value fluctuates against the base currency. The EUR is always listed first in these pairs; the GBP is also listed first except against the EUR, etc. The JPY is always the counter currency (always listed 2nd). The currencies in the chart above are mixed into the following 19 pair combinations and include a range of commonly traded pairs as well as very obscure pairs.
When currencies are arranged in pairs, there is a dominant currency and a counter currency. The dominant currency is always listed first and remains constant as the pair’s exchange rate fluctuates. The second currency is the counter currency and its value fluctuates against the base currency. The EUR is always listed first in these pairs; the GBP is also listed first except against the EUR, etc. The JPY is always the counter currency (always listed 2nd). The currencies in the chart above are mixed into the following 19 pair combinations and include a range of commonly traded pairs as well as very obscure pairs.
When looking at the chart above, don’t be fooled into thinking “the more pairs a currency has, the stronger it must be.” It doesn’t work that way. Nearly every 4 out of 5 trades around the world use the EUR, GBP, USD, and JPY. Out of those top four currencies, the Euro is the dominant pair with the most trade volume. The Euro pairs are such a large part of the market, it’s as if Coca-Cola and Pepsi merged and only sold one flavor, the EURUSD. That doesn’t make the Euro better, it’s just traded more often, so there is a lot more liquidity.
Currency Pair Value (or Buy Low, Sell High)
There is no denying that there are many factors that cause a currency rate to fluctuate. Some of these factors include but are not limited to: analysis of the previous market movement (technical analysis), seasonal flow (such as a foreign car maker sending its monthly profit back to the company’s headquarters), and straightforward supply and demand.
When you open a currency pair trade (buy or sell), you instantaneously buy one currency and sell the other. When you close that trade you instantaneously sell the currency you bought and buy the currency you sold. All of that happens in the broker’s system, and is invisible to you. All you’ll see is if you opened a BUY or SELL trade for the pair.
The first currency in the pair is the base currency. So, if you open a BUY trade on the EURUSD pair when the exchange rate is at 1.25, you are essentially trading 1.25 U.S. Dollars to buy 1 Euro Dollar. Then, if you close that BUY trade when the EURUSD pair’s exchange rate is at 1.50 you will trade the Euro Dollar that you have back into 1.50 U.S. Dollars. Here’s the recap: you opened a BUY trade on the EURUSD pair at 1.25 because you thought the exchange rate would go higher. Later, when it did go higher to 1.50, you closed your BUY trade on the EURUSD pair for a profit of 0.25. Buy low, Sell high. Or more accurately, open a Buy trade low, then close that same Buy trade high. Easy right?
Conversely, you can take the above example and flip it. Since the currencies are traded in pairs, when you open a trade you are buying one currency and selling the other in the same instant. When you close that same trade, you are selling one currency and buying the other in the same instant. Take another look at the example above. The exchange rate went up from 1.25 to 1.50 over time. For this second example, let’s assume the exchange rate dropped from 1.25 to 1.10. So, based on the training and education you continue to get with Windsor Park FX, you open a SELL trade on the EURUSD when it is at 1.25 because you believe it will drop below that level. Later, when it does drop, you close the SELL trade on the EURUSD when it hits 1.10 and you make the difference, 0.15 profit.
Currency Pair Value (or Buy Low, Sell High)
There is no denying that there are many factors that cause a currency rate to fluctuate. Some of these factors include but are not limited to: analysis of the previous market movement (technical analysis), seasonal flow (such as a foreign car maker sending its monthly profit back to the company’s headquarters), and straightforward supply and demand.
When you open a currency pair trade (buy or sell), you instantaneously buy one currency and sell the other. When you close that trade you instantaneously sell the currency you bought and buy the currency you sold. All of that happens in the broker’s system, and is invisible to you. All you’ll see is if you opened a BUY or SELL trade for the pair.
The first currency in the pair is the base currency. So, if you open a BUY trade on the EURUSD pair when the exchange rate is at 1.25, you are essentially trading 1.25 U.S. Dollars to buy 1 Euro Dollar. Then, if you close that BUY trade when the EURUSD pair’s exchange rate is at 1.50 you will trade the Euro Dollar that you have back into 1.50 U.S. Dollars. Here’s the recap: you opened a BUY trade on the EURUSD pair at 1.25 because you thought the exchange rate would go higher. Later, when it did go higher to 1.50, you closed your BUY trade on the EURUSD pair for a profit of 0.25. Buy low, Sell high. Or more accurately, open a Buy trade low, then close that same Buy trade high. Easy right?
- Open the BUY trade at 1.25, Close the trade at 1.50, pocket the profit!
Conversely, you can take the above example and flip it. Since the currencies are traded in pairs, when you open a trade you are buying one currency and selling the other in the same instant. When you close that same trade, you are selling one currency and buying the other in the same instant. Take another look at the example above. The exchange rate went up from 1.25 to 1.50 over time. For this second example, let’s assume the exchange rate dropped from 1.25 to 1.10. So, based on the training and education you continue to get with Windsor Park FX, you open a SELL trade on the EURUSD when it is at 1.25 because you believe it will drop below that level. Later, when it does drop, you close the SELL trade on the EURUSD when it hits 1.10 and you make the difference, 0.15 profit.
- Open the SELL trade at 1.25, Close the trade at 1.10, pocket the profit!
Halfway down this page and you've learned a lot already, but wait, there's more!
Flickr adrinphoto
Your Favorite Fruit, and Longer Prices
If you go to the grocery store tomorrow, and (because of supply and demand) the price of your favorite fruit has risen to $1.20/lb, you might choose to wait until it drops back to its normal price of $1.13/lb. This is similar to what many Windsor Park FX members do with the currencies they watch. Now imagine that the fruit price had more numbers. So instead of $1.13/lb for your favorite fruit, the price is $1.1256. When you have access to more information like that, you are able to make a clearer decision about whether you want the fruit at that price, or whether you’ll wait to get the fruit because you’ve been watching the price fall recently.
The exchange rate for any currency pair will look something like this:
- 1.1234 (most EUR pairs, USD pairs, and others)
- 120.34 (JPY pairs)
“Wait a second… What’s a pip?”
A pip is a measurement of distance travelled, like an inch. You use inches on a ruler, traders use pips on a chart. For many years, the pip was the smallest measurement of movement on any chart. Recently (in the past few years) most Forex brokers have changed to showing charts with an additional digit, measured in micropips.
- 1.12345 (most EUR and USD pairs)
- 120.345 (JPY pairs)
To give you an idea of how important pips are, read the following:
- The Daily Range of a currency pair is how far the exchange rate moved (highest – lowest) on a single day. The Average Daily Range (ADR) is an average of a number of daily ranges (usually between 10 to 30 days). Of course, by its nature, the ADR changes every day based on a number of the previous days’ movements. On one particular day in the past, the ADR of the EURUSD was 191.2 pips. You could also say that the ADR for the EURUSD was 1912 micropips. The ADR of the EURCHF was 89.7 pips, and the ADR of the EURJPY was 153.5 pips. Now that you know the ADRs from these three currency pairs, what can you surmise? Well according to those numbers, the EURUSD has had greater volatility and has moved more per day than the other two, and the EURCHF has only moved about half as much. Usually, this difference is due to the fact that there are more traders around the world pushing the EURUSD’s exchange rate (or price) up and down. By comparison, there are far fewer traders around the world trading the EURCHF and the EURJPY.
Leverage is Neutral, Neither Good or Bad
Forex brokers in the U.S. offer leverage ratios up to 50:1. One way of looking at that is, for every $1 you put towards a trade, the broker puts an additional $49 into the market with you. When you close that trade at a profit, they remove their $49, and you get your $1 plus whatever profit you made while trading $50. That’s the quick answer.
Some people worry about using too much leverage when they are in a drawdown. But of course they don’t complain when their trades are more profitable because of leverage! That’s okay, we’re all human. Windsor Park FX educates its members to trade conservatively, and in doing so, Windsor Park members are rarely worried about small drawdowns and are excited about their larger profits because of leverage!
More Math? Why Margin Matters
Here the best news about this section. You don’t have to do the math. The broker’s MT4 trading station will do the math as you open and close trades. But, just like you took driver’s education when you started learning how to drive, you still need to know how margin works before you start trading.
Margin is like escrow. When you place a trade, the broker holds onto a small portion of your account (margin) while that trade is open, like putting the money in escrow. When that trade closes, the broker returns that margin back to your account (it never really leaves the account, but you can’t use it while that trade is open).
The other way of explaining margin is this. When you open a trade for 10,000 EURUSD (equal to 0.10 lots), the margin required to hold that trade would only be $240 if the EURUSD exchange rate was 1.2000. How did we arrive at $240? Here comes the math. To open that trade for 10,000 EURUSD, you take the exchange rate of 1.2000 and multiply it by the amount of EURUSD you want to trade which is 10,000 (or 0.10 lots) and the answer is: you would need U.S. $12,000 in margin if you didn’t have any leverage. But you do have access to leverage, and it is 50:1. So take that $12,000 margin needed, divide it by 50 (leverage) and the answer is $240 needed for margin on a 0.10 lot EURUSD trade. To recap: your $240 is trading in the market like it is $12,000.
That’s enough math for now, don’t you think?
So, How Much is a Pip Worth?
By the way, some people are surprisingly curious about what the dollar value of a pip is. There’s more math to figure that out, but for now I’ll let you copy out of the back of the textbook.
The U.S. Dollar value of a pip is different for most currency pairs. Also, the value of a pip is dependent on how many lots you are trading. And it fluctuates with the exchange rate. With all those variables, you can now see why we ballpark the price of a pip, rather than try to nail it down every time someone is curious. So the next time someone asks you “How much is a pip worth?”, you can say:
When trading a full lot, the value of one pip’s worth of movement equals about $10. When trading a tenth of a lot, about $1. And a hundredth of a lot equals about $0.10.
- 1.0 lot (a standard lot, normally traded on a $100,000 account)
- 0.10 lots (a mini lot, or a tenth of a full lot, normally traded on a $10,000 account)
- 0.01 lots (a micro lot, or one hundredth of a lot, normally traded on a $1,000 account)
- Value of a pip in U.S. Dollars, when moving from 1.2000 to 1.2001
- One pip = (one ten-thousandth or 0.0001) x (lot size 0.10 or 10,000) = $1
Bid/Ask, Buy/Sell, Long/Short?
When you open a Buy order on a currency pair, you are “going long”. Conversely, when you open a Sell order, you are “going short”. Whether the trade you open is a Buy or a Sell, you’ll see two different prices: the Bid price and the Ask price.
Imagine a limbo party game, but this time it has two limbo bars. The bottom bar is the bid price and the top bar is the ask price. The difference between them is the spread (remember to check your Standard Forex Terms pdf for any words you don’t recognize). All throughout the day as the exchange rates change and worldwide liquidity changes (like the ocean tides) the spread will fluctuate as well. The spread is how the broker gets paid to provide their services to you. When you open a Sell trade, it starts at the top limbo bar and has to move down below where the bottom limbo bar was before the Sell trade becomes profitable. Also, when you open a Buy trade, it starts at the bottom limbo bar and has to move above where the top limbo bar was before the Buy trade becomes profitable. The moment you open either of these trades, you’ll see them go a little negative. That is normal and it is the amount of the spread that your trade has to cover before you make profit.
And that’s the Long and the Short of it.
Important Info Here:
A reminder before you read the next paragraph. Windsor Park FX provides education and makes no claims about their member’s trading performance. Get ready. Here is the spot where you get to read the warnings about all trading, in any market:
It should be understood that if you decide to do any of (but not limited to) the following, currency trading, stock trading, futures trading, banking strategies, and other investment techniques, any of them could involve high risk. There is always a relationship between high reward and high risk. Any type of market or trade speculation that can yield an unusually high return on investment is subject to unusually high risk. Only surplus funds should be placed at risk. For more information, go to www.cftc.gov. Now that you’ve read that, here is another sentence you’ve heard before; but feel free to read it and memorize it again:
Past performance is no guarantee of future results.
Windsor Park FX is here to answer your questions and help you along your educational journey. Whether you are a beginner or a professional trader we are here to help. So don’t hesitate to contact us via email or phone.
info@WindsorParkFX.com 425-223-4567
|
|
