Cross ref :http://awanginvest.com/?p=692
August 28, 2008 – 6:17 pm
I am still acting moderator for Tradingsuccess blog as some urgent matters have claimed our mentor to fly off again.
Since the August seminar at SMU is just over from last weekend, my post is aimed at the newbies again.
Many of the attendees may not be familiar with the history or terms for forex trading.
Forex or FX are terms used to describe the trading of the world’s many currencies. The Forex Market is the largest market in the world, with trades amounting to more than USD 3 trillion every day. Most Forex trading is speculative with a low percentage of market activity representing governments’ and companies’ fundamental currency conversion needs.
There is also another aspect to fixed income market. The term fixed income is used to describe a collection of securities which have predefined pay-out terms. An example is the CD or Certificate of Deposit when one deposits an amount of money and receives a given amount of money which includes both the original deposit plus interest earned at maturity.
Fixed income securities come in various maturity dates. Those with initial maturities of one year or less trade in what is the Money Market. This term comes from short-term instruments which are very liquid and often trade between banks. Money market instruments include Banker’s Acceptance or a Draft or Bill of Exchange, Municipal Notes, Certificates of Deposits, Treasury Bills, and Commercial papers.
Most of these instruments are out of the realm of the individual traders but a handful can be traded via the futures markets.
Since the fixed income market is driven by interest rates, ie prices are inversely related to yields, there are factors which impact on rates to influence prices. The biggest driver of these rates is monetary policy, which central banks make in respect to the level of domestic interest rates. Central banks directly control interest rates in the short-term at least, and they do have a heavy influence over the direction of interest rates.
Other less direct influencers are fiscal policy, general economic growth, employment, inflation and currency exchange rates and trades.
Hence, it is advisable to track the key economic news data that are coming out each week which I post almost every week day at IDkit at www.awanginvest.com under Archives.
There are some terms/scenarios newbies must understand:
24 hour trading
One of the major advantages of trading Forex is the opportunity to trade 24 hours a day from Sunday evening (20:00 GMT) to Friday evening (22:00 GMT). This gives you a unique opportunity to react instantly to breaking news that is affecting the markets.
The Forex market is so liquid that there are always buyers and sellers to trade with. The liquidity of this market, especially of the major currencies, helps ensure price stability and narrow spreads. The liquidity comes mainly from banks that provide liquidity to investors, companies, institutions and other currency market players.
The fact that Forex is often traded without commissions makes it very attractive as an investment opportunity for investors who want to deal on a frequent basis.
Trading the “majors” is also cheaper than trading other cross because of the high level of liquidity. 100:1 Leverage for some trading platforms.
- Leverage (gearing) enables you to hold a position worth up to 100 times more than your margin deposit. For example, a USD 10,000 deposit can command positions of up to USD 1,000,000 through leverage. You can leverage the first USD 25,000 of your investment up to 100 times and additional collateral up to 50 times. However, with money management, you would not trade with such high leverage permitted by the trading platforms.
Profit potential in falling markets
Since the market is constantly moving, there are always trading opportunities, whether a currency is strengthening or weakening in relation to another currency. When you trade currencies, they literally work against each other. If the EURUSD declines, it is because the US dollar gets stronger against the euro and vice versa. So, if you think the EURUSD will decline against the dollar, you would sell EUR now and then later you buy euro back at a lower price with a profit. The opposite trading scenario would occur if the EURUSD appreciates.
The spread is the difference between the price that you can sell currency at or BID and the price you can buy currency at ASK. The spread on majors is usually 3 pips under normal market conditions.
- A pip is the smallest unit by which a cross price quote changes. When trading Forex you will often hear that there is a 3-pip spread when you trade the majors. This spread is revealed when you compare the bid and the ask price, for example EURUSD is quoted at a bid price of 0.9875 and an ask price of 0.9878. The difference is USD 0.0003, which is equal to 3 “pips”.
- On a contract or position, the value of a pip can easily be calculated. You know that the EURUSD is quoted with four decimals, so all you have to do is cancel out the four zeros on the amount you trade and you will have the value of one pip. Thus, on a EURUSD 100,000 contract, one pip is USD 10. On a USDJPY 100,000 contract, one pip is equal to 1000 yen, because USDJPY is quoted with only two decimals.
You can read more about Forex if you learn to use the search engine for more.
ANA aka IDKIT