Forex Essentials

FOREX is the term that stands for FOREIGN EXCHANGE MARKET

FOREX is the international market for the free trade of currencies where any trader can place orders to buy one currency with another currency. For example, a trader may want to buy Euros with US dollars, and can use the forex market to do this. FOREX is the LARGEST market in the world and is estimated to have an average DAILY TURNOVER of 5 trillion dollars. The top 5 major currencies in FOREX are the US Dollar, the European Euro, The Japanese Yen, The BRITISH POUND and the SWISS FRANC.

So what gets traded on FOREX and how exactly does it work? Generally speaking, the price of any FOREX asset is determined by simple supply and demand economics. For an example, when ramping up production for the iPhoneX Apple would first need exchange its U.S. dollars for Japanese yen when purchasing electronic parts from Japan for their products.  So one can imagine when many companies use electronic parts from Japan for their products that the demand for Japanese Yen is going to increase, which in turn affects the price of the Yen to also increase.

So with all of this exchanging going on all around the world, it’s easy to see that the exchange rates are always moving. The RATE & MAGNITUDE of fluctuation in the currency prices is called VOLATILITY, volatility is that from which trading opportunities & risks are born. Beginner traders, before they start trading, have to know what assets to trade, how to trade these assets, and how to predict the price movement in the future and can use technical, fundamental, sentimental analysis (or any combination thereof) for this purpose.

 

Market Players

Traders, Corporations, Governments, Investment Funds and Banks/Central Banks are the main players in the Forex markets, a geographically multifarious Forex clientele, and as a consequence so is the market as a whole. In practice, the foreign exchange market is made up of a network of players located in various hubs around the world. The main difference among these market participants is their level of capitalization and sophistication, where the elements of sophistication mainly include: money management techniques, technological level, research abilities, level of discipline, so on and so forth.

BANKS

There are hundreds of banks participating in the Forex network. Whether big or small scale, banks participate in the currency markets not only to offset their own foreign exchange risks and that of their clients, but also to increase wealth of their stock holders. Each bank, although differently organized, has a dealing desk responsible for order execution, market making and risk management. Accounting for the majority of the transacted volume, there are around 25 major banks such as Deutsche bank, UBS, and others such as Royal bank of Scotland, HSBC, Barclays, Merrill Lynch, JP Morgan Chase, and still others such as Morgan Stanley, and so on, which are actively trading in the Forex market. Among these major banks, huge amounts of funds are being traded in an instant. While it is standard to trade in 5 to10 million Dollar parcels, quite often 100 to 500 million Dollar parcels get quoted. Deals are usually transacted by telephone with brokers or via an electronic dealing terminal connection to their counter party.

Many times banks also position themselves in the currency markets guided by a particularly view of the market prices. What probably distinguishes them from the non-banking participants is their unique access to the buying and selling interests of their clients. This “insider” information can provide them with insight to the likely buying and selling pressures on the exchange rates at any given time. But while this is an advantage, it is only of relative value: no single bank is bigger than the market – not even the major global brand name banks can claim to be able to dominate the market. In fact, like all other players, banks are vulnerable to market moves and they are also subject to market volatility.

CENTRAL BANKS / GOVERNMENTS

The majority of developed market economies have a central bank as their main monetary authority. The role of central banks tends to be diverse and can differ from country to country, but their duty as banks for their particular government is not trading to make profits but rather facilitating government monetary policies (the supply and the availability of money) and to help smoothen out the fluctuation of the value of their currency (through interest rates, for example).

Central banks hold foreign currency deposits called “reserves” also known as “official reserves” or “international reserves”. This form of assets held by central banks is used in foreign-relation policies and indicates a whole lot about a countries’ ability to repair foreign debts and also indicates a nation’s credit rating.

While in the past reserves were mostly held in gold, today they are mainly held in Dollars. It is common for central banks nowadays to possess many currencies at once. No matter what currencies the banks own, the Dollar is still the most significant reserve currency. The different reserve currencies that central banks hold as assets can be the US Dollar, Euro, Japanese Yen, Swiss Franc, etc. They can use these reserves as means to stabilize their own currency. In a practical sense this means monitoring and checking the integrity of the quoted prices dealt in the market and eventually use these reserves to test market prices by actually dealing in the interbank market. They can do this when they think prices are out of alignment with broad fundamental economic values. The intervention can take the form of direct buying to push prices higher or selling to push prices down. Another tactic that is adopted by monetary authorities is stepping into the market and signaling that an intervention is a possibility, by commenting in the media about its preferred level for the currency. This strategy is also known as jawboning and can be interpreted as a precursor to official action. Most central bankers would much rather let market forces move the exchange rates, in this case by convincing market participants to reverse the trend in a certain currency.

BUSINESSES & CORPORATIONS

Not all participants have the power to set prices as market makers. Some just buy and sell according to the prevailing exchange rate. They make up a substantial allotment of the volume being traded in the market. This is the case of companies and businesses of any size from a small importer/exporter to a multi-billion Dollar cash flow enterprise. They are compelled by the nature of their business – to receive or make payments for goods or services they may have rendered – to engage in commercial or capital transactions that require them to either purchase or sell foreign currency. These so called “commercial traders” use financial markets to offset risk and hedge their operations. Non-commercial traders, instead, are the ones considered speculators. It includes large institutional investors, hedge funds and other entities that are trading in the financial markets for capital gains.

 

INVESTMENT FUNDS

With Forex trading surging in recent decades, and as more individuals earn their living trading, the popularity of riskier investment vehicles like hedge funds has increased. These participants are basically international and domestic money managers. They can deal hundreds of millions, as their pools of investment funds tend to be very large. Because of their investment charters and obligations towards their investors, the bottom line of the most aggressive hedge funds is to achieve absolute returns besides of managing the total risk of the pooled capital. Foreign exchange advantage factors like liquidity, leverage and relatively low cost create a unique investment environment for these participants. Generally speaking, fund managers invest on behalf of a range of clients including pension funds, individual investors, governments and even central banks.

Also government-run investment pools known as sovereign wealth funds have grown rapidly in recent years.

TRADERS / BROKERS

What does it mean to directly trade with a market maker? Every market maker has a dealing desk, which is the traditional method that most banks and financial institutions use. The market maker interacts with other market maker banks to manage their position exposure and risk. Every market maker offers a slightly different price in a particular currency pair based on their order book and pricing feeds. As trader, you should be able to produce gains independently if you are using a market maker or a more direct access through an ECN. But nevertheless, it’s always essential to know what happens on the other side of your trades. To gain that insight, you first need to understand the intermediary function of a broker-dealer. The interbank market is where Forex broker-dealers offset their positions, but not exactly the way banks do. Forex brokers don’t have access to trading in the interbank through trading platforms like EBS or Reuters Dealing, but they can use their data feed to support their pricing engines. Enhanced price integrity is a major factor traders consider when dealing in off-exchange products, since most prices originate in decentralized interbank networks.

Before you start trading in the foreign exchange market, one should open an account with a broker. Brokers earn through their commissions or fees for their services. The fees are charged for the difference between buying and selling prices. The broker is reliable as far as deposits and withdrawals are concerned. When you choose a Forex broker you need to find out where he is registered in the regulatory agencies register. In the U.S., the broker he should be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) and must be a member of the NFA. CFTC and NFA have been established to protect merchants from fraud, manipulation, etc. Each broker can verify CFTC registration and NFA membership status as well as his disciplinary history by the phone number or by checking the NFA Web, Select the type of account, registration and account activation. When opening your account, you will need to fill in the forms, of which you need to enter your information such as name, address, city and state of residence; there are usually multiple account types to choose from. The cost of transactions is calculated in pips. This calculation is called a spread. It is where you can compare brokers. You will see that each has a different spread on each currency pair. It is preferable to choose the one broker that has the smallest spread, for your earnings at each store to be higher. Low requirements for margins is one of the best solutions for you. The size of trading one lot may differ from broker to broker (it can be in 1,000, 10,000 and 100,000 units). The broker gives you the best charts and technical analysis that he has. This will also include automatic execution of your order. The trading platform (Online Trading Platform) is a very important segment for each trader. Brokers can offer the MT4 platform. In order to quote prices to their customers and offset their positions in the interbank market, brokers require a certain level of capitalization, business agreements and direct electronic contact with one or several market maker banks. You know from chapter A01 that the Forex spot market works over-the-counter, which means there are no guarantors or exchanges involved. Banks wanting to participate as primary market makers require credit relationships with other banks, based on their capitalization and creditworthiness. The more credit relationships they can have, the better pricing they will get. The same is true for retail Forex brokers: depending on the size of the retail broker in terms of capital available, the more favourable pricing and effectiveness it can provide to its clients. Usually this is so because brokers are able to aggregate several price feeds and always quote the tighter average spread to its retail customers.

 

Exchange Rates & Quotations

Before trading FOREX one must comprehend that Forex trading is the simultaneous buying of one currency and selling of another, because the currencies are traded in pairs. For example, given two discreet currencies, the Euro and the U.S. dollar, in FOREX, these are traded as the Euro-Dollar. Similarly, the British pound and the Japanese yen would be referred to and traded as the Pound-Yen. In Forex, currency pairs are perceived to be single units, or financial instruments, that are bought and sold as such. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency. The currency pair indicates how much of the quote currency is needed to purchase one unit of the base currency. Currently the top 5 major currency pairs traded in the Forex market are:

EUR/USD | The Euro – USD                            

USD/JPY | The USD – Yen                               

GBP/USD | The Pound – USD                         

AUD/USD | The Aussie Dollar – USD            

USD/CHF | And the USD – Swiss Franc       

 

Is It a Direct or Indirect Quote?

Direct Quotation: Under this method, the quote is expressed in terms of domestic currency. This means that the rate expresses how one unit of domestic currency relates to the foreign currency. Therefore, if unit of the domestic currency were to be exchanged, how many units of the foreign currency would it beget? This method is also alternatively referred to as the price quotation method.

Therefore, if the value of the domestic currency increases, a smaller amount of it would have to be exchanged. Conversely a decline in value would create a situation where a large amount of the domestic currency would have to be exchanged. Hence, it can be said that the quotation rate has an inverse relationship with the value of the domestic currency. The value of the domestic currency is assumed to be 1 in case of a direct quotation. The price being quoted explains the number of units of foreign currency that can be exchanged for a single unit of domestic currency.

Example: An example of direct quotation would be:

USD/JPY: 142.15/18

This quote suggests that roughly 142 units of Japanese Yen can be exchanged for 1 unit of United States Dollar. The two rates provided are bid and ask rates i.e. the different rates at which the market maker is willing to buy and sell the currency.

Usage: The direct quote method is one of the most widely used quotation methods across the world. This is the norm for quoting Forex prices and is assumed de facto until another method has been explicitly mentioned.

Indirect Quotation: This method is the opposite of the direct quotation method. Under this method, the quote is expressed in terms of foreign currency. Therefore this rate assumes one unit of foreign currency. It then expresses how many units of domestic currency are required to obtain a single unit of a foreign currency. Sometimes this quote is also expressed in terms of 100 units of foreign currency. This method is often referred to as the quantity quotation method. Since this method is quoted in terms of foreign currency, the quoted rate has a direct correlation with the domestic rate. If the quote goes up, so does the value of the domestic currency and vice versa.

Example: An example of indirect quotation would be:

EUR/USD: 0.874/79

In this case, the first currency i.e. EUR is the domestic currency. Therefore, the indirect quote refers to approximately 0.875 EUR being exchanged for 1 unit of USD. Once again the two rates provided are the bid ask rate i.e. the two different rates at which market makers are willing to buy and sell the currency.

Usage: The usage of indirect currency quotation is extremely rare. It is only in the Commonwealth countries like United Kingdom and Australia that the indirect quotation method is used as a result of convention.

Know the Bid Ask Price

Every currency pair has a “bid” (buy) price and an “ask” (sell) price. When buying a currency pair, this is called “going long,” and shows how much needs to be paid to purchase one unit of the base unit. When the bid price is used for selling a currency pair, this is called “going short,” and shows how much the market will pay for the currency quote in relation to the base currency.

Understand a Cross Currency

This is where a currency quote is given without the U.S. dollar as one of its components, including EUR/GBP for euros and British pounds, or EUR/JPY for euros and Japanese yen. This isn’t done as frequently, since the U.S. dollar is the international reserve currency.

Pip vs. Spread

The difference between the bid and ask price is called a spread. A pip is the smallest amount a price can move in any currency quote. For example, for the quote, EUR/USD 1.2700/05, the spread would be 0.0005 or 5 pips, which are also called points. Familiarizing yourself with these five basics of a foreign exchange chart (fx chart) makes it easier to see the value of one currency relative to other currencies. Having a firm grasp on currency values is vital to making smart decisions about international business transactions.

So for a general example, a Euro-Dollar trader may feel, or have performed some ANALYSIS that indicates the US economy will continue to weaken which reduces the value of the US Dollar that trader would then execute a buy Euro Dollar order, and by doing so, they will have bought Euros in the expectation that they will rise versus the US Dollar. So really what we are talking about here, the modus operandi of most trading, simply put, is really just a difference engine. A trader buys some amount of currency pairs, holds onto them while the exchange rates move, and then changes them back.. Ideally making some profit along the way. The decision of which asset to trade, when to enter and exit the trade, and whether to go long or short is of course entirely up to the trader.

 

Characteristics of the Forex Market

Flexibility: Forex exchange markets provide traders with a lot of flexibility. This is because there is no restriction on the amount of money that can be used for trading. Also, there is almost no regulation of the markets. This combined with the fact that the market operates on a 24 by 7 basis creates a very flexible scenario for traders. People with regular jobs can also indulge in Forex trading on the weekends or in the nights. However, they cannot do the same if they are trading in the stock or bond markets or their own countries! It is for this reason that Forex trading is the trading of choice for part time traders since it provides a flexible schedule with least interference in their full time jobs.

Transparency: The Forex market is huge in size and operates across several time zones. Despite this, information regarding Forex markets is easily available. Also, no country or Central Bank has the ability to single-handedly corner the market or rig prices for an extended period of time. Short term advantages may occur to some entities because of the time lag in passing information. However, this advantage cannot be sustained over time. The size of the Forex market also makes it fair and efficient!

Trading Options:   Forex markets provide traders with a wide variety of trading options. Traders can trade in hundreds of currency pairs. They also have the choice of entering into spot trade or they could enter into a future agreement. Futures agreements are also available in different sizes and with different maturities to meet the needs of the Forex traders. Therefore, Forex market provides an option for every budget and every investor with a different appetite for risk taking. Also, one needs to take into account the fact that Forex markets have a massive trading volume. More trading occurs in the Forex market than anywhere else in the world. It is for this reason that Forex provides unmatched liquidity to its traders who can enter and exit the market in a matter of seconds any time they feel like!

Transaction Costs: Forex market provides an environment with low transaction costs as compared to other markets. When compared on a percentage point basis, the transaction costs of trading in Forex are extremely low as compared to trading in other markets. This is primarily because Forex market is largely operated by dealers who provide a two way quote after reserving a spread for themselves to cover the risks. Pure play brokerage is very low in Forex markets.

Leverage: Forex markets provide the most leverage amongst all financial asset markets. The arrangements in the Forex markets provide investors to lever their original investment by as many as 20 to 30 times and trade in the market! This magnifies both profits and gains. Therefore, even though the movements in the Forex market are usually small, traders end up gaining or losing a significant amount of money thanks to leverage!

Counterparty Risks:  Forex market is an international market. Therefore, regulation of the Forex market is a difficult issue because it pertains to the sovereignty of the currencies of many countries. This creates a scenario wherein the Forex market is largely unregulated. Therefore, there is no centralized exchange which guarantees the risk free execution of trades. Therefore, when investors or traders enter into trades, they also have to be cognizant of the default risk that they are facing i.e. the risk that the counterparty may not have the intention or the ability to honor the contracts. Forex trading therefore involves careful assessment of counterparty risks as well as creation of plans to mitigate them.

Leverage Risks:  Forex markets provide the maximum leverage. The word leverage automatically implies risk and a gearing ratio of 20 to 30 times implies a lot of risk! Given the fact that there are no limits to the amount of movement that could happen in the Forex market in a given day, it is possible that a person may lose all of their investment in a matter of minutes if they placed highly leveraged bets. Novice investors are more prone to making such mistakes because they do not understand the amount of risk that leverage brings along!

Operational Risks: Forex trading operations are difficult to manage operationally. This is because the Forex market works all the time whereas humans do not! Therefore, traders have to resort to algorithms to protect the value of their investments when they are away. Alternatively, multinational firms have trading desks spread all across the world. However, that can only be done if trading is conducted on a very large scale. Therefore, if a person does not have the capital or the know how to manage their positions when they are away, Forex markets could cause a significant loss of value in the nights or on weekends.

The Forex market caters to different types of investors with different risk appetites.

 

Factors Affecting Foreign Exchange Rates

While interest rates and inflation are two important factors that affect a country’s economic health, currency exchange rate plays a crucial role in a country’s trade. No wonder, currency exchange rates are widely watched, scrutinized and manipulated by governments. After all, a higher currency translates into expensive exports and cheaper imports in foreign markets, whereas a lower currency makes a country’s exports cheaper and imports expensive in foreign markets. An appreciated currency exchange rate can be expected to lower the country’s balance of trade, whereas a depreciated currency exchange rate simply increases it.

There are several macroeconomic factors that affect a country’s currency exchange rate, and is mainly related to the trading relationship between two countries. It’s needless to say that currency exchange rates are relative and expressed as a comparison of the currencies of two countries. What also needs to be kept in mind is that a currency’s movement is largely driven by global factors, which may not be under the control of a central banker.

So for a better understanding of the factors that drive changes in the currency exchange rates, let’s look at them as short-term and long-term factors:

Short-term factors affecting currency exchange rate

Interest rate: This plays a vital role in the movement of a currency. A weak policy leads to depreciation of the currency, thus resulting in decreased currency exchange rate.

Economic growth: Investors are naturally inclined towards countries with strong economic growth. A country’s currency exchange rate strengthens when the economic scenario is healthy, and there are expectations that the trend will continue.

Trade balance: Any economy’s currency movement is largely affected by this alone. A nation that has more exports than imports experiences trade surplus, which in turn results in gain for the currency, which in turn results in better currency exchange rate.

Inflation: Central bankers always look to curb inflation by increasing interest rates, or vice versa. A rise in rates will support the currency, whereas a fall will cause a fall in demand for the currency, thereby affecting the currency exchange rate.

Commodity imports: When a country largely depends on commodity imports for domestic consumption, its currency usually tends to fall. For example, the increase in gold imports resulted in trade deficit in India, leading to depreciation in the currency. This resulted in a sharp decline in the currency exchange rate.

Political/geopolitical/natural calamities: These also have a negative impact on a country’s currency, since the movement of currency that decides currency exchange rate is largely dependent on day-to-day economic data, fluctuations in the global equity markets and change in commodity prices.

Long-term factors affecting currency exchange rate

Economic growth and inflation: The movement of a currency depends on the expectations of economic growth and inflation over a long period of time. For example, the US economy suffered largely during the financial crisis in 2008. However, the global market pegs the US economy to be bullish, which in turn is strengthening the Dollar index. As far as inflation is concerned, the central bank will always target a lower range as higher inflation results in depreciation of the currency.

Stimulus measures: The market sentiment for a strong currency changes if stimulus is rolled out to make up for capital deficit. More stimulus results in weaker exchange rate for that currency in the global market.

The bottom-line is that before engaging in currency trading, ensure that your research on the subject matter is thorough. Keep yourself abreast with the latest in currency exchange rates independently, or with the help of a qualified broker. After all, knowledge about the market also reduces the chances of you being duped into trading at the wrong time.

Fundamental Analysis

Applied to the currency market, fundamental analysis studies international economic, financial and political factors, their correlation and influence on the behaviour of exchange rates. By this way, it sees what is absent in graphics. Technical and fundamental analysis is the market statistics. The main difference between fundamental analysis of Forex and technical analysis is that the fundamental analysis is based on positions; prices of the currencies in Forex market reflect the supply and demand, which in their turn depend on fundamental economic factors.

The changes in the economy of trading countries, political elections, regulatory actions of financial authorities, natural disasters influence the currency rate. And if one of these events is impossible to predict, the others are quite possible to plan. The date and time of the release of one or another indicator are known in advance. There are so called calendars of economic indicators and the most important events (indicating concrete dates, or approximate time of their release). Accordingly, if we want to create rational and contemporary prognosis, it is possible to predict the future of exchange rate shifts and to derive profit from it.

Don’t over analyse going through too much details. Together with great amount of fundamental factors there exist the dangers of overloading yourself with too much information. Even the experienced traders fall into this trap and cannot take decisions about the price shift. The best approach for fundamentalists is considered to be dealing with some of the most influential indicators than to use an overall list of all fundamental factors. Among the main macroeconomic indicators that influence the shift of the currency rate, the following significant indicators can be distinguished:

Interest Rate: None of the economic and financial indicators track dynamics of the currency market so significantly, as interest rates. Interest rate is considered to be means of influence of Central Bank on national currency and is considered to be one of the chains of state’s monetary policy. Short term interest rates determine the size of percentage by credits, issued by the Central bank for commercial banks. In case of observing a wave of inflation, the Central Bank, depending on set goals, will try to influence the national currency. It is done through regulating interest rates. If a decision is made to take counter inflation means, the Central Bank will increase the level of interest rates. Thereby, the amount of monetary means, being in free circulation, will be shortened, which will bring to containment of the inflation level. If a decision of infusion of money in circulation is made, then accordingly the straps of interest rates will decrease. The higher is the interest rate of the given currency in comparison with the other currencies / large percentage differential/ the more there will be volunteers among foreign investors who will buy that currency in order to place funds on deposit with high interest rate. In short, high interest rates make the given currency attractive as an investment instrument, which means that demand on that currency increases in international exchange market and exchange rate of that currency grows.

Other indicators include but are not limited to:

GDP, Nonfarm payrolls (NFP), Consumer Prices Index, Production Price Index, Employment Cost Index, Durable Goods Orders, Employment Reports, Balance of Payments, Trade Balance, Unemployment Rate, Import Prices, Export Prices, Retail Sales, Building Permits, etc.

 

Technical Analysis

Technical analysis has collected information on market price movements, using a chart and its predicted future trends. The concept of technical analysis is based on the assumption that all the factors that affect or may affect the stock price are already included in the current price. Based on previous trends we can predict the future price movements of shares of a certain company. The primary means of technical analysis are graphs. The concept of technical analysis involves the application of a wide range of graphs. Among which the most significant are: line, bar, and candlestick. The main task of technical analysts, therefore, involves the monitoring of the previous trend of share prices as a basis for predicting future trends – growth, decline or stagnation. For this purpose, technical analysts or chartist, using different techniques such as figures that indicate a change or continuation of trend, indicators, etc. Significant help from modern users of technical analysis provide software solutions – specific programs of technical analysis that simplify the job of “reading” the chart and predict future trends. Technical analysis represents only a tool that can help us in making the right investment decisions.

Fibonacci Levels

The most commonly used method in technical analysis are Fibonacci levels. This method of technical analysis are to obtain lines and support levels. This method is especially good at determining the short-term support and resistance levels. However, there is some less success in the medium and long term levels. The basic logic behind this method is possible to detect the change trend of the top and bottom of each level as determined by Fibonacci coefficients. Another way of applying the Fibonacci levels. Even with this method of technical analysis it is essential to identify the upper and lower point. The specificity of such upper and lower coupling point is that an upper point at an angle beyond the three lines, rather than seven. Bottom line, representing the 38.2% retracement level, through the lower point, above which the withdrawing line at 50.0% and 61.8%. Traders use the Fibonacci retracement levels as support and resistance levels. Because the vast majority of traders, follow the same levels and sets them as support and resistance levels, have become self-fulfilling prophecies. Traders use the Fibonacci levels extended. Again, the majority of those watching these levels and appropriate them, set goals of winning trades. Therefore this tool becomes a self-fulfilling expectation. In an uptrend, the main idea is to monitor the market to retreat to the Fibonacci support level.

Moving Averages

Moving averages are trend indicators and are used by traders. It is a tool to verify existing trends and the end of the trend. They enable the trader to view long-term price movements without the short-term fluctuations. A moving average line will change depending on the number of periods chosen – the higher the number the slower the average. Some traders will play with a different number of moving averages in different time periods, until they find a series of moving averages that they feel best indicates the behaviour of the particular instrument being studied. The moving average should form a support line during upward trends and a resistance line during downward trend. If the upward trend continues, but the moving average line interrupted several times, then it is a good indication that the moving average line chosen is too fast, and not sufficiently adjusted. When a trader is content with the behaviour of the moving average line against the actual prices, s/he may use the line to signify the continuation of a trend or the end of a trend. If the price closes below the moving average line on two occasions in a growing market, it is an indication of the end of the trend and time to exit a long position. The same logic follows in a downward trending market except in reverse. The current price needs to close above the moving average on two occasions to indicate that the downtrend is over. Another way of using moving averages is by the pairs. Many traders will first find the long-term moving average as described above and add a faster moving average (smaller period) as an even earlier indication of the end of the trend. If the shorter moving average crosses the slower moving average, it may signal an earlier exit point trend.

Support and Resistance

Traders use it for the identification of important levels of support and resistance. They can be very useful since many currency pairs usually vary between these levels. When trading in a range the trader uses for the identification of trades, and thereby places an order for purchase near the line support, and an order for sale near the line of resistance. The market follows a price of opening, closing, highest price and the lowest price for the day. These are the basic information required to calculate the support resistance levels. It is uses the information from the previous day to calculate potential levels at which the price will change its direction in the day when we trade. Since many traders monitored support/resistance levels, and the market usually reacts to the same. This gives you the possibility for successful trading. Support/resistance line should be the first place to look when you open your position. It is the primary level of support/resistance. The biggest price movements usually occurs between the support and resistance levels. When price reaches the support/resistance line, you will be able to determine whether to go long position or sell position.  You can set up stop loss above the support/resistance line and initial profit target would be first support line. The same applies to the upward trend. Currency pair touches a few times support/resistance levels then reverses, the level becomes stronger. If the pair is approaching the upper level of resistance, you can sell it and set a protective stop loss immediately above the level of resistance. If the pair continues to move upwards and dash above the level of resistance, it would be considered in ascending breakthrough. The above default short position will be closed (SL), but if you believe that a breakthrough has strong buying power, you can come in again, but this time in a long position. In this case, you can set a protective stop loss (SL) immediately above the first level of resistance. Which has just broken and now acts as support. If the pair is closer to the lower level of support, you can buy a pair and set a stop loss below the level of support. In the Forex market support/resistance strategy does not always work. Sometimes the price will stop immediately to the support/resistance levels.

 

TYPE OF TRADERS

There are three main types of traders: Scalper trader, Daily Traders and Position traders

Scalper Traders use every second to make a profitable trade. They usually make ten profit per each trade. Scalper traders make 30 – 40 trades per day.  It depends from market conditions and market sentiment in the Forex market. This requires great trading skills to chase the sudden market fluctuations. They lose money in most cases because if they are gamblers, not traders. It is needed to avoid this type of traders. They usually use the short time frame from M1-M15 charts.

Daily traders open and close all transactions within a day. They have never been left overnight in the open position. They usually are used in H1, M30 charts for technical analysis while long-term analysis looks at the D1 and H4 charts. Daily traders understand the relationship between risk and profit. This relationship should be proportionately greater in favour of the profitable trades. It can be expected that trades cannot always be recorded in the money. Daily traders usually make 250-300 pips profit per trade.

Positions traders follow long-term trends. They buy and hold open positions. They ignore minor fluctuations in the price during the period of unstable markets. They follow the wave of the main trend that has a long term effect. They realize 1800-2000 pips per trade. They use technical and fundamental analysis for trading. Positions traders traded leverage 100:1 or 200:1 per each trade.

Traders should adopt their own trading strategies for market conditions. Traders make their investment decisions during the strategic planning process. A trader should try to find the faults, with cool heads, in their way of investing. They must have discipline. Psychology of traders are the most important type of traders. One should take the time, to be honest with oneself. Traders that are willing to risk their hard earned money need risk control. They have to control themselves when they are winning or losing trades. A trader has to control his emotions no matter what happens. Does he/she win or lose? It depends on the way you approach your new beginning. You will have the education for this. There are many different ways online for continuing education and webinars. The educated trader learns every day.