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Foreign-Currency-Trading
Foreign-Currency-Trading in the Forex currency trading market does involve risk of losing money. Any investment in the currency exchange system should involve only risk capital.
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Introduction The Forex currency trading system is the largest financial market on earth. It’s average daily foreign-currency-trading volume is more than US$ 1.9 trillion. Compare that with the New York Stock Exchange which has a average daily trading volume of only US$55 billion. All the world’s equity and futures markets together, they would amount to only half the size of the foreign exchange market. Since there are so many buyers and sellers transaction prices are incredibly low. They are less than 1/20 of 1%. One major difference between the stock market and the Forex foreign-currency-trading system is that the Forex doesn’t care if you buy or sell. The stock market favors buyers. And stock traders do not usually prosper in bear markets. But when you trade currency you can sell just a easily as you can buy. There are no restrictions on short selling as there are in the stock market. You can find good trades in rising or falling markets. And you can find them anytime during the day or night because Forex foreign-currency-trading exchange follows the sun. Financial centers around the world are always trading. Thus, Forex offers extremely high market liquidity. Fundamental Analysis – Analyzing developments in political changes and economic developments. A currency acts as a barometer of the economy of a country. A strong currency is a currency that people want to own and indicates a strong economy. And vice versa, a week currency is one that people do not want to own. Each country has its primary interest rate that is set by the country’s central bank. In the U.S. it called the Federal Funds Rate. As the country’s interest rate rises, the value of the country’s currency tends to follow. Reason: A currency that is paying a high rate of interest is more desirable to own. Simply because it pays you more for holding it. Also, a rising interest rate indicates that the economy is growing so fast that it needs to be reigned in. Another major factor is a country’s employment situation. A high level of employment indicates a expanding economy which means a desirable currency. The mechanics of foreign-currency-trading system are virtually the same as other markets. The only difference is that you are buying one currency and selling another at the simultaneously That’s why currencies are quoted in pairs such as Euro/Yen. The first listed currency is called the Base Currency – that is the currency you are buying. The second currency – the one you are selling – is called the Counter Currency. For example if you were buying Euros you would be simultaneously be selling Yen. You are doing that because you anticipate that the Euro will go up in value relative to the Yen. So, if you feel that the Japanese economy is getting weaker. This will hurt the Yen. You will buy Euros and selling Yen since you are expecting the Euro to rise in value in relations to the Yen. In the retail market, foreign currency is traded in lots – each lot usually represents 100,000 units of base currency. (the one you are buying)A Mini Account represents 10,000 units. The foreign-currency-trading system is like other markets that let you trade many times the value of your account. Keep in mind that without proper risk management, this high degree of leverage can lead to large losses as well as gains. Why must the lots be so large? Reason: Currency fluctuations are so small. They usually involve only the 3rd or 4th decimal place. And occasionally the 2nd decimal place. For example if the USD/JPY is quoted at 112.000 That means that one USD is worth Y112.000. If the market moves from 112.000 to 112.001 that represents a 1 PIP movement. A PIP or a number up to the 5th decimal place is the smallest increment a currency pair can move. In the case of the AUD/CAD currency pair a PIP is worth $10.00 in a100,000 one lot position and $1.00 in a 10,000 unit Mini account. The currency pair represents the exchange or the purchase rate between the two currencies. For the AUD/CAD it is the amount dollars one Euro can purchase. The Spreads Difference between the buy and sell price - is the cost of doing the trade. In other markets it is often difficult to determine spread. But in the Forex exchange trading station you will always know how much the cost of every trade before you make it.
Technical Analysis this is the most popular family of foreign-currency-trading techniques. When most people think about trading currency, they usually think about finding a trend which means to find a strong directional tendency in the currency price. Since the foreign-currency-trading market develops strong price trends, what Technical Analysis does is chart those price trends and interpret those price charts for guidance in placing trades. Foreign exchange traders utilize a whole array of Technical Analysis techniques. The objective is of determining a currency’s future movements on the basis of its previous behavior. One major advantage of Technical Analysis over other trading tools is that it can be used in any currency pair over any time period from hours to days to months. Range Trading is the other trading method. – trading in a narrow range. Range traders don’t care about trends. Range traders assume that no matter which way the currency pair travels, its natural tendency is to move back and forth inside a defined price channel for weeks and sometimes months at a time. Range trading is measured in terms of Support Floor and Resistance Ceiling for the currency pair you are trading. Then buying at Support and selling at Resistance. And making sure you don’t get caught chasing a trend. Unwritten laws in Range Trading 1. Stops must be used to insure against major loss. The biggest risk to a Range Trader is the Break Out. When a pair breaks out of its trading channel, it often moves very fast, very far in the direction of the Break Out. As a general rule the Range Trade should set stops at about half the width of the range. That leaves room for slippage while preserving a 2 to 1 reward to risk ratio. Range trading is all about finding Price Support and Price Resistance levels. Range Support Is where the majority of currency traders would like to buy a given currency pair. Range Resistance is where they would like to sell. Define those levels and see how many times the price touches a specific level but fails to break through. That means that level is an “indecisive point” for buyers and/or sellers. The longer the “indecisive point” remains the more significance the support or resistance. Range Traders should focus trade on certain currency pairs In foreign-currency-trading electing the right currencies to trade is important and simple. The idea is to narrow your choices to those currencies with the highest probability of remaining range bound and the lowest probability of trending. There is school of range trading that avoids the US dollar. Reason: The USD is the trendiest currency because it represents the opposite side of 90% of all currency transactions. Thus, avoid any currency pair that includes the USD. When you avoid the US dollar you are left with what is called Currency Crosses which is the pairing of the six major non USD currencies against each other - AUD, CAD,CHF, GBP, JPY, EUR. But which of these pairs give you the best range trade? Check their Interest Rate Differentials. The rule of thumb in foreign-currency-trading is the larger the Interest Rate Differential (IRD), the more volatile the currency pair and the wider the trading range. For example, the interest rate spread between Switzerland and the Euro Zone that’s between the Swiss Franc and the Euro is only a 125 basis points. In contrast the differential between the British Pound and the Japanese Yen is 450 basis point, a far bigger differential. Look a table that highlights the interest rate spreads of each Currency Cross. And its 2 month trading range… A trader who wants to maintain a low risk profile and make only safer trades should stay with low interest rate spread, low range trading currency pairs If you are more risk tolerant you can try currency pairs with higher interest rate spreads, provided that you install very tight stops. Range traders do not care about direction. They simply want to sell the over bought and buy the oversold Trend Trader Indicators designed for Range Style Market 1. Relative Strength Index (RSI) – is a popular momentum tracker. It compares the magnitude of the currency pair’s recent gains with the magnitude of the pair’s recent losses and transposes that into a number from 1 to 100. A reading of 30 or below is usually interpreted as oversold.- meaning time to buy. And a reading of 70 or above is overbought - time to sell 2. Bolinger Band – this chart lets you compare volatility and relative price levels of a currency pair over time. It does that by using three bands that enclose most of the price action of the pair. The middle band is the simple moving average, The top band is that average plus two standard deviations. The lower band is the average minus two standard deviations. Its operation is simplicity itself. When price hits the upper band, currency is considered “overbought” because it is so far above the average. When it hits the lower band it is “oversold”. The goal of the Range Trader is to buy or sell when price hits the appropriate band. The key to successful range trading in the in foreign-currency-trading is accurately forecasting support and resistance levels. It is important to remember when to get out. When a range is broken you take one loss and one loss only. Technical Analysis this is the most popular family of trading techniques. When most people think about foreign-currency-trading, they usually think about finding a trend which means to find a strong directional tendency in the currency price. Since the foreign-currency-trading market develops strong price trends, what Technical Analysis does is chart those price trends and interpret those price charts for guidance in placing trades. Foreign exchange traders utilize a whole array of Technical Analysis techniques. The objective is of determining a currency’s future movements on the basis of its previous behavior. One major advantage of Technical Analysis over other trading tools is that it can be used in any currency pair over any time period from hours to days to months. Range Trading is the other trading method. – trading in a narrow range. Range traders don’t care about trends. Range traders assume that no matter which way the currency pair travels, its natural tendency is to move back and forth inside a defined price channel for weeks and sometimes months at a time. Range trading is measured in terms of Support Floor and Resistance Ceiling for the currency pair you are trading. Then buying at Support and selling at Resistance. And making sure you don’t get caught chasing a trend. Unwritten laws in Range Trading 1. Stops must be used to insure against major loss. The biggest risk to a Range Trader is the Break Out. When a pair breaks out of its trading channel, it often moves very fast, very far in the direction of the Break Out. As a general rule the Range Trade should set stops at about half the width of the range. That leaves room for slippage while preserving a 2 to 1 reward to risk ratio. Range trading is all about finding Price Support and Price Resistance levels. Range Support Is where the majority of currency traders would like to buy a given currency pair. Range Resistance is where they would like to sell. Define those levels and see how many times the price touches a specific level but fails to break through. That means that level is an “indecisive point” for buyers and/or sellers. The longer the “indecisive point” remains the more significance the support or resistance. Range Traders should focus trade on certain currency pairs In foreign-currency-trading selecting the right currencies to trade is important and simple. The idea is to narrow your choices to those currencies with the highest probability of remaining range bound and the lowest probability of trending. There is school of range trading that avoids the US dollar. Reason: The USD is the trendiest currency because it represents the opposite side of 90% of all currency transactions. Thus, avoid any currency pair that includes the USD. When you avoid he US dollar you are left with what is called Currency Crosses which is the pairing of the six major non USD currencies against each other - AUD, CAD,CHF, GBP, JPY, EUR. But which of these pairs give you the best range trade? Check their Interest Rate Differentials. The rule of thumb in foreign-currency-trading is the larger the Interest Rate Differential (IRD), the more volatile the currency pair and the wider the trading range. For example, the interest rate spread between Switzerland and the Euro Zone that’s between the Swiss Franc and the Euro is only a 125 basis points. In contrast the differential between the British Pound and the Japanese Yen is 450 basis point, a far bigger differential. Look a table that highlights the interest rate spreads of each Currency Cross. And its 2 month trading range… A trader who wants to maintain a low risk profile and make only safer trades should stay with low interest rate spread, low range trading currency pairs If you are more risk tolerant you can try currency pairs with higher interest rate spreads, provided that you install very tight stops. Range traders do not care about direction. They simply want to sell the over bought and buy the oversold Trend Trader Indicators designed for Range Style Market 1. Relative Strength Index (RSI) – is a popular momentum tracker. It compares the magnitude of the currency pair’s recent gains with the magnitude of the pair’s recent losses and transposes that into a number from 1 to 100. A reading of 30 or below is usually interpreted as oversold.- meaning time to buy. And a reading of 70 or above is overbought - time to sell 2. Bolinger Band – this chart lets you compare volatility and relative price levels of a currency pair over time. It does that by using three bands that enclose most of the price action of the pair. The middle band is the simple moving average, The top band is that average plus two standard deviations. The lower band is the average minus two standard deviations. Its operation is simplicity itself. When price hits the upper band, currency is considered “overbought” because it is so far above the average. When it hits the lower band it is “oversold”. The goal of the Range Trader is to buy or sell when price hits the appropriate band. The key to successful range trading in the in foreign-curency-trading is accurately forecasting support and resistance levels. It is important to remember when to get out. When a range is broken you take one loss and one loss only.
In addition to foreign-currency-trading,
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