Foreign Exchange (FOREX) for dummies

FOREX GUIDELINES



A. Resources & Guides
The introductory articles and various other contents on these pages are intended to help you understand forex trading basics. They are not intended to be definitive, and they are not necessarily compatible with your trading techniques, methods and goals. You should make an independent judgment as to whether techniques or methods described on these pages are appropriate for you in light of your financial condition, investment experience, risk tolerance, and other relevant factors.



B. Introduction to Forex
Unlike other financial markets, the foreign exchange market has no physical location and no central exchange. It operates through a global network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the forex market to operate on a 24-hour basis, spanning from one zone to another in all the major financial centers. Please click on the links below to read more about the exciting world of forex trading.

1. Forex Market
Forex (Foreign Exchange) is the name given to the "direct access" trading of foreign currencies. With an average daily volume of $1.4 trillion, forex is 46 times larger than all the futures markets combined and, for that reason, is the world's most liquid market. In the past, forex trading was limited largely to enormous money center banks and other institutional traders. But in just the past few years, technological innovations and the development of online trading platforms allow small traders to take advantage of the significant benefits of trading foreign currencies with forex.
In contrast to the world's stock markets, foreign exchange is traded without the constraints of a central physical exchange. Transactions are instead conducted via telephone or online. With this transaction structure as its foundation, the Foreign Exchange Market has become by far the largest marketplace in the world.

a. Buying and Selling
In the forex market, currencies are always priced and traded in pairs. You simultaneously buy one currency and sell another, but you can determine which pair of currencies you wish to trade. For example, if you believe the value of the euro is going to increase vis-á-vis the U.S. Dollar, then you would go long on EUR/USD instrument (currency pair). Obviously, the objective of forex currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased its value relative to the one you sold. If you have bought a currency and the price appreciates in value, then you must sell the currency back in order to lock in the profit. An open trade or position is one in which a trader has either bought / sold one currency pair and has not sold / bought back the equivalent amount to effectively close the position.

b. Market Conventions
Market conventions are rules and standards imposed by a governing body. In case of decentralized forex market these conventions might differ due to many national regulators (FSA, FSC, CFTC, NFA, BCSC, etc.). Since there is no central governing body that sets forex market rules and standards, we will reference only these that are universal.
Quoting Conventions
The first currency in the pair is referred to as the base currency, and the second currency is the counter or quote currency. The U.S Dollar is usually the base currency for quotes, and includes USD/JPY, USD/CHF, and USD/CAD. The exceptions are the Euro (EUR), Great Britain Pound (GBP), and Australian Dollar (AUD). As with all financial products, forex quotes include a "bid" and "ask", which is more often called "offer" in the forex market. The bid is the price at which a forex market maker is willing to buy (and you can sell) the base currency in exchange for the counter currency. The offer is the price at which a forex market maker will sell (and you can buy) the base currency in exchange for the counter currency. The difference between the bid and the offer price is referred to as the spread.

2. Orders and Positions
When you want to open a position you need to place an "entry" order. If and when the entry order executes, the position becomes "open" and starts its life on the market. At one point in time, you will place an "exit" order to "close" the position. A position can be "long" (entry order is to buy and exit order is to sell an instrument) or "short" (entry order is to sell and exit order is to buy an instrument).
At the point when you place your entry order, you need to define price level at which you want to buy or sell certain instrument. You also need to specify type of the order and quantity of the instrument you want to trade. There are 3 order types:

a. Market Order
Placing a market order means that you will buy at your broker's current "ask" (or "offer") price, or sell at your broker's current "bid" price, whatever that price currently is. For example, suppose you are buying EUR/USD. The current market, as quoted by your broker is 1.2934 / 1.2938. This means that your broker is willing to buy EUR/USD from you at 1.2934, and sell it to you at 1.2938.

b. Stop Order
Initiating a trade with a stop order means that you will only open a position if the market moves in the direction you are anticipating. For example, if USD/JPY is currently 108.72 and you believe it will move higher, you could place a stop order to buy at 108.82. This means that the order will only be executed if the market moves up to 108.82. The advantage is that if you are wrong and the market moves straight down, you will not have bought (because 108.82 will never have been reached). The disadvantage is that 108.82 is clearly a less attractive rate at which to buy than 108.72. Opening a position with a stop order is usually appropriate if you wish to trade only with strong market momentum in a particular direction.

c. Limit Order
A limit order is an order to buy below the current price, or sell above the current price. For example, if EUR/USD is trading at 1.2952 / 56 and you believe the market will rise, you could place a limit order to buy at 1.2945. If executed, this will give you a long position in EUR/USD at 1.2945, which is 11 pips better than if you had just bought EUR/USD with a market order. The disadvantage of the limit order is that if EUR/USD moves straight up from 1.2952 / 56, your limit at 1.2945 will never be filled and you will miss out on the profit opportunity even though your view on the direction of EUR/USD was correct. Opening a position with a limit order is usually appropriate if you believe that the market will remain in a range before moving in your anticipated direction, allowing the order to be filled first.
For both entry and exits orders you can specify price levels at which you want them to be executed. You have to specify entry levels when you place you entry order, while most brokers would allow you to specify exit levels at any time.

3. Calculating profit
The objective of forex currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased its value relative to the one you sold. If you have bought a currency and the price appreciates in value, then you must sell the currency back in order to lock in the profit.
Let us assume that you open a long position by buying USD/JPY for 107.58 (quantity of 100000) and few hours after that, you close the position by selling USD/JPY for 107.74 (quantity of 100000). These two trades would bring you profit of (107.74 - 107.58) * 100000 = JPY 16000 (JPY is the counter or quote currency in the USD/JPY pair). You can than convert the profit to a currency you like, for example JPY 16000 = 16000 / 107.74 = USD 148.51.
We can also say that these two trades would bring you 16 "pips" profit. A "pip" is the smallest increment in any instrument. For asset types other than forex, the smallest increment is often called "tick". In EUR/USD one pip is 0.0001, in USD/JPY one pip is 0.01. Expressing position profits in pips is often very useful for quick calculations and estimates.
One pip, from the example above, would bring you 0.01 * 100000 = JPY 1000 profit, or JPY 1000 = 1000 / 107.74 = USD 9.28.


C. Trading Techniques
Experienced traders will often say "trend is your friend" or "do not overtrade". What does it mean? The links below will lead you to pages where you can read more about basic trading guidelines, general information about the technical and fundamental analysis, and some simple ideas about risk management. These are just basics - you will need to read much more related literature to become a successful trader.


1. Common Guidelines
Plan your trade and trade your plan: You must have a trading plan to succeed. A trading plan should consist of a position, why you enter, stop loss point, profit taking level, plus a sound money management strategy. A good plan will remove all the emotions from your trades.
The trend is your friend: Do not buck the trend. When the market is bullish, go long. On the reverse, if the market is bearish, you short. Never go against the trend.
Focus on capital preservation: This is the most important step that you must take when you deal with your trading capital. You main goal is to preserve the capital. Do not trade more than 10% of your deposit in a single trade. For example, if your total deposit is $10,000, every trade should limit to $1000. If you don't do this, you'll be out of the market very soon.
Know when to cut loss: If a trade goes against you, sell it and let go. Do not hold on to a bad trade hoping that the price will go up. Most likely, you end up losing more money. Before you enter a trade, decide your stop loss price, a price where you must sell when the trade turns sour. It depends on your risk profile as of how much you should set for the stop loss.
Take profit when the trade is good: Before entering a trade, decide how much profit you are willing to take. When a trade turns out to be good, take the profit. You can take profit all at one go, or take profit in stages. When you've recovered your trading cost, you have nothing to lose. Sit tight and watch the profit run.
Be emotionless: Two biggest emotions in trading: greed and fear. Do not let greed and fear influence your trade. Trading is a mechanical process and it's not for the emotional ones. As Dr. Alexander Elder said in his book "Trading For A Living", if you sit in front of a successful trader and observe how he trades, you might not be able to tell whether he is making or losing money. That's how emotionally stable a successful trader is.
Do not trade based on a tip from a friend or broker: Trade only when you have done your own research and analysis. Be an informed trader.
Keep a trading journal: When you buy a currency or stock, write down the reasons why you buy, and your feelings at that time. You do the same when you sell. Analyze and write down the mistakes you've made, as well as things that you've done right. By referring to your trading journal, you learn from your past mistakes. Improve on your mistakes, keep learning and keep improving.
When in doubt, stay out: When you have doubt and not sure where the market or stock is going, stay on the sideline. Sometimes, doing nothing is the best thing to do.
Do not overtrade: Ideally you should have 3-5 positions at a time. No more than that. If you have too many positions, you tend to be out of control and make emotional decisions when there is a change in market. Do not trade for the sake of trading.

2. Technical Analysis
Technical Analysis is probably the most common and successful method of making trading decisions and analyzing forex and commodities markets.
Technical analysis differs from fundamental analysis in that technical analysis is applied only to the price action of the market, ignoring fundamental factors. As fundamental data can often provide only a long-term or "delayed" forecast of exchange rate movements, technical analysis has become the primary tool with which to successfully trade shorter-term price movements, and to set stop loss and profit targets.
Technical analysis consists primarily of a variety of technical studies, each of which can be interpreted to generate buy and sell decisions or to predict market direction.
Support and Resistance Levels
One use of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past.
Popular Technical Analysis Tools
Moving Averages (MA): Indicators used to smooth price fluctuations and identify trends. The most basic type of moving average, the simple moving average, is the average of the past x bars ending with the current bar;
Moving Average Convergence Divergence (MACD): Indicator that utilizes moving averages to identify possible trends and an oscillator to determine when a trend is overbought or oversold;
Bollinger Bands: Bands that are placed x moving average standard deviations above and below a simple MA line;
Fibonacci Retracement Levels: Indicator used to identify potential levels of support and resistance;
Directional Movement Index (DMI): A positive line (+DI) measuring buying and a negative line (-DI) measuring selling pressure;
Relative Strength Index (RSI): Momentum oscillator that is plotted on a vertical scale from 0 to 100;
Stochastics: Momentum oscillator that measure momentum by comparing the recent close to the absolute price range (high of the range minus the low of the range) over a period of x bars;
Trendlines: Straight line on a chart that connects consecutive tops or consecutive bottoms of prices and is utilized to identify levels of support and resistance;

3. Fundamental Analysis
Fundamental analysis is the evaluation of non-visual information to evaluate trading activity and make trading decisions. Whereas technical analysts utilize charts and mathematical indicators to quantify price activity, fundamental analysts utilize market news and market forecasts to qualify price activity.
There are numerous market events that move the currency markets every week. Some affect every currency pair while others affect specific currency pairs. If the outcome of a market event has been fully discounted by the market, traders will not notice any discernible impact on their charts. If the outcome of a market event has not been fully discounted by the market, the result is either price appreciation or price depreciation and traders will see this activity on their charts.
Every week, there are fundamentally-important market events that are scheduled in every country at specific times. Similarly, there are fundamentally-important market events that may not be scheduled for specific times. Some countries (Germany, for instance) often do not schedule market events for specific times. The outcome of market events is sometimes leaked in advance in certain countries (Germany, for instance) for different reasons.
Market events include the release of economic data, speeches and testimony by government officials, interest rate decisions, and others.


4. Controlling Risk
Controlling risk is one of the most important ingredients of successful trading. While it is emotionally more appealing to focus on the upside of trading, every trader should know precisely how much he is willing to lose on each trade before cutting losses, and how much he is willing to lose in his account before ceasing trading and re-evaluating.
Risk will essentially be controlled in two ways: 1) by exiting losing trades before losses exceed your pre-determined maximum tolerance (or "cutting losses"), and 2) by limiting the "leverage" or position size you trade for a given account size.

a. Cutting Losses
Too often, the beginning trader will be overly concerned about incurring losing trades. He therefore lets losses mount, with the "hope" that the market will turn around and the loss will turn into a gain.
Almost all successful trading strategies include a disciplined procedure for cutting losses. When a trader is down on a position, many emotions often come into play, making it difficult to cut losses at the right level. The best practice is to decide where losses will be cut before a trade is even initiated. This will assure the trader of the maximum amount he can expect to lose on the trade.
The other key element of risk control is overall account risk. In other words, a trader should know before he begins his trading endeavor how much of his account he is willing to lose before ceasing trading and re-evaluating his strategy. If you open an account with $2,000, are you willing to lose all $2,000? $1,000? As with risk control on individual trades, the most important discipline is to decide on a level and stick with it. Further information on the mechanics of limiting risk can be found in the foreign currency trading literature.

b. Determining Position Size
Before beginning any trading program, an assessment should be made of the maximum account loss that is likely to occur over time, per your standard trading quantity. For example, assume you have determined that your worse case loss on your standard trade (quantity of 100,000) is 30 pips. That translates into approximately USD 300 per 100,000 EUR/USD position size. Five consecutive 100,000 EUR/USD losing trades would result in a loss of USD 1,500 (5 x USD 300); a difficult period but not to be unexpected over the long run. For a $10,000 account trading 100,000 EUR/USD, this translates into 15% loss. Therefore, even though it may be possible to trade 5 such positions or more with a $10,000 account, this analysis suggests that the resulting "drawdown" would be too great (75% or more of the account value would be wiped out).
Any trader should have a sense of this maximum loss per their standard trading quantity, and then determine the amount he wishes to trade for a given account size that will yield tolerable drawdowns.



D. Specifics and Facts

If you want to trade forex you simply have to know what margin requirement is, how margin call occurs and what does it affect. You also need to know why your forex broker will charge you interest or premium. While you chat with traders they will often use slang to express their thoughts in a shorter form: "what is going on with kiwi this morning?". Please click on the links below to read more about the trading specifics and the language used in the forex world.

1. Trading Terminology
Traders often chat with one another about a variety of topics related to the forex market, giving their perspectives and discussing trading ideas and current moves on the market. While communicating with each other they often use slang to express their thoughts in a shorter form. You can read about the slang and other trading terminology in these pages.
EUR/USD: Euro / US Dollar is often called Euro;
USD/JPY: US Dollar / Japanese Yen is often called Dollar Yen;
GBP/USD: British Pound / US Dollar is often called Cable;
USD/CHF: US Dollar / Swiss Franc is often called Dollar Swiss, or Swissy;
USD/CAD: US Dollar / Canadian Dollar is often called Dollar Canada, or C-Dollar;
AUD/USD: Australian Dollar / US Dollar is often called Aussie Dollar;
EUR/GBP: Euro / British Pound is often called Euro Sterling;
EUR/JPY: Euro / Japanese Yen is often called Euro Yen;
EUR/CHF: Euro / Swiss Franc is often called Euro Swiss;
GBP/CHF: British Pound / Swiss Franc is often called Sterling Swiss;
GBP/JPY: British Pound / Japanese Yen is often called Sterling Yen;
CHF/JPY: Swiss Franc / Japanese Yen is often called Swiss Yen;
NZD/USD: New Zealand Dollar / US Dollar is often called New Zealand Dollar or Kiwi;

2. Margin Requirements
As you know, the margin deposit is not a down payment on a purchase. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows you to hold a position much larger than your actual account value. Forex online trading platforms have margin management capabilities that allow you to get as much as four times the leverage of a typical futures contract. The trading platforms often perform automatic pre-trade checks for margin availability, and will execute the trade only if you have sufficient margin funds in your account. These systems also calculate the funds needed for current positions and display this information to you in real time.
For example, a broker might require only $1,000 in the trader's account in order to trade a 100,000 EUR/USD currency position. The $1,000 is referred to as "margin". This amount is essentially collateral to cover any losses that you might incur. Since nothing is actually being purchased or sold for delivery, the only requirement, and indeed the only real purpose for having funds in your account, is for sufficient margin.
Margin should reflect some rational assessment of potential risk in a position. For example, if a currency is very volatile, a higher margin requirement would normally be justified.
In the event that funds in your account fall below margin requirements, most forex platforms will automatically close one or more open positions. This prevents your account from ever falling below the available equity even in a highly volatile, fast moving market.

3. Overnight Interest
Every currency and commodity has a "cost of carry" associated with holding the position for more than one day. It is called "overnight interest" or "premium". In currencies, this cost is a function of the "interest rate differential" of the two currencies that comprise the exchange rate.
For example, in USD/JPY, the interest rate differential is the difference between short-term U.S. interest rates and short-term Japanese interest rates. If, for example, U.S. interest rates are 5.0% and Japanese interest rates are 1.0%, the interest rate differential is 4.0% (5.0% - 1.0%). This means that if a trader was to sell USD/JPY, he would have to pay 4.0% of the notional amount of the contract per year to hold the position. If position quantity is 100,000, the trader would have to pay approximately $4,000 to hold the position for one year. This translates to approximately $11.00 per day for holding the USD/JPY position ($4,000 / 365).


4.0 Glossary of terms


5. Forex FAQ

The following are the questions beginner forex traders often ask. If there are additional questions you feel we should address, please notify us and we will list your questions to assist other clients. Please have in mind that this is a general forex-related FAQ, while there are other documents on this Web Site that address Marketiva-specific topics.
To open and read a particular FAQ page, please click on its title.


1.0General Information

What is Foreign Exchange?

Where is the central location of the forex market?

Who are the participants in the forex market?

When is the forex market open for trading?

What are the most commonly traded currencies in the forex markets?

Is forex trading capital intensive?


2.0Trading Fundamentals

What is Margin?

What does it mean have a "long" or "short" position?

What is the difference between an "intraday" and "overnight position"?

How are currency prices determined?

How does the Margin Call work?

3.0Strategies and Techniques
How do I manage risk?
What kind of trading strategy should I use?
How long are positions maintained?


E. Marketiva FAQ


Marketiva has compiled a list of Frequently Asked Questions about our service and its features. The FAQ addresses the questions our clients most commonly ask, and includes links to other FAQ documents on Marketiva.com web site. You will find the Forex FAQ and Streamster™ Help very useful in understanding many aspects of forex trading and the services provided by Marketiva. If there are additional questions you feel we should address, please notify us and we will list your questions, to assist you and other clients.

Introduction to Marketiva

What is Marketiva?

How do I open a Marketiva account?

May I open a demo account and try the system first?

What legal statements must I read before becoming a Marketiva client?

What if I do not understand some of Marketiva's legal statements?

How much money do I need to start trading with Marketiva?

How can I contact Marketiva?

How can I do business with Marketiva as introducing broker or referring agent?

Can I open two accounts?


Marketiva Account Services

How can I deposit funds to my account?


Where can I see my account information, username and account number?
Where can I see a summary of my billing transactions?
How can I change my contact information?

I forgot my password. What can I do?

How can I change my password?

Can I withdraw funds to E-Gold or E-Bullion?


Forex Rates and News

Where can I find current rates for forex instruments?

Why rates change colors?

Why # symbols show up instead of forex rates?

When does the Change column reset?

How can I select which currency pairs I will see?

Who provides news from the Latest News window?

Are the news stories real-time and how to select categories?

Why the Forex Rates differ from the Chart rates?

Trading with Marketiva

What currency pairs can I trade through Marketiva?

During what hours can I trade with Marketiva?

How do I choose between Mini and Standard forex account?
Why the position Profit field is sometimes empty?

When do I receive or pay Overnight Interest?
Do you offer automatic execution and guaranteed prices in all market conditions?


Trading Signals and Alerts

I am new to forex signals and alerts. What are they?

What does the yellow bell, exclamation point or arrow mean?

What does the blue question mark mean?

How can I subscribe to a signal or alert?

Where can I read about abbreviations in alerts?


How do I read the Equity Chart in the Performance Report?
What should I be looking at in the Performance Reports?

I periodically hear my computer talking. Why is that?

Marketiva Chat Channels

What are the chat channels?

Should I trade based on ideas being discussed in the chat channels?

How do subscribe and post a comment to a chat channel?

What does it mean when the name of a chat channel flashes in red?

Must I type English in these chat channels?

How do I save or clear the text in a chat channel?

Are the chat channels moderated?

I do not like some of the language posted. What should I do?

Are there limitations in chat I should be aware of?





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