Maverick FX Trading. Forex 101 Session #2 Forex Market Basics

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1 Maverick FX Trading Forex 101 Session #2 Forex Market Basics

2 Session #1 Review How the currency market works Pairs Trading Building a Trading Plan

3 Session #2 Schedule Understanding PIPs Margin, Margin Rates, Account Management Dominant Pairs Currency Rollover Swaps

4 Lots Currency trade sizes are referred to as lots. They can be in $100 nano-lots, $1000 micro-mini lots, $10,000 minilots increments, or $100,000 standard-lots increments. Some brokers you place orders in lots, some in amount You can trade any amount. Ex: Buy 56,000 of EURUSD or.56 lots Margin Margin is a monetary deposit that you provide as collateral to cover any losses. All dealers establish their own margin; normal ranges are 1% - 5%. PIPS A pip (Price Interest Percentage) is the smallest increment a price moves and it determines the profit or loss of a trade. A few examples of where the pip is located within the exchange rate are listed next. The one-digit for pip values is highlighted in red for each example.

5 Pips

6 Major Currencies of the World Currency Name ISO abbreviation Nickname Euro dollar EUR euro Great British Pound GBP cable, sterling US dollar USD green back Swiss franc CHF swissy Japanese yen JPY --- Canadian dollar CAD loonie, caddie New Zealand dollar NZD kiwi Australian dollar AUD aussie

7 Terminology Cross Rate or Currency Pair EUR/USD 1/ base currency/exchange rate

8 Dominant & Recessive Pairs Dominant Pair EURusd = Gbpjpy = Usdcad = Euraud = Recessive Pair USDEUR =.6895 JPYGBP = CADUSD =.9335 AUDEUR =.5868

9 Long Vs. Short Long Going long means you buy first and sell second Long trades will gain from a rise in prices and lose in a fall in prices Short Going short means you sell first and buy second Short trades will lose from a rise in prices and gain from a rise in prices

10 Trade Example Your Analysis You have decided you think the Japanese Yen is going to rise in value against the Euro. The dominant pair is the EURJPY. To capture this move, you would short the EURJPY pair

11 Bid/Ask Spread All FX quotes include a two-way price the bid (sell) and ask (buy) The bid (sell)is always lower than the ask(buy) The difference in the bid/ask is the spread, or cost of the trade; which can be recovered with a favorable currency move. Bid/Ask example: EUR/USD BID (sell)/ ASK (buy) / In the above example, a trader could buy the Euro at the ask price of The difference in the BID/ASK is 2 pips. The 2 pip spread represents the cost of doing business.

12

13 Interest Rollover (Swap) Interest rollover fees are a function of the interest rates established by the various central banks and various authorities used to regulate the official policy of the currency. Rollover takes place at daily at 5pm EST. For the FX trader, these charges can have a very small impact on their overall profit and loss from exchange rate speculation. Interest can work for or against traders; again, this has a very small impact. Interactive Brokers pays swaps in different currencies. You will periodically need to convert them back to USD

14 You will earn/pay the difference between the base currency (long) and the opposite (short) currency while you hold onto your position. Many funds/investors look to earn higher fixed income rates through a carry trade Interest Income/Expense

15 Example You are long the AUDJPY The Reserve Bank of Australia currently has a central bank interest rate of 4.25% The Bank of Japan currently has a central bank interest rate of.1% You have a net interest income of 4.15% and will receive a credit at 5 PM EST in your account in a swap

16 Example You are short the EURGBP The European Central Bank currently has a central bank interest rate of 2% The Bank of England currently has a central bank interest rate of 1.5% You have a net interest expense of.5% and will be charged a debit at 5 PM EST in your account in a swap

17 Conclusion/Next Steps Browse and Watch Advanced Concept Videos Pairs Trading (28 Min) FX Time chart (40 Min) Trading Personality Test (85 Min) Continue with Forex 101 and complete the tests Continue the process of building your trading plan Make a plan that will work for you Find some quotes online Become familiar with Dominant Crosses Watch price changes

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