Trading Forex. TradeStation. with. michael burke and jesus nava

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1 Trading Forex with TradeStation michael burke and jesus nava

2 Trading Forex with TradeStation contents The Forex Market...1 Who Trades Forex...1 Benefits of Trading Forex...2 Risks Associated with Forex Trading...3 Why TradeStation?...5 When Does Forex Trade?...6 Worldwide Forex Trading...6 Forex Trading Specifications...7 Forex Quotes...8 Available Forex Pairs and Historical Data in TradeStation...9 Bid-Ask Spread Charting Bid and Ask Costs of Trading Forex Forex Margin Calculations Carry Trade and Roll Over Calculating Forex Trading Profit and Loss TradeStation Platform Trading Forex in TradeStation Advanced Order Options OCO and OSO Orders Tracking Orders and Positions Rollover Adjustments in TradeStation Strategy Back-Testing and Automation Forex Analysis in TradeStation Chart Analysis Analysis Techniques and Drawing Tools Appendix Charting Indicators RadarScreen Indicators Forex Glossary... 38

3 Forex Risk Disclosure OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVE THE LEVERAGED TRADING OF CONTRACTS DENOMINATED IN FOREIGN CURRENCY CONDUCTED WITH A FUTURES COMMISSION MERCHANT OR A RETAIL FOREIGN EXCHANGE DEALER AS YOUR COUNTERPARTY. BECAUSE OF THE LEVERAGE AND THE OTHER RISKS DISCLOSED HERE, YOU CAN RAPIDLY LOSE ALL OF THE FUNDS YOU DEPOSIT FOR SUCH TRADING AND YOU MAY LOSE MORE THAN YOU DEPOSIT. YOU SHOULD BE AWARE OF AND CAREFULLY CONSIDER THE FOLLOWING POINTS BEFORE DETERMINING WHETHER SUCH TRADING IS APPROPRIATE FOR YOU. (1) TRADING IS NOT ON A REGULATED MARKET OR EXCHANGE YOUR DEALER IS YOUR TRADING PARTNER WHICH IS A DIRECT CONFLICT OF INTEREST. BEFORE YOU ENGAGE IN ANY RETAIL FOREIGN EXCHANGE TRADING, YOU SHOULD CONFIRM THE REGISTRATION STATUS OF YOUR COUNTERPARTY. The off-exchange foreign currency trading you are entering into is not conducted on an interbank market, nor is it conducted on a futures exchange subject to regulation as a designated contract market by the Commodity Futures Trading Commission. The foreign currency trades you transact are trades with the futures commission merchant or retail foreign exchange dealer as your counterparty. WHEN YOU SELL, THE DEALER IS THE BUYER. WHEN YOU BUY, THE DEALER IS THE SELLER. As a result, when you lose money trading, your dealer is making money on such trades, in addition to any fees, commission, or spreads the dealer may charge. (2) AN ELECTRONIC TRADING PLATFORM FOR RETAIL FOREIGN CURRENCY TRANSACTIONS IS NOT AN EXCHANGE. IT IS AN ELECTRONIC CONNECTION FOR ACCESSING YOUR DEALER. THE TERMS OF AVAILABILITY OF SUCH A PLATFORM ARE GOVERNED ONLY BY YOUR CONTRACT WITH YOUR DEALER. Any trading platform that you may use to enter off-exchange foreign currency transactions is only connected to your futures commission merchant or retail foreign exchange dealer. You are accessing that trading platform only to transact with your dealer. You are not trading with any other entities or customers of the dealer by accessing such platform. The availability and operation of any such platform, including the consequences of the unavailability of the trading platform for any reason, is governed only by the terms of your account agreement with the dealer. (3) YOUR DEPOSITS WITH THE DEALER HAVE NO REGULATORY PROTECTIONS. All of your rights associated with your retail forex trading, including the manner and denomination of any payments made to you, are governed by the contract terms established in your account agreement with the futures commission merchant or retail foreign exchange dealer. Funds deposited by you with a futures commission or retail foreign exchange dealer for trading off-exchange foreign currency transactions are not subject to the customer funds protections provided to customers trading on a contract market that is designated by the Commodity Futures Trading Commission. Your dealer may commingle your funds with its own operating funds or use them for other purposes. In the event your dealer becomes bankrupt, any funds the dealer is holding for you in addition to any amounts owed to you resulting from trading, whether or not any assets are maintained in separate deposit accounts by the dealer, may be treated as an unsecured creditor s claim.

4 (4) YOU ARE LIMITED TO YOUR DEALER TO OFFSET OR LIQUIDATE ANY TRADING POSITIONS SINCE THE TRANSACTIONS ARE NOT MADE ON AN EXCHANGE OR MARKET AND, AND YOUR DEALER MAY SET ITS OWN PRICES. Your ability to close your transactions or offset positions is limited to what your dealer will offer to you, as there is no other market for these transactions. Your dealer may offer any prices it wishes, and it may offer prices derived from outside sources or not in its discretion. Your dealer may establish its prices by offering spreads from third party prices, but it is under no obligation to do so or to continue to do so. Your dealer may offer different prices to different customers at any point in time on its own terms. The terms of your account agreement alone govern the obligations your dealer has to you to offer prices and offer offset or liquidating transactions in your account and make any payments to you. The prices offered by your dealer may or may not reflect prices available elsewhere at any exchange, interbank, or other market for foreign currency. (5) PAID SOLICITORS MAY HAVE UNDISCLOSED CONFLICTS The futures commission merchant or retail foreign exchange dealer may compensate introducing brokers for introducing your account in ways which are not disclosed to you. Such paid solicitors are not required to have, and may not have, any special expertise in trading, and may have conflicts of interest based on the method by which they are compensated. Solicitors working on behalf of futures commission merchants and retail foreign exchange dealers are required to register. You should confirm that they are, in fact registered. You should thoroughly investigate the manner in which all such solicitors are compensated and be very cautious in granting any person or entity authority to trade on your behalf. You should always consider obtaining dated written confirmation of any information you are relying on from your dealer or a solicitor in making any trading or account decisions. FINALLY, YOU SHOULD THOROUGHLY INVESTIGATE ANY STATEMENTS BY ANY DEALERS OR SALES REPRESENTATIVES WHICH MINIMIZE THE IMPORTANCE OF, OR CONTRADICT, ANY OF THE TERMS OF THIS RISK DISCLOSURE. SUCH STATEMENTS MAY INDICATE POTENTIAL SALES FRAUD. THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER ASPECTS OF TRADING OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE DEALER. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

5 Important Information and Disclosure TradeStation Forex, Inc. seeks to serve institutional and active traders. Please be advised that active trading is generally not appropriate for someone of limited resources, limited investment or trading experience, or low risk tolerance, or who is not willing to risk at least $50,000 of capital. This book may discuss in detail how TradeStation is designed to help you develop, test and implement trading strategies. However, TradeStation Forex does not provide or suggest trading strategies. We offer you unique tools to help you design your own strategies and look at how they could have performed in the past. While we believe this is very valuable information, we caution you that simulated past performance of a trading strategy is no guarantee of its future performance or success. We also do not recommend or solicit the purchase or sale of any particular foreign currencies, commodities, securities or derivative products. Any symbols referenced in this book are used only for the purposes of demonstration, as an example, not a recommendation. Finally, this book may discuss automated buy and sell alerts and/or electronic order placement and execution. Please note that even though TradeStation has been designed to automate your trading strategies and deliver timely order placement, routing and execution, these things, as well as access to the system itself, may at times be delayed or even fail due to market volatility, quote delays, system and software errors, Internet traffic, outages and other factors. All proprietary technology in TradeStation is owned by TradeStation Technologies, Inc., an affiliate of TradeStation Forex, Inc. The order execution services accessible from within TradeStation are provided by TradeStation Forex, Inc. pursuant to a technology license from its affiliate and its authority as a registered broker-dealer and introducing broker. All other features and functions of TradeStation are provided directly by TradeStation Technologies. TradeStation and EasyLanguage are registered trademarks of TradeStation Technologies, Inc. TradeStation, as used in this document, should be understood in the foregoing context. The price charts presented in this book are for demonstration purposes only and are not a recommendation or endorsement of the symbols or analysis displayed within the charts.

6 the forex market Forex, or FX, is an abbreviation for foreign exchange. It is the mechanism of exchanging one currency for another. This exchange rate is the basis of Forex trading and you can take a position in expectation of the exchange rate increasing or decreasing. The off-exchange international cash Forex markets are the biggest trading markets in the world, with billions of dollars in transactions daily. These transactions are conducted from Sunday to Friday through various financial institutions around the world in a global 24- hour marketplace. The largest of these marketplaces include financial institutions in New York, London, Zurich, Frankfurt, Singapore, Hong Kong and Tokyo. Off-exchange foreign currency trading is not conducted of a futures exchange subject to regulation as a designated contract market by the CFTC. Almost all international currencies are traded against the U.S. dollar (USD). The next-mosttraded currencies are the euro (EUR), Japanese yen (JPY), pound sterling (GBP) and Swiss franc (CHF). There are literally dozens of Forex currency-pair combinations that can be traded. Many different factors affecting supply and demand can drive the price and volatility of a currency, including interest rates, domestic and international news, government actions, economic indicators, and monetary policy, just to name a few. Market access through Internet technology makes it very easy to trade these dynamic currency markets online from anywhere in the world. But as with all trading, it is critical to fully understand the Forex markets, risks and procedures before starting to trade. Who Trades Forex? There are three primary groups that utilize and influence the Forex markets: Speculators This group accounts for the majority of all currency transactions; it includes small-, medium- and large-sized hedge funds, along with smaller individual traders from all around the world. International Business The transfer of goods from one country to another is paid in the local country s currency. This type of trade occurs all around the world every day. Hedgers may need to safeguard an investment or business transaction against the potential depreciation of a currency. Tourists To a lesser extent, people that are traveling from one country to another may require an exchange of currency for the countries that they are visiting. 1

7 Benefits of Trading Forex Cash Forex trading offers many unique advantages compared to trading other financial instruments: 24-Hour Market Action The Forex currency markets are a 24-hour marketplace, starting from 5 p.m. ET Sunday to 5 p.m. ET on Friday. This gives you the flexibility to trade the Forex markets fulltime or part-time, whenever your schedule or lifestyle permits. Liquidity As the largest markets in the world, the cash Forex markets offer excellent liquidity at all hours of the trading day, unlike many other 24-hour markets. This means you can trade large amounts of currency into and out of foreign currency markets with little market impact. Leverage Cash Forex trading allows you to leverage up to 50 times your account value on most major forex pairs, minor pairs offer 20 to 1 margin. These leverage amounts may change or may not be available at all times. For example, with 50:1 leverage, you maycontrol100,000 units of the Euro quoted at $1.3000, using only $2,600. Remember that while leverage can help build profits quickly, it can also produce large catastrophic losses quickly. Trading Opportunities In addition to technical trading, the Forex markets offer unique opportunities to trade foreign currency exchange rates to take advantage of international news, economic indicators, and interest rate changes and differentials. 2

8 Risks Associated with Forex Trading As with all financial trading instruments, there are risks you must consider before trading cash Forex: Leverage Risk Leverage is the mechanism by which a trader can control a large market position with a much smaller initial investment. TradeStation enables you to take positions of up to 50 times greater than the value of the initial investment for major cash Forex pairs. However, professional traders will often recommend that your open Forex positions not exceed more than 10 times your total account value at any one time. In addition, sound money-management techniques suggest not risking any more than 2-3 percent of your total account value on any one trade. Even when market conditions are relatively calm, leverage can create large gains or losses very quickly. This may cause your broker to take action to avoid a negative account balance or to avoid your account exceeding that maximum allowed margin. In either case, your broker, without prior notification, may close any or all open positions in the account to remedy the situation. You are responsible for the risks you take and the consequences of those risks, positive and negative, on every trade you make. Because of the highly leveraged risk inherent to cash Forex, Forex trading may not be suitable for all traders. Price Risk Forex prices are quoted and charted using only the current bid price stream; there is no concept of a last price in Forex. TradeStation offers analysis and trading tools that allow you to visualize and measure the bid-ask spread. Since the transactional cost of trading Forex is tied to the bid-ask spread, it is important to understand what the normal bid-ask spread is for any pair, and what that spread means in the actual cost per trade. The bid-ask spread can also fluctuate throughout the trading day and is often a function of the liquidity of the Forex pair; you may also see slightly wider bid-ask spreads in quiet market situations, especially on lightly traded Forex pairs. Just like any trading market, Forex prices are driven by short- and longterm supply and demand, which can cause prices to move rapidly and often erratically. Traders need to employ sound risk-management techniques on each and every trade. Interest Rate Risk Traditionally, if a country s interest rates rise, its currency will normally strengthen because investors will shift their assets to that country to gain higher returns. Conversely, if a country s interest rates fall, its currency will normally weaken as investors shift money away looking for higher returns. Consequently, if the interest rate differential of one currency versus another increases or decreases dramatically, the exchange rate and thus Forex prices may also dramatically change. 3

9 News and Economic Risk In our global economy, news from anywhere in the world can affect the Forex markets in many ways. These effects can manifest as rapid price movements or changes in trend direction or long-term outlooks. It is prudent when trading either long term or short term to keep your eye on news and other factors like government reports that can affect your profitability. Governments gather economic activity statistics and release reports almost every day. The challenge is figuring out which reports may have an effect on Forex prices. Below is a short list of the most widely followed reports. Remember that not all countries offer every report, and it is a good idea to monitor how certain reports affect Forex prices before trying to trade based on news and government reports. Gross Domestic Product (GDP) The sum of all goods and services produced in a country by both domestic and foreign companies. Increasing GDP indicates a growing economy. Industrial Production The change in production or capacity of the nation s factories, mines and utilities. Increasing production generally indicates a growing economy. Consumer Price Index (CPI) A measure of the average price level paid by consumers. Increasing CPI may indicate a growing economy. Changes in CPI can also affect nominal interest rates. Non-Farm Payrolls The number of new jobs created by the economy during the previous month and the percentage of workers seeking employment who remain unemployed. Increasing employment generally indicates a growing economy. Operational Risk Brokers face operational risk as they transact their daily business activities. Some of these risks arise as internal procedures, human resources, organizational structure, technology, etc. Although they do not impose a risk to the market system as a whole, they could prevent you from monitoring positions or placing orders. Forex traders should always maintain backup procedures in case the Internet, the trading platform, or the broker fails. Settlement Risk In a foreign exchange trade, one party delivers currency while the other takes delivery of the currency. Settlement risk is the possibility that one of the parties in the transaction fails to fulfill their responsibility. 4

10 why tradestation? There are many Forex brokers out there to choose from, but what ultimately sets one Forex broker apart from the others is the ability to provide a complete Forex trading solution with all the resources clients need to accomplish their trading goals. Advanced Multi-Asset Trading, Data and Analysis Platform The award-winning TradeStation trading platform offers unlimited analysis potential for every level of trader, driven by world-class data and the ability to back-test ideas before risking your money.* Regulated Industry Leader Unlike stocks and futures, there are no exchanges or clearing houses that guarantee all Forex transactions, which makes it critical to know who you are dealing with when you trade Forex and who the trustee of your assets is. TradeStation has been in business since Financial Strength TradeStation s management team has a proven record of innovation and success. The company is financially sound with a strong balance sheet. Lower Trading Costs When trading cash Forex with TradeStation, you pay NO commissions. TradeStation makes the same amount of money on each forex trade from a markup embedded in the spread, which is the difference between the bid price and the ask price. There are no real-time data fees; all real-time and historical Forex price data is free. And there are no monthly service fees for Forex-only accounts. Competitive Spreads TradeStation brings together multiple competing banks to provide greater liquidity and better access to competitive Forex market spreads. And TradeStation DOES NOT trade against any client position. Hold Multiple Currencies in Your Account To allow for more flexibility in your Forex trading, TradeStation will allow you to hold multiple currencies in your account in addition to your native currency. Educational Resources To get you up and running quickly with TradeStation, we offer an extensive set of FREE online educational tools that include online courses and seminars, video tutorials, archived videos, QuickTips, and PDF books. *Ratings and awards are based on; (1) for Stocks & Commodities, in each award category, the company that receives the highest number of votes cast by the magazine s subscribers over a fixed time period that ends shortly before announcement of the awards; (2) for TraderPlanet.com, individual reviews of products and services by the TraderPlanet editorial staff to determine the finalists, followed by voting by the full TraderPlanet membership to choose the winners during a two-month voting process that ends shortly before the announcement of the awards. You may contact TradeStation if you are interested in learning more about these ratings and awards. (3) for Barron s, a hands-on review of each company s online brokerage products and services by a Barron s journalist, in several categories, after which numerical scores are assigned per category and aggregated to determine overall numerical score and star rating. You may contact the company if you are interested in learning more about these ratings and awards. Barron s is a registered trademark of Dow Jones. 5

11 When Does Forex Trade? Forex trading takes place in all major financial centers across the globe. The Forex trading market is open 24 hours a day, from Sunday at 5 p.m. ET through Friday at 5 p.m. ET. Although the Forex markets are open almost all of the time, some trading hours may present better opportunities for traders based on market activity and price action. Worldwide Forex Trading Forex trading opens in Asia with Japan, New Zealand, and Australia (with Japan being the biggest player), then in the Middle East, followed by Europe (primarily London) and the U.S. Approximate Worldwide Forex Trading Hours: Asia: 6 p.m. 3 a.m. ET Europe: 2 10 a.m. ET USA: 9 a.m. 3 p.m. ET These hours are usually the time when the Forex markets are the most active, have the largest volume of trades and the biggest price movements. Notice that these market hours will overlap and trading activity can increase during these overlapping periods. Quiet market conditions typically occur from 4p.m. to 6p.m. ET when no major financial centers are active. Note: The FX_Trading Time Zones indicator, displayed on the chart above, is part of the Forex Trader Pack of indicators available as a download with the book. 6

12 Forex Trading Specifications Just like any other trading instrument, cash Forex has product specifications and trading characteristics that the trader needs to understand thoroughly before trading. What are you trading when you trade cash Forex? When you buy or sell in the cash Forex market, you are anticipating that the value or exchange rate of a specific currency is going to increase or decrease in relation to that of a different currency. There are dozens of unique currency pairs that you can trade. In order to fully appreciate this concept, it is important to understand the nature of cash Forex pair symbols. Base Currency (EURUSD) The base currency in a Forex symbol is the first symbol notated. In the case of EURUSD, the base currency is EUR (euro). This is the currency you are buying or selling. For example, if your trade size is 100,000, you are buying or selling 100,000 Euros against U.S. dollars. Quote Currency (EURUSD) The quote currency, sometimes called the secondary or terms currency, is the second symbol notated in a Forex symbol. In the case of EURUSD, the quote currency is USD (U.S. dollars). This is the currency price being quoted. For example, if EURUSD is currently quoted at Bid/ Ask, then you would pay $ U.S. dollars to buy 1 euro and receive $ U.S. dollars to sell 1 euro. The realized profit or loss of a trade is always based on the quote currency, and is automatically converted into your native account currency at the end of the session, based on the current conversion rate. 7

13 Forex Quotes Most Forex symbols are quoted out to four decimal places, with the primary exception of the Japanese yen, which is quoted out to two decimals. TradeStation quotes out all pairs to another decimal place, creating fractional pips, which allows for greater quote precision and tighter bid-ask spreads. Pip A pip is the smallest price/rate change movement. Example 1 (EURUSD) 1 pip in EURUSD is quoted as.0001 U.S. dollars; if you are trading 100,000 units that would make one pip worth 10 U.S. dollars. (100,000 X.0001) = $10. Example 2 (USDJPY) 1 pip in USDJPY is quoted as.01 Japanese yen; if you are trading 100,000 units that would make one pip worth 1,000 Japanese yen. (100,000 X.01) = 1,000 yen. Note: If the quote currency of the trading symbol is not in your native account currency (e.g., U.S. dollars), a balance in this quote currency is generated in your account. This balance is automatically exchanged into your native account currency at the end of the trading session using a conversion factor. In example 2 above, any realized profit or loss trading USDJPY would be in yen. However, this profit or loss is automatically exchanged or converted back into U.S. dollars and placed in your account at the end of the trading session. 8

14 Available Forex Pairs and Historical Data in TradeStation Although there are many available currency pairs to trade, the major pairs primarily traded include U.S. Dollar, Japanese Yen, Euro, Swiss Franc, and British Pound. Many of the major currencies or pairs have trader nicknames: Aussie = Australian dollar, Cable = GBPUSD pair, and Sterling = British Pound. Symbol Description Most-Active Forex Pairs: EURUSD, USDJPY, EURJPY, GBPUSD and USDCHF Daily Data Start Date Minute Data Start Date AUDCAD Australian Dollar / Canadian Dollar 10/22/ /22/2007 AUDCHF Australian Dollar / Swiss Franc 10/29/ /02/2007 AUDJPY Australian Dollar / Japanese Yen 04/09/ /21/2002 AUDNZD Australian Dollar / New Zealand Dollar 10/22/ /22/2007 AUDUSD Australian Dollar / U.S. Dollar 01/04/ /21/2002 CADCHF Canadian Dollar / Swiss Franc 06/01/ /28/2007 CADJPY Canadian Dollar / Japanese Yen 03/14/ /14/2007 CHFJPY Swiss Franc / Japanese Yen 04/09/ /21/2002 EURAUD Euro / Australian Dollar 12/03/ /21/2002 EURCAD Euro / Canadian Dollar 03/14/ /14/2007 EURCHF Euro / Swiss Franc 01/03/ /21/2002 EURGBP Euro / British Pound 01/03/ /21/2002 EURJPY Euro / Japanese Yen 01/03/ /21/2002 EURNOK Euro / Norwegian Kroner 09/05/ /04/2008 EURNZD Euro / New Zealand Dollar 10/29/ /16/2007 EURSEK Euro / Swedish Krona 09/05/ /04/2008 EURUSD Euro / U.S. Dollar 01/05/ /21/2002 GBPAUD British Pound / Australian Dollar 10/22/ /22/2007 GBPCAD British Pound / Canadian Dollar 10/22/ /22/2007 GBPCHF British Pound / Swiss Franc 04/09/ /21/2002 GBPJPY British Pound / Japanese Yen 04/09/ /21/2002 GBPNZD British Pound / New Zealand Dollar 10/29/ /16/2007 GBPUSD British Pound / U.S. Dollar 01/04/ /21/2002 USDCAD US Dollar / Canadian Dollar 01/04/ /21/2002 USDCHF US Dollar / Swiss Franc 01/04/ /21/2002 USDJPY US Dollar / Japanese Yen 01/04/ /21/2002 Note: TradeStation may offer or add additional currency pairs to trade that are not listed here. You can view all available Forex symbols within the TradeStation platform from the Symbol Lookup dialog. 9

15 Bid-Ask Spread The bid and ask prices/rates determine the entry and exit prices for each trade. Entering a new long BUY order or closing an existing short position with a BUY order is executed at the ASK price. A new short SELL order or closing a long position with a SELL order is executed at the BID price. The difference between the bid and ask prices is called the spread, and is the transactional cost of a Forex trade. TradeStation, like all other Forex dealers, makes money on the difference in the bid-ask spread for each completed trade. It is important to fully understand this transactional spread cost concept and to be fully aware of the costs associated with every Forex trade you make. Note: The values under the BA Sprd$ column above are based on 10,000-unit trades in a U.S. dollar-based account, but the values can be based on the quote currency of the symbol by formatting the Indicator and selecting Currency Based on: Symbol in the General tab. Charting Bid and Ask In TradeStation, historical and real-time Forex data is based on the BID data stream only. There is no concept of a trade tick in cash Forex. Since ASK prices are not displayed as part of the bar, you may see BUY orders filled above the bar. Note: In the chart above, the BID and ASK spread is displayed on the last bar as a thicker bar, with the spread in pips below. Note: The FX_BidAsk Charting and FX_BidAsk Pip Spread indicators are part of the Forex Trader Pack of indicators available as a download with the book. 10

16 Costs of Trading Forex Experienced Forex traders know that the major costs to initiate any trade are the spread between the bid and ask prices, plus any commission costs. The spread and commission costs will put your position immediately into the negative when entering a trade. This negative amount must be overcome before the position can become profitable. Pip Spread Trade Cost Although there are no commissions when trading Forex with TradeStation, the bid-ask spread can be a significant trading cost to overcome if you trade frequently or trade less active Forex pairs. The following examples show you how to calculate these costs. Pip Spread Trade Cost Example 1: Long Trade EURUSD Symbol = EURUSD, Units Traded = 100,000, Buy at the Pip Spread Trade Cost = $14.00 USD ( = * 100,000 Units) Pip Spread Trade Cost Example 2: Short Trade EURUSD Symbol = EURUSD, Units Traded = 100,000, Sell at the Pip Spread Trade Cost = $14.00 USD ( = * 100,000 Units) Pip Spread Trade Cost Example 3: Long Trade USDJPY Symbol = USDJPY, Units Traded = 100,000, Buy at the Pip Spread Trade Cost = $13.58 USD ( = 0.012* 100,000 Units * Conversion Factor) Pip Spread Trade Cost Example 4: Short Trade EURCHF Symbol = EURCHF, Units Traded = 100,000, Sell at the Pip Spread Trade Cost = $38.96 USD ( = * 100,000 Units * Conversion Factor) Note: Conversion factors are based on U.S. dollars. 11

17 Costs of Trading Forex Generally, the more active and liquid a currency pair is, the smaller the transactional bid-ask spread costs tend to be. Sample (as low as) Bid-Ask Pip Spreads Note: Pip spreads will fluctuate under different market conditions and will often exceed these minimum spreads throughout the day. Always be aware of the actual bid-ask spread costs before making any Forex trade. Sample Conversion Factors Conversion factors are used to convert the profit or loss of a non-u.s. dollar-based Forex trade into your account s native currency. These factors are based on the exchange rate at the time the conversion is made. Remember that the profit or loss of a Forex trade is always realized in the symbol quote currency, then this profit or loss is automatically converted into your native account currency. Let s say your native account currency is the U.S. dollar and you have a profit in a EURJPY trade. That profit is in YEN; so your YEN would have to be sold at the bid into dollars in order to sweep it into your account currency. If you have a loss, then you need to buy YEN at the ask to cover the loss. Note: This requires two different conversion factors for either profitable trades or for losing trades, depending on which currency needs to be bought or sold for the final conversion into your native account currency. 12

18 Forex Margin Calculations In order to place a Forex trade, your broker will set aside a portion of your account funds to guarantee payment for any potential loss of the position. Margin can be thought of as a good faith deposit required to maintain an open position. This is not a fee or a transaction cost. Calculating Forex Margin The initial margin to trade a major Forex pair is 2% of the trade value (50 to 1) converted to your native account currency. Margin rates are subject to change. Minor Forex pairs offer 20 to 1 margin rates or 5% of the trade value. However, most commonly traded Forex pairs are considered majors. Note: Examples below use U.S. Dollars as the native account currency. Example 1: USD Base Currency Based on a 2% margin requirement, the margin for each dollar-based currency pair, where USD is the base currency (first part) of the symbol, is generally 2%, or $200 for every $10,000 U.S. dollars traded. Symbol Last In this example, if 100,000 units are traded, since USD is the base currency the trade value equals $100,000 U.S. dollars. So USDJPY with a 2% initial margin requirement, this trade would require approximately $2,000 of margin. Example 2: USD Quote Currency The margin required for each non-dollar based currency pair, where USD is NOT the base currency (first part) but is the quote currency (second part) of the symbol, is 2% of the value of the base currency times the current price. Symbol Last In this example, if 100,000 units are traded, the trade value equals 100,000 X = $133,003 U.S. dollars, so with EURUSD a 2% initial margin requirement, this trade would require approximately $2,660 of margin. Example 3: Cross-Currency Pairs The margin required for a non-dollar cross-currency pair is the same calculation as in Example 2 above, which is 2% of the value of the base currency times the base currency s exchange rate to U.S. dollars, or to your native account currency. Symbol Last In this example, if 100,000 units are traded, the trade value equals 100,000 X (EURJPY) = 13,516,100yen. EURJPY Then converted back to U.S. Dollars, 13,516,100 / (USDJPY) = 133,073 U.S. dollars. So with a 2% initial margin requirement, this trade would require approximately $2,661 of margin. Note: Margin trading involves risks and you should understand those risks before trading: You can lose more money than you deposit in your margin account Your brokerage firm can sell your assets without contacting you. 13

19 Carry Trade and Roll Over In the Forex market, interest rate differential adjustments happen at the end of every trading day for all open positions. At the end of each session (5p.m. ET), all positions are closed and then reopened (rolled over) automatically for the next trading day, which begins just a few minutes later, except on Friday. At the end-of-session rollover time each day, the interest rate differential between the two currencies is either credited or debited to your account in a cash transaction. Over the weekend, you are credited or debited with three days worth of interest rate differential. Forex Carry Trade The Forex carry trade involves trading a cash Forex pair in which you are selling the base currency with a lower interest rate and buying the quote currency with a higher interest rate, or buying the base currency with a higher interest rate and selling the quote currency with a lower interest rate. The idea is to pay the low interest rate and collect the higher interest rate, creating a profit from the interest rate differential. The leverage available in Forex can make this a very attractive trade, since your Forex trade allows you to control a large amount of currency for a small amount of margin. The carry trade is normally a long-term strategy that can generate income and profits. However, you are still at risk for price moves against your position in the underlying currencies, so market direction is also critical to the carry trade. You need the currency prices to remain stable or move in your direction during the life of the carry trade. Sample Roll Rates in U.S. Dollars: Notes: The actual Forex prices/rates for each pair are adjusted by the roll amount on the open of the next session. Interest rate differential roll values may change on a daily basis and are based on the native account currency which at this time only supports the U.S. dollar. Example: Let s say you are long 100,000 AUDJPY in a U.S. dollar-based account, and you carry the position into the next trading session. Using the table above, AUDJPY shows that $7.02 would be credited to your account as of the open of the next session. If you were short 100,000 AUDJPY, $18.72 would be debited from your account as of the open of the next session. 14

20 Calculating Forex Trading Profit and Loss Although the TradeStation trading platform automatically does the estimated profit and loss calculations for you in real time, it is important to understand how these P&L equations are derived. Forex Profit and Loss Long Trade = (Closing Price - Opening Price) * Conversion Factor * Trade Size Forex Profit and Loss Short Trade = (Opening Price - Closing Price) * Conversion Factor * Trade Size Sample P&L Scenarios: Example 1: Long 100,000 EURUSD at U.S. Dollar Native Account Currency The above position is closed at: (Closing Price - Opening Price): = (Profit) (Profit X Conversion Factor): X 1.0 = (Conversion Profit) (Conversion Profit * Trade Size): X 100,000 = $1, (Total Profit) Example 2: Short 100,000 USDJPY at U.S. Dollar Native Account Currency The above position is closed at: (Opening Price - Closing Price): = (Loss) (Loss X Conversion Factor): X = (Conversion Loss) (Conversion Loss * Trade Size): X 100,000 = -$ (Total Loss) Example 3: Long 100,000 EURJPY at U.S. Dollar Native Account Currency The above position is closed at: (Closing Price - Opening Price): =.150 (Profit) (Profit X Conversion Factor):.150 X = (Conversion Profit) (Conversion Profit * Trade Size): X 100,000 = $ (Total Profit) Example 4: Short 100,000 GBPCHF at U.S. Dollar Native Account Currency The above position is closed at: (Opening Price - Closing Price): = (Loss) (Loss X Conversion Factor): X = (Conversion Loss) (Conversion Loss * Trade Size): X 100,000 = -$ (Total Loss) Note: All examples are hypothetical trades that use sample prices and conversion rates. 15

21 Important Disclosure HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. 16

22 tradestation platform For traders, today s unpredictable financial markets present unprecedented challenges. Yet the keys to successful trading focus, discipline, consistency remain constant. And that s where TradeStation comes in. With TradeStation, you can develop and execute trading strategies that are based on informed analysis, rather than on emotion, impulse or guesswork. TradeStation offers a complete trading solution, allowing you to: Create custom strategies and back-test them against our extensive historical database Trade your strategies in live simulated trading before risking your money in the market Identify trading opportunities with superior charting and analytical tools Use your computer to fully automate and execute your strategies in real time. Since the June 2001 release of the TradeStation electronic platform, TradeStation Forex Inc. s affiliate, TradeStation Securities, has been repeatedly rated the best online brokerage firm for active traders.* TradeStation s award-winning combination of advanced technology and brokerage services can help you take your trading to the next level. Trading Forex in TradeStation TradeStation Quick Trade Bar The Quick Trade Bar is a dynamic tool that simplifies the placing of market and limit orders and the monitoring of price quotes for different Forex currency pairs. It offers an enhanced *Ratings and awards are based on; (1) for Stocks & Commodities, in each award category, the company that receives the highest number of votes cast by the magazine s subscribers over a fixed time period that ends shortly before announcement of the awards; (2) for TraderPlanet.com, individual reviews of products and services by the TraderPlanet editorial staff to determine the finalists, followed by voting by the full TraderPlanet membership to choose the winners during a two-month voting process that ends shortly before the announcement of the awards. You may contact TradeStation if you are interested in learning more about these ratings and awards. (3) for Barron s, a hands-on review of each company s online brokerage products and services by a Barron s journalist, in several categories, after which numerical scores are assigned per category and aggregated to determine overall numerical score and star rating. You may contact the company if you are interested in learning more about these ratings and awards. Barron s is a registered trademark of Dow Jones. 17

23 display of real-time prices by highlighting the decimal places representing the pip value of a quote. Single clicking on the Bid to sell and on the Ask to buy provides a better perception of the inherent transactional cost. You may also place market orders, close positions, and adjust the quantity with single-click buttons. Forex Market Depth Since TradeStation brings banks together to compete and offer you the best spread, the Market Depth window is able to display three levels of bid and ask prices with the size of currency at each price level. This information allows you to gauge the strength and size of markets. At a glance you will know the price that an order may get filled based on liquidity. You may also compare the amount of liquidity between the bid and the ask and use this as an indicator of market pressure or sentiment. Having greater liquidity on any side of the bid-ask spread could indicate that prices may move in that direction. TradeStation Order Bar The TradeStation Order Bar is the order-entry facility for discretionary trades. Its design emphasizes simplicity and speed. With a click of your mouse, you can easily select the route, order type and duration for your order. Order types include Limit, Market, Stop Market and Stop Limit. The durations include Day, Good till Cancel (GTC), Good till Day (GTD), Immediate or Cancel (IOC) and Fill or Kill (FOK). Multiple accounts can be managed from the convenient drop-down list, and default settings for most choices can easily be set or changed at any time. By using the Buy and Sell buttons, you may open and close currency positions. 18

24 Advanced Order Options The TradeStation order entry tools provide additional advanced functionality. Some of these advanced order features are: Activation Rules: Place an order only when your predefined time- and/or price-based conditions are met. With activation rules, your order is held on the TradeStation Order Execution servers until the specified conditions are true, at which time the order is sent to the market. Trailing Stops: Profit from a currency pair s movement and limit your downside risk without the need to constantly monitor the stock. With trailing stops, your stop price moves along with the price of the stock, as the TradeStation Order Execution servers constantly monitor your order, protecting you in case of loss of connectivity.* If Touched: Market-if-Touched (MIT) orders are the opposite of stop orders. Buy MIT orders are placed below the market and Sell MIT orders are placed above the market. MIT orders are usually used to enter the market or initiate a trade. They are similar to limit orders in that a specific price is placed on the order. However, MIT orders become market orders once the limit price is touched or passed through. OCO and OSO Orders The ability to send multiple orders simultaneously adds efficiency to your trading. OCO and OSO functionality is available via the TradeStation Order Bar and Matrix. Order Cancels Order (OCO) An OCO order consists of a group of two or more parallel orders that are linked together in such a way that if one of the orders is filled, then all of the other parallel orders are cancelled. Bracket OCO A Bracket OCO consists of two exit orders with the same symbol, quantity and order action (Buy or Sell). When one of the orders is partially filled, the other order s quantity is automatically decremented by the same amount. Order Sends Order (OSO) An OSO order consists of a primary order that will send one or more secondary orders when the primary order is filled. OSO orders can be used in combination with Bracket OCO orders when you want to have a Bracket OCO Order (stop loss and profit target) sent once the initial order is filled. To expedite the creation of OCO, Bracket OCO and OSO orders, TradeStation includes a set of order templates that may be selected right from the OCO/OSO menus. *The placing of certain orders (e.g. stop-loss orders or stop-limit order), which are intended to limit losses to certain amounts, may not be effective because market conditions may make it impossible to execute such orders. 19

25 Tracking Orders and Positions TradeStation s TradeManager is an advanced order-management system that allows you to easily view and manage your orders and positions on a real-time basis. All it takes is a single glance at your screen to see the real-time status of all your open, cancelled and filled orders, open positions, real-time profit/loss and much more. Multiple accounts can be easily managed from a convenient drop-down list. Orders Tab The Orders tab displays all your orders for the day, color-coded based on the order status (i.e., open, filled, cancelled, etc.). The colors change automatically as the order status changes. You can easily filter the view based on order status (open, filled, etc.) and/or account number, and sort on any column to quickly find a desired order. To cancel an order, simply right-click on the displayed order and choose Cancel/Close. The TradeManager window also allows you retrieve historical orders and trading activity. Position Tab The Positions tab displays your current long and/or short open positions, color-coded so you can see them at a glance. Winning positions are highlighted in green and losing positions are highlighted in red. Flat positions are shown in a darker shade of color to differentiate them from open positions. In addition, you may format the TradeManager window to display other helpful information such as cumulative profit and loss, and conversion factors. Balances Tab 20

26 The Balances tab of the TradeManager window provides extensive information on the funds in your account. You have access to information such as Beginning Day Cash Balance, Real-time Purchasing Power, Conversion Factors for each of the currency pairs traded, and a detailed breakdown of realized and unrealized profit and loss for each of the positions transacted during the trading day. The Native (USD) column displays an estimated U.S. dollar value of your real-time profit and loss for your convenience. Position Graphs Once you ve placed an order, TradeStation s unique PositionGraphs allow you to track your positions with a glance at your Position Graph Bar. PositionGraphs graphically display each position s drawdown, current profit/loss and run-up in percentage or the account currency amounts. Advanced color coding allows you to easily identify profitable positions displayed in green and losing positions displayed in red. PositionGraphs also enable you to quickly close or reverse a current position by simply right-clicking your mouse on the appropriate PositionGraph and selecting the close position or reverse position option. Enabling cumulative profit and loss allows you to keep track of how much a particular currency pair has affected your account s overall performance. 21

27 Rollover Adjustments in TradeStation At 5 p.m. ET, any open Forex position in TradeStation is exchanged for a new position to expire the following settlement date. The interest rate differential between the two currencies is either credited or debited to your account in a cash transaction. If you are long the currency bearing the higher interest rate, then you should receive a credit in your account. On the other hand, if you are short the currency bearing the higher interest rate, then you should receive a debit in your account. This information is accessible via the TradeStation Support Center at These credits and debits are applied on a daily basis and are clearly identified as part of your daily trades and other transactions. You may view rollover rates and the adjustment amounts for currency pairs by using two TradeStation built-in indicators called FX Roll Acct Value and FX Roll Rates. These two indicators can be used in RadarScreen and Chart Analysis windows, and they display the rollover rates that are applied each day and the amounts that are debited and credited for both long and short positions. 22

28 Strategy Back-Testing and Automation One of TradeStation s most significant advantages is that it enables you to design, historically test and optimize your own custom trading strategies before you risk a penny of trading capital. With hundreds of technical indicators to choose from along with TradeStation s proprietary EasyLanguage technology you can create strategies ranging from simple to complex. You can design strategies with multiple entry and exit signals, order types, money management rules and more. TradeStation gives you the power to translate your trading ideas into a multitude of custom strategies. The chart below contains a TradeStation built-in strategy based on a 2-Line Moving Average crossover. The rules of this strategy are tested against historical data and the Chart Analysis window displays a signal wherever the strategy would have bought or sold based on the moving average crossover. TradeStation enables you to test your strategies using one of the industry s most extensive historical databases. You may test your trading ideas and strategies against days, weeks or even years of historical data. With TradeStation Simulator, you can do more than back-test your strategies against historical market data. Just like a live TradeStation brokerage account, TradeStation Simulator allows you to trade your strategies in today s markets and see the results in real time but without risking a penny of your own money. TradeStation Simulator also gives you the opportunity to gain hands-on experience with all the advanced features of the TradeStation platform. 23

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