Finance: Forex CONTENT MASARYK UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATION. Advisor: Ing. Luděk Benada. Prepared by: Liridon Gashi

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1 MASARYK UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATION Finance: Forex Advisor: Ing. Luděk Benada Prepared by: Liridon Gashi CONTENT Page 2 What is "FOREX "? Page 3 Page 3 Page 5 Page 6 Page 8 Page 9 Page 9 How to make money in FOREX? Pips, Spread and Cotation Forex Leverage and Lots to Forex Analysis methods in FOREX When trading the FOREX? What is the trade FOREX market? What is a FOREX broker? 1

2 What is "FOREX "? FOREX is a contraction of" Foreign Exchange "and the term is universally used to designate the foreign exchange market in which currencies are traded against one another, at rates that are constantly changing. Indeed, the exchange rate, or cotations vary constantly depending on supply and demand and the economic climate. This world market is the second largest market in the world after interest rates. It sees pass every day nearly 3000 billion, which is much larger than the stock (equity market). Criteria market Forex This market is reputed to be the most cash market in the world. Intense volatility, and its proximity to everyday life (since he is the actor of the exchange rates between currencies) makes a particularly endearing and exciting market. Recently, it is possible for any individual to negotiate currency online, in entering this market on specialized trading platforms. Note that before, only banks and large financial institutions could afford it because the minimum investment was around 10 million dollars! Now the trading platform, called Brokers Forex, can offer accounts accessible to small investors and speculators like us. In addition, volatility and leverage offered make it a particularly lucrative market for any person qualified or experienced. FOREX allows you to exchange any currency in the world. Some are more popular, and most are exchanged in the order the dollar, euro, yen and sterling. 2

3 How to make money in FOREX? We'll see how the FOREX market is a market that can be extremely lucrative for very short periods. This requires to be smart and use strategies to maximize our earnings. Roughly the Forex market is like the stock market. But instead of manipulating stock prices, we will manipulate the value of a currency against another, as the euro, the dollar or the sterling. Another difference with the stock market, one can speculate on the market Forex DOWN as well as rise. This means that you can place orders to buy or sell at any time. As a concrete example. Let now the course of the euro against the dollar (known as EUR USD in the jargon) is 1.30.This means that one euro is equivalent to 1 dollar and 30cents. A few days later in the course evolved and is now If you open a purchase order when the price was 1.30 and you were close your position when he was at 1.40, then you have generated a profit from the difference of the two. But if you bought when the price was high, and sold when it was low, and although you would then undergoes loss of the difference between the two. If you handle currency strategy without you (over the long term) after winning two and losing half the time. Overall there would be no point. Pips, Spread and cotation Forex 3

4 Cotation Forex You are abroad and you want to exchange one currency against another. Suppose you are in the U.S. and you want to exchange your Euros against U.S. dollars. Exchange at the counter you then displayed on a screen is called a cotation. In our example, the euro against the dollar is displayed to This means that if you exchange 1 euro, you will in return dollars. What is a Pip in Forex? The last figure, the fourth decimal place, (the "2", ), is the smallest difference rating possible. This is called in the jargon a "pip" If the price of the EUR USD climbed from to when the price rose to 1 pip. IT acts of the unit used to speak fluently in the amplitude of price movements and earnings you will be able to achieve. But there is one exception, these are all pairs related to the Yen. In fact, our Japanese friends do not have (unlike other currencies) centimes. For example, the current Euro Yen (JPY EUR in the jargon) is now at In this case the smallest difference in scoring is possible, to two decimal places instead of the fourth. So if the price of the euro falling yen from to while the price fell by 2 pips. What is spread? The supply and demand The same window you may have noticed there is a difference between the listing buying and selling. In fact, if you want to exchange Euros against dollars, or dollars against Euros listing is not the same. The tables all have two columns: one for the ASK (demand) and the other for the IDB (supply). For example if the table shows the column ASK and in the BID column, then there is a difference of 3 pips between the buying and selling. In the Forex market, this difference is called the spread. This is the commission that the broker (broker in the jargon) will affect your transaction. Principle of a Forex transaction: You open a buy order at on the EURUSD. 30 minutes before the course is worth and you close your position. 4

5 What's going on? First, we note that the price was up 40 pips ( to = ). Subtract the spread of 3 pips (the broker's commission), so you have generated a net profit of 37pips. But how did you win? It depends on two factors. How much you have invested in this operation and what leverage you have requested. You will discover in the course according to the mechanism of leverage in forex. 5

6 Leverage and Lots to Forex What is leverage in the FOREX? Leverage is a principle that can multiply your investment. Archimedes had written "Give me a lever long enough and I could move the world." Similarly, the more you use a high leverage in Forex is more increased your investment. Calculation of the lever in Forex: In the previous example if you have invested and you did not used to leverage, which is equal to 1 leverage, then you would have earned: to to = $ 3.70 You have invested 1,000 the price was up 40 pips, which is relatively large, and you have yet to generate a small profit of $ Indeed, the currency fluctuate but very little, that's why all traders use leverage. While leverage is a principle that allows you to multiply the amount you have invested personally. Technically, you are investing for example, and a bank lends you an additional will be added to your investment. So you have changed your to In other words you are using a leverage of 100. In the same example if you had invested with a leverage of 100 forex then you would have won: to to = $ 370 You have won $ 370 (or 269) having the same amount invested at the beginning. You understand therefore how much leverage is important in equity markets, especially on the Forex market or levers can reach up to 500! How does leverage? One question remains unanswered: " If you have lost is what you could be liable for prepared by the bank? ". The answer, fortunately, is no! Indeed the system is made so that if your position to ruin, your position will automatically be closed when your investment ( 1000 here) is reached. So you can not lose more than what you invested and the bank for its part is taking no chances. 6

7 Lot, mini-lot, micro-lot and nano-lot in Forex In the language we speak regularly "lots" to express the amount of capital at stake (after leverage). 1 lot = mini-lot = micro-lot = nano-lot = 100 Analysis methods in FOREX As you understand, the secret lies in the ability to determine future market movements and to intelligently manage its portfolio. To anticipate the market there are two main branches of analyzes in forex: graphical analysis and fundamental analysis. Both types of analysis for understanding the mechanisms and factors involved in the future movements of currency pairs. What is the graphical analysis? The graphical analysis (also called analytical or technical) is the study of Forex charts. These studies usually live done with different forex indicators. It s like a meteorologist to forecast weather, we will see various indicators such as temperature, humidity, pressure, wind... By combining this information, and by analogy with what he already knows, the meteorologist will then be able to decide on future projections with varying degrees of certainty. The trader who makes the graphical analysis, will consider graphs of different parities, using indicators such as oscillators, moving averages, volume indices, the straight horizontal or oblique... etc.. By combining this information with experience, the trader will then be able to meter identification of specific contexts or the course will be more likely to go up or down. And, by estimating how much. As you understood it is estimated with varying degrees of certainty. The goal is not to be right every time, the goal is to have more than one reason half the time. Months or have a sum of profits greater than the losses. Some graphical analysis are generated directly by computer. Software, developed by traders, themselves overlapping information of the selected indicators and then deliver instructions to buy or sell. These programs are called fluent or expert advisor trading system. 7

8 What is fundamental analysis? Fundamental analysis is based on the economic climate. There are two basic types of analysis. The first is to go long (several months) based on the profound economic climate giving the trend of currency. This analysis proves to be very complicated because it requires increased knowledge and the opportunity to learn critical information unavailable to individual traders. The second part consists of fundamental analysis to trade many small business news. In fact, several times a day, results of economic announcements were found at specific times. Their result, when diverges with the result that was widely expected, then causes more or less hard acceleration upward or downward, depending on the number revealed. These include such announcements of employment rates, unemployment, the result of trade balances, indices of consumer rates of interest statements, or speeches by leaders of the future monetary policy of a state. All these ads are witness to the economic climate of a currency (or a country) and can therefore trigger a strong impact on the market. A healthy economy leads to a strengthening of the currency. Poor health Economic causes a drop in the currency. 8

9 When trading the FOREX? Schedule Forex market Unlike the stock market, the Forex market is open 24 24! To achieve this "exploit" take turns four awards (one in London, New York, Tokyo and Sydney). The schedule of bearings are available in the following table: Note that all budgets are not requested on the same scale. Indeed some are more active than others. The most active stock markets The most active stock market is London. On the other hand, when both exchanges overlap, their trading volumes are additive. More activity, the more the market is volatile. It is these contexts that traders prefer because they are the ones who provide most of the fluctuations and therefore more opportunities to transact interest. The most volatile slots Slots are the most sought those where the grant London is open and when another market simultaneously active. In GMT time, the niche 8am-9am is the overlap of the Tokyo Stock Exchange and London. The niche 13h-17h GMT is the overlap between the stock exchanges in London and New York. These are the slots that are the most active periods and the most volatile Forex market. However, it is also possible to trade currencies at any time while the market provides opportunities generally less impressive outside these periods. Opening hours and closing of the Forex market open 24/24 FOREX market closes its doors still between the weekend every Friday at 22h and 23h (GMT) every Sunday. 9

10 What is the trade FOREX market? In FOREX, trade is money. Specifically parities of currencies. Such as the euro against the dollar commonly known as EUR / USD. Parity left is called the base currency, and the right currency exchange. What happens if the base currency increases Answer: the pair rises What happens if the base currency decline Answer: the pair down What happens if the counter currency increases Answer: the pair down Whathappens if the currency exchange decline Answer: the pair increases What is a FOREX broker? A FOREX broker is an operator that links you - the trader - and the real market of FOREX. This is equivalent to what is commonly called by "broker" or "trader". Today brokers are in the form of software (available online or download) that allows you to make your trading operations on the Internet. All brokers offer the ability to trade in virtual mode or "demo" mode. Giving you plenty of time to train you to speculate on the Forex market without the risk can lose real money! When trading real money, the broker takes note of your orders and applies them instantly (or almost) by investing your money with major international banks. Your capital is thus found on the Forex market, until you close your transaction in order to recover your capital and your profits boosted by reduced losses. There are dozens of different brokers. Some are preferred for beginners, others for intermediate traders, some traders are reserved for experts equipped with a lot of money. That's why right choosing the broker is essential to successfully launch into the world of Forex trading. Difference between market maker and broker no dealing desk is also another important, there are two types of brokers: NO Dealing Desk which are intermediary between the trader (you) and the interbank market. All your transactions are automatically placed on the market. There are two types of no dealing desk broker, the STP (Straight Through Process, as FXCM) and ECN (Electronic Communication Network) (+ info on broker forex no dealing desk) The dealing desk (or market maker) that serve as currency exchange. This means that they behave themselves as the market. Some positions are covered, some not. (+ Info on broker forex market maker) 10