Learn to Trade FOREX II

Transcription

1 Lesson 1 The Forex Market The Foreign Exchange market, also referred to as the "FX market" or "Spot FX", is the largest financial market in the world with daily average turnover of US$1.9 trillion. Unlike other markets you may be familiar with, there is no central marketplace for Forex or currency trading; instead, all transactions are conducted through dealers over-the-counter. Currencies are traded in pairs; in each transaction, one currency is bought while another is simultaneously sold. Exchanging currencies on vacation works in much the same way: if you travel to Europe and change US dollars for Euros, you're effectively buying Euros at a posted price while simultaneously selling US dollars. Forex Trading Day & The Majors Forex trading begins each day in Sydney and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night. Currency pairs In the pairs, the first named currency is referred to as the base currency, while the second is known as the counter currency. The price of the currency pair represents how much of the counter currency is needed to buy one unit of the base currency. Example: The Majors USD / JPY Base Currency / Counter Currency It is believed by speculators that the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called "the Majors." The following are collectively known as the majors: EUR/USD Euro vs. U.S. Dollar Euro GBP/USD Sterling vs. U.S. Dollar Sterling, Pound, Cable AUD/USD Australian Dollar vs. U.S. Dollar Aussie USD/JPY U.S. Dollar vs. Yen Yen USD/CHF U.S. Dollar vs. Swiss Franc Swissie USD/CAD U.S. Dollar vs. Canadian Loonie, The Funds NZD/USD New Zealand Dollar vs. U.S. Dollar Kiwi

2 Lesson 1 2 Cross Currency Pairs A cross currency pair, also known simply as a "cross" or "crosses", is a currency pair that does not include the US dollar. The most heavily traded crosses are the other major currencies versus each other. Some examples are: EUR/JPY EUR/GBP EUR/CHF EUR/AUD GBP/CHF GBP/JPY CHF/JPY AUD/JPY NZD/JPY EUR/CAD CAD/JPY Euro vs. Yen Euro vs. Pound Euro vs. Swiss Franc Euro vs. Australian Dollar Pound vs. Swiss Franc Pound vs. Yen Swiss Franc vs. Yen Australian Dollar vs. Yen New Zealand Dollar vs. Yen Euro vs. Canadian Dollar Canadian Dollar vs. Yen Lots In Forex, a lot is a unit of measurement for transactions. There are two types of trade sizes available in Forex: standard and mini. The standard account trades in lot sizes of 100,000 and is for clients who feel comfortable trading Forex. A mini account is great way to get started in a live environment and offers smaller lot sizes of 10,000. Bids and Asks Each currency pair price has two parts: the bid and the ask. The bid price is always lower than the ask price, and the difference between the two is known as the "spread." The bid is where you re able to sell the pair (sell the base currency/buy the counter), and the ask is the price where you can buy the currency pair. Buying and Selling When a trader wishes to enter the market, he or she can either buy or sell a currency pair. When a position is opened by buying, the trader is purchasing the base currency while selling the counter currency. This is known as "going long". When a trader chooses to enter a position by selling, he or she is selling the base currency while buying the counter currency. This is known as "going short".

3 Lesson 1 3 Pip Value In the Forex market, prices are quoted in Pips. Pip stands for "percentage in point" and is the fourth decimal point, which is 1/100th of 1%. A 'Pip' is the smallest unit of price change in currency trading. For example, a 1 Pip difference for the USD/JPY is a change from to Among the major currencies, the only exception to that quoting rule is in currency pairs including the Japanese Yen. In USD/JPY, for example, the quotation is only taken out to two decimal points (i.e. to 1/100th of yen, as opposed to 1/1000th with other major currencies). The value of a Pip is always denominated in USD and is determined by the counter currency. When USD is the counter currency, each Pip is worth $1 when trading in lots of 10,000 and $10 with lots of 100,000. However, when USD is the base currency, the price per Pip varies, depending on the counter currency.

4 Lesson 1 4 Quiz 1. What are the Majors? 2. Where does Forex trading begin each day? What is the order of the other financial centers? 3. What are the opening times of each session in ET? 4. For each pair, which is the base currency and which is the counter currency? a. USD/CHF b. GBP/USD c. EUR/USD d. USD/JPY 5. What is a cross currency pair? Give 2 examples of a cross currency pair. 6. Explain what the spread is: 7. When you buy a currency, you are purchasing the base currency. This is known as:. 8. When you sell a currency, you are selling the base currency. This is known as:. 9. Give the definition of a Pip: 10. If GBP/USD moves from to , how many Pips has that currency moved? 11. What is the value of a Pip when USD is the counter currency for a 10,000 lot size trade? For a 100,000 lot size trade?

5 Lesson 1 5 Answer Key 1. The Majors include Euro/US Dollar (EUR/USD), the US Dollar/Japanese Yen (USD/JPY), the British Pound/US Dollar (GBP/USD), and the US Dollar/Swiss Franc (USD/CHF). 2. It begins in Sidney and continues through Tokyo, London, and New York. 3. Tokyo: 6:00 pm ET, London: 3:00 am ET, New York: 8:00 am ET 4. a. Base: USD, Counter: CHF b. Base: GPD, Counter: USD c. Base: EUR, Counter: USD d. Base: USD, Counter: JPY 5. A cross currency pair, also known simply as a "cross" or "crosses", is a currency pair that does not include the US dollar. Examples: EUR/JPY, EUR/GBP, EUR/CHF, EUR/AUD, GBP/CHF, GBP/JPY, CHF/JPY, AUD/JPY, NZD/JPY, EUR/CAD, CAD/JPY. 6. The difference between the bid and offer rates. 7. Going Long. 8. Going Short. 9. Pip stands for "percentage in point" and is the fourth decimal point, which is 1/100th of 1%. A 'pip' is the smallest unit of price change in currency trading Pips 11. For a 10,000 lot size it is $1. For a 100,000 lot size it is $10.