An Introduction to Forex Trading
Forex Forex is the fancy abbreviation for the Foreign Exchange, or Currency Market. This is where people and organizations go to buy and sell one country s currency in exchange for another country s currency. This forex market is quite unique as far as markets go these days. Here are some reasons why: 1. Market Size: If you know anything about forex, then you probably know this the forex market is the largest market in the world. The forex brokers love to tell you this fact. The trillions of dollars traded in the forex market means that you can surely skim some profits off for yourself, right? Well, maybe, maybe not. The only real advantage of the size of the forex market is that you can, under most circumstances, get your order filled very quickly (within a second or two) for trades up to 20 million dollars. If you are trading larger positions you may call your broker or move to a platform that offers access to the order books of the banks and financial institutions. The dirty little secret is that the forex market the real forex market where banks and hedge funds and large multinational companies exchange foreign currencies, is not accessible to most traders. Nearly all of the independent traders in forex trade in the retail forex market, which is entirely created by your forex broker. 2. No Exchange: Unlike other markets, such as stocks and futures, currencies are not traded in a location where people gather and trade currencies face to face. All of currency trading is done through a network of banks, currency dealers and other financial institutions. Nearly all currency exchange is done electronically. Without a central exchange, there are no rules on commissions, limitations for positions, there are no insider trading laws or margin requirements. Each country decides which regulating authority will create the foreign currency policies for that country. 3. 24 hours: Forex brokers will allow you to trade 24 hours a day, from Monday morning in Tokyo until Friday evening in New York. The end of the week is defined differently by each broker, but most brokers end the trading week within a few hours of Friday, 5:00pm in New York. It is possible to trade forex 24 hours a day, 5 ½ days per week, although it certainly is not recommended that you do so.
Here is a quick look at the opening and closing times of the major forex markets. Time Zone New York GMT Tokyo Open 7:00 pm 0:00 Tokyo Close 4:00 am 9:00 London Open 3:00 am 8:00 London Close 12:00 pm 17:00 New York Open 8:00 am 13:00 New York Close 5:00 pm 22:00 4. High Leverage: Because each country is left to regulate the forex market within its own borders, there are no accepted margin laws for trading forex. However, most brokers will offer 100:1 margin, and some will offer as much as 400:1 margin. With 100:1 margin, and a $2,000 account, it is possible for you to buy 100,000 AUD/USD (you will learn later what this means). If you buy 100,000 AUD/USD, your broker will then take $1,000 (100,000 / 100) out of your account and set it aside as margin (this is simply a cushion to guarantee that you can pay for any potential losses without risk to the broker). This means that you now have $1,000 left in your account as available margin. So, if the AUD/USD goes down 100 points ( = $1,000 on a 100,000 position), your broker will close your trade, remove $1,000 to pay for the loss, and put the $1,000 margin back into your account. 5. Sell Short: Currency trading is very different from stock trading in that you can sell a currency short just as easily as you can buy it. There are no rules about selling short, unlike many other markets that make it difficult or illegal to sell short. Why Trade Forex? There are many benefits and advantages to trading Forex. Here are just a few reasons why so many people are choosing this market:
No commissions. No clearing fees, no exchange fees, no government fees, no brokerage fees. Brokers are compensated for their services through something called the bid-ask spread. No middlemen. Spot currency trading eliminates the middlemen, and allows you to trade directly with the market responsible for the pricing on a particular currency pair. No fixed lot size. In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5000 ounces. In spot Forex, you determine your own lot size. This allows traders to participate with accounts as small as $250 (although a $250 account may be a bad idea). Low transaction costs. The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under normal market conditions. At larger dealers, the spread could be as low as.07 percent. Of course this depends on your leverage and all will be explained later. No one can corner the market. The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank) can control the market price for an extended period of time. Leverage. In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500 dollars, one could trade with $100,000 dollars and so on. But leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
High Liquidity. Because the Forex Market is so enormous, it is also extremely liquid. This means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will. You have no reason to ever be "stuck" in a trade. You can even set your online trading platform to automatically close your position at your desired profit level (a limit order), and/or close a trade if a trade is going against you (a stop loss order). Free Demo Accounts, News, Charts, and Analysis. Most online Forex brokers offer 'demo' accounts to practice trading, along with breaking Forex news and charting services. All free! These are very valuable resources for poor and SMART traders who would like to hone their trading skills with 'play' money before opening a live trading account and risking real money. Mini and Micro Trading: You would think that getting started as a currency trader would cost a ton of money. The fact is, compared to trading stocks, options or futures, it doesn't. Online Forex brokers offer "mini" and micro trading accounts, some with a minimum account deposit of $300 or less. Now we're not saying you should open an account with the bare minimum but it does makes Forex much more accessible to the average (poorer) individual who doesn't have a lot of start-up trading capital. A computer with a high-speed Internet connection is all that is needed to begin trading currencies. What is Traded in the Forex Market? The simple answer is money. Forex trading is the simultaneous buying of one currency and the selling of another. Currencies are traded through a broker or dealer, and are traded in pairs; for example the euro and the US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY). Because you're not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.
In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to the other countries' economies. As you know, the forex spot market is not located at a physical location or a central exchange. The forex market is considered an Over-the-Counter (OTC) or 'Interbank' market because the entire market is run electronically, within a network of banks, continuously over a 24-hour period. Until the late 1990's, only the "big guys" could play this game. The initial requirement was that you could trade only if you had about ten to fifty million bucks to start with! Forex was originally intended to be used by bankers and large institutions - and not by us "little guys". However, because of the rise of the Internet, online Forex trading firms are now able to offer trading accounts to 'retail' traders like us. Who Trades in the Forex Market? Much of the forex trading is done by banks, moving money from one form of currency to another. Businesses are also involved in the forex market. International businesses must move their money from one currency to another in order to buy and sell goods and services. For example, automobile distributors in Australia must sell Australian dollars and buy Japanese Yen in order to pay for a shipment of Japanese automobiles. A chocolate store in France may sell chocolates made in the USA, so the French company will sell Euros and buy US Dollars in order to pay for the US chocolates. You get the idea the main thing to remember is that in today s world market there are many reasons why one currency may have to be exchanged for another currency. Businesses and banks are the some of the biggest, but not the only players in the forex market. The rest of the forex market is made up of all kinds of speculators. Some of them are buying US Dollars, for example, in order to buy US Stocks, others are buying Australian Dollars in order to buy Australian stocks, still others may buy Euros to keep Euros in a bank account as a currency speculation on its own, and some just to make a leveraged bet on currency direction. Some investment groups and hedge funds also move money from one currency to another in order to realise gains. You are probably one of the speculators, and that is why you are reading this. Banks, hedge funds, account managers, and companies all make up the group of speculators. Additionally, sometimes retail currency brokers (your broker), institutional investors and retail currency traders (people like you) will hedge or speculate in the forex market.
What is a Spot Market? A spot market is any market that deals in the current price of a financial instrument. In forex, nearly all of the trading done by normal people (e.g., you and I) is done in the forex spot market. Which Currencies Are Traded? The most popular currencies along with their symbols are shown below: Symbol Country Currency Nickname USD United States Dollar Buck EUR Euro members Euro Fiber JPY Japan Yen Yen GBP Great Britain Pound Cable CHF Switzerland Franc Swissy CAD Canada Dollar Loonie AUD Australia Dollar Aussie NZD New Zealand Dollar Kiwi Forex currency symbols are always three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country s currency. The Forex OTC Market The Forex OTC market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organizations. In the OTC market, participants determine who they want to trade with depending on trading conditions, attractiveness of prices and reputation of the trading counterpart.
The chart below shows global foreign exchange activity. The US Dollar is the most traded currency, being on one side of 86% of all transactions. The Euro s share is second at 37%, while that of the Yen is third at 16.5%. How To Read a Forex Quote Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason they are quoted in pairs is because in every foreign exchange transaction you are simultaneously buying one currency and selling another. Here is an example of a foreign exchange rate for the British pound versus the U.S. dollar: GBP/USD = 1.7500 The first listed currency to the left of the slash ("/") is known as the base currency (in this example, the British pound), while the second one on the right is called the counter or quote currency (in this example, the U.S. dollar).
When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you have to pay 1.7500 U.S. dollar to buy 1 British pound. When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example above, you will receive 1.7500 U.S. dollars when you sell 1 British pound. The base currency is the basis for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency. You would buy the pair if you believe the base currency will appreciate (go up) relative to the quote currency. You would sell the pair if you think the base currency will depreciate (go down) relative to the quote currency. The Spread All Forex quotes include a two-way price, the bid and ask. The bid is always lower than the ask price. The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency. This means the bid is the price at which you (as the trader) will sell. The ask is the price at which the dealer will sell the base currency in exchange for the quote currency. This means the ask is the price at which you will buy. The difference between the bid and the ask price is popularly known as the spread. Let's take a look at an example of a price quote taken from a trading platform: On this GBP/USD quote, the bid price is 1.7445 and the ask price is 1.7449. Look at how this broker makes it so easy for you to trade away your money. If you want to sell GBP, you click "Sell" and you will sell pounds at 1.7445. If you want to buy GBP, you click "Buy" and you will buy pounds at 1.7449.
How a Forex Trade Works Placing a trade in the foreign exchange market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless. Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the basis for the buy or the sell. For example, if you BUY EUR/USD you have bought Euros (simultaneously sold dollars). You would do so in expectation that the Euro will appreciate (go up) relative to the US dollar. Just like in all markets, there are two prices for every currency pair. As you know, the difference between these two prices is the spread, or the cost of the trade. In this example, the spread is three pips. On a mini account, a pip on the EUR/USD currency pair is worth $1. For example, if the EUR/USD has an ask price of 1.2178 that means you can buy one Euro for 1.2178 US dollars. A pip is simply the standard unit of movement of value between two currencies. Pip stands for "Price Index Point" and is the smallest increment of trade in FX. In the FX market, prices are quoted to the fourth decimal point. For example, if a candy bar in the super market priced at $1.20, in the FX market the same candy bar would be quoted at 1.2000. The change in that fourth decimal point is called 1 pip and is typically equal to 1/100th of 1% or 1/1000th. This is true for most currencies except the Japanese yen. Because the Japanese yen has never been revalued since the Second World War, 1 yen is now worth approximately US$0.08; so, in the USD/JPY pair, 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).
Positions Sometimes you will hear going long or going short when making a trade. We call this our position. Sometimes we refer our positions as either going long which mean buying; or going short which means that we are selling. So if we say that we are going long with the EUR/USD, we are also saying that we are buying Euros and selling dollars. If we say that we are going short on the EUR/USD, then we are saying that we are selling Euros and buying dollars. When you see a price quote for a EUR/USD (or any other currency) you will also see the bidask spreads. They look something like this: 1.1911/1.1916. The first part is the amount that you receive in exchange for 1 unit of the base currency. We call this the bid price. The second part of the quote is the amount of the currency you must spend for 1 unit of the base currency. So in other words if you see a quote for a EUR/USD as 1.1911/1.1916, this means that you can sell one Euro for 1.1911 and buy one Euro for 1.1916. The first part is the Bid price. The second part is the quote price. Remember that sometimes they won t list the full price on both sides. Sometimes they will write it as 1.1911/16. It s just because they are too lazy to write out the whole quote. The numbers are almost the same except for the last two digits so they just put the last two. Transactions Cost for Trading Forex dealers in the USA dealers must disclose the charges to customers. However, there are no laws about how a forex broker may charge a customer for the services the broker provides, neither are there any laws about how much the dealer can charge. Brokers will charge fees to trade forex and to withdraw money from your account. Some firms charge more than others, so it is worthwhile to look into the wire fees that brokers charge. Ask around to compare the charges for different brokers. Some firms charge a per trade commission, while other firms charge a mark-up by widening the spread between the bid and ask prices they give their customers. In the earlier trade example, let us assume that the dealer can get a AUD/USD spread of 0.8510/12 from a bank. If the dealer widens the spread to 0.8508/14 for its customers, the dealer has marked up the spread by.0002 on each side. Some brokers may charge both a commission and a mark-up. Brokers may also charge a different mark-up for buying the base currency than for selling it. You should read your agreement with the dealer carefully and be sure you understand how the firm will charge you for your trades.
Calculating profits and losses Let s say that you buy Australian Dollars (AUD/USD) at 0.8510 (you are going long at 0.8510). When the currency pair goes up to 0.8532 you decide to close the trade. If the transaction size is 100,000 Australian Dollars, you will have $220.00 in profit. This is the formula for calculating: (Difference in the buy & sell price) x Transaction size = Profit (or loss) (0.8510 0.8532) x 100,000 = 220.00 You have the ability to leverage the money in your account. So, you can control a large amount of currency using a very small percentage of its value. So if your broker is offering leverage of 100:1 and you have $2000 in your account, then you can trade $200,000 worth of currency ($2000 x 100 = $200,000). Trading $200,000 worth of currency with a $2000 is not recommended, however, because you will not have enough money in the account to account for fluctuations in the market. Can I Still Trade Forex With Little Money? You can with margin trading! Margin trading is simply the term used for trading with borrowed capital. This is how you're able to open $10,000 or $100,000 positions with as little as $50 or $1,000. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital. Margin Trading in Forex The margin deposit used for leveraging in forex is very different from the margin used in the stock market. In the stock market margin is like a down payment on a purchase of the stock. In the forex market margin is like a security bond, or deposit, to ensure against trading losses. The margin requirement allows forex traders to hold a position much larger than the account value. This is a critical part of forex trading because the fluctuations in forex are so small that without leverage most individual traders would not be able to achieve gains of any real significance.
If the funds in the trading account fall below margin requirements, most brokers will automatically close the account. This prevents clients' accounts from falling into a negative balance, even in a highly volatile, fast moving market. Since the trader opened 1 lot of the EUR/USD, his margin requirement or Used Margin is $1000. Usable Margin is the funds available to open new positions or sustain trading losses. If the equity (the value of his account) falls below his Used Margin due to trading losses, his position will automatically be closed. As a result, the trader can never lose more than he/she deposits. Here are some examples of how the usable margin is displayed in a forex trading account. You can see here that the account has $50,010.00 in usable margin. And this account has $23,528.85 in usable margin. Margin Trading: An Example Margin trading in the foreign exchange market is quantified in lots. We will be discussing these in depth in our next lesson. For now, just think of the term "lot" as the minimum amount of currency you have to buy. When you go to the grocery store and want to buy an egg, you can't just buy a single egg; they come in dozens or "lots" of 12. In Forex, it would be just as foolish to buy or sell 1 euro, so they usually come in "lots" of 10,000 (Mini) or 100,000 (Standard) depending on the type of account you have. For Example: You believe that signals in the market are indicating that the British Pound will go up against the US dollar. You open one lot (100,000), buying with the British pound at 1% margin and wait for the exchange rate to climb. When you buy one lot (100,000) of GBP/USD at a price of 1.5000, you are buying 100,000 pounds, which is worth US$150,000 (100,000 units of GBP * 1.50 (exchange rate with USD)). If the margin requirement was 1%, then US$1500 would be set aside in your account to open up the trade (US$150,000 * 1%). You now control 100,000 pounds with US$1500. Your predictions come true and you decide to sell.
You close the position at 1.5050. You earn 50 pips or about $500. (A pip is the smallest price movement available in a currency). Your Actions GBP USD You buy 100,000 pounds at the GBP/USD exchange rate of 1.5000 You blink for two seconds and the GBP/USD exchange rate rises to 1.5050 and you sell. +100,000-150,000-100,000 +150,500** You have earned a profit of $500. 0 +500 When you decide to close a position, the deposit that you originally made is returned to you and a calculation of your profits or losses is done. This profit or loss is then credited to your account. What Does it Cost to Trade Forex? An online currency trading (a micro account ) may be opened with a couple hundred bucks. Do not laugh micro accounts and its bigger cousin, the mini account, are both good ways to get your feet wet without drowning. For a micro account, I would recommend at least $500 to start. For a mini account, it may be good to have about at least $5,000 to start. In the FX market, you buy or sell currencies. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are very similar to those found in other markets (like the stock market), so if you have any experience in trading, you should be able to pick it up pretty quickly. The object of Forex trading is to exchange one currency for another in the expectation that the price will change, so that the currency you bought will increase in value compared to the one you sold. What is a Forex Dealer? A forex dealer (or forex broker ) is a company set up to allow people to make foreign currency trades. For most speculators, trading through a currency dealer has many advantages.
1. Trading Platform: Forex dealers usually have fairly sophisticated trading software that streams live prices to your computer. You can place several types of orders with just a few clicks, and get immediate trade confirmation. 2. Easy Account Setup: Account applications at forex dealers are relatively simple. Some dealers even have applications that you can fill online. Then you only need to fax or email a copy of your identification. You can usually get all setup and ready to trade in under a week, as long as you are ready to make a wire transfer as soon as the dealer gives you the green light. 3. Reports: Each dealer has different account reports that show all of the trades you have made. Make sure to try a demo account before signing up, and make sure that you understand them, and they are easy to understand. Most dealers have pretty good reports. Spot Forex Advantages Over Currency Futures 1. More Flexibility: For example if you have reason to believe that the British Pound will be strengthening in relation to the Japanese Yen, you can just buy the GBP/JPY forex pair, instead of buying one contract of GBP s, and selling one contract of JPY s. Most forex dealers these days also offer very flexible position sizes, some starting at just 1,000 units (i.e. Dollars). 2. No Expiration: Your forex positions do not expire the way futures contracts do, so if you want to make a long term trade, you are not forced to roll over into a new contract and paying another commission. 3. No Commissions: This applies to most forex dealers but not all. Be sure to check. But most currency dealers do not charge commissions. Instead they just have a slightly wider spread between bid and ask (buy and sell) prices. It usually evens out to about the same as paying a commission on a futures contract. I just think it is simpler on the part of the forex dealer. 4. Interest: When you place trades with a forex dealer, most of them will pay or charge you interest, depending on the central bank interest rates of the countries whose currencies you are trading. For example: If the Bank of England rate is 4.5% and the Federal Reserve Rate is 2%, and you buy the GBP/USD forex pair, then your dealer should pay you some interest every day that you hold the position. Note: Each dealer has their own policy on interest. Be sure to ask your dealer how it works on their system. The interest in a futures contract is built into the price so buying and selling futures is very different than buying and selling spot forex.
Myths of the Evil Forex Dealers There is a common folklore amongst some retail currency traders about their forex dealer playing tricks on them. The main one is about running stops. In this type of tale, the disgruntled trader will give detailed accounts of how he placed a buy trade with a stop loss order 40 pips lower than current market. Then, his forex dealer proceeded to sell the pair down, lower and lower, accumulating a position of millions of dollars in the process (although this bit of logic is usually omitted from the story). They sold it all the way down to the stop order of this poor victim, stopped him out of his trade, and then stopped selling, allowing the pair to rise up again back to where the trade was initially opened. Holes in the story: 1. As noted above, it usually takes millions and millions of dollars to move a currency pair just a few pips. That is a lot of risk for a dealer to take on in order to just to execute the stop loss order of one of its thousands of clients. 2. Your currency dealer likely has hundreds, if not thousands of trades on its books at any given time. Many of which are likely to be the opposite of yours. Therefore, if they are taking pips from you, they are probably giving pips to other clients. It is a risky balance for a dealer to try and screw one side of its order book. 3. Victim Syndrome. It is emotionally and socially very convenient to have your faults be the result of the evildoings of your perceived (sometimes imaginary) enemy. It allows one to be wrong without having to take responsibility for it. Yesterday my trade would have been profitable, if only the FOMC hadn t opened its big fat mouth about being afraid of inflation again. Today I took a loss because my dealer decided he wanted my money and he ran my stop. But when this person wins, it is because he has a good system, or he is just smart. He quickly takes responsibility for his wins, where he was avoiding doing so with his losses. He overlooks the presence of chance or luck that is part of every trade. This way of thinking is very common. Most of us (myself included) have in some form tried to make our shortcomings the product of some outside force, but not our own mistake, lack of discipline, baseless hope, or just plain bad luck. Take Responsibility for your Trading I firmly believe that one can never be a successful trader until one takes responsibility in ones losses as well as wins. To always come up with reasons outside of yourself for your losses is a crippling habit to your development as a trader. To have a trade go just one pip past your stop loss and then come back is always frustrating. But it happens. It also happens that trades sometimes go 10, 17, 50, or 500 pips past your stop loss before turning around. Ever had a trade go just one pip past your profit limit order and then turn around? I have.
Not because I was super smart to pick the best exit. Just because after making lots and lots of trades, things like that happen. How to Protect Yourself In the rare but possible event that you have major problems with your forex dealer, it is good to be prepared. Here are a few things you can have in mind when choosing a forex dealer: 1. Open and Honest: Pick a dealer that is open about their financial situation, and how they handle client funds (separated from company operating capital, etc). 2. Jurisdiction and Regulation: Pick a dealer that is regulated in a country where you understand the laws (as much as possible). Being able to understand the national language is important. 3. Accounts at more than one dealer: You can always have accounts at multiple dealers. This also allows you to use more of the features of each, and get to know which one you really like trading with the best over a longer period of time. Sometimes seemingly good companies go bankrupt, and it is difficult or impossible for all of use to see it coming. It is a risk to have your money in a bank, a forex dealer or in your mattress. It is a risk to cross the street. But you can t just paralyze yourself out of fear of the unknowable. Just shop around and go with what feels right to you. Choosing a Dealer In addition to the above, there are a few things that should influence your decision in what dealer(s) to go with in the end. 1. Software: You should understand and be comfortable with the trading software. Try a demo account at a few different dealers and get familiar with what is available. 2. Features: The trading platform should have features that are important to you (varies for each individual). Write down what features are important to you, and then make a Pros and Cons table for the different dealers you have tried out. 3. Stability: You will really only get an idea of how stable a trading platform is after using it for a while. But it can be pretty frustrating to use software that loses its connection all the time. 4. Reporting: Again, make sure you can understand the trade reports that show your trades over a given time period. Some of them are easy to read, simple and great. Others can be confusing.
5. Customer Service: Don t be afraid to call your dealer on the phone a lot. They should be available to answer all your questions about their software, trade execution, and anything else in regard to their products and service to you. 6. Warm and Fuzzies: Some dealers just make you feel good to be their client. This may not be of any financial benefit to you, but it can add a little bit to your Life Happiness Index. They can make you feel good by being polite on the phone, resolving a disputed trade in your favor, or maybe just sending you a Happy Holidays card. Bottom Line The bottom line here is that most forex dealers are ok. Most of them run an honest shop, and provide a valuable service to us, the traders. Namely, giving us flexible access to the forex market that was previously a viable trading market only for banks and other sizable trading houses.
Candlestick Charts Candlestick charts are very popular with traders. Many traders find candlesticks useful for displaying the relationship between the open, high, low and close of a given time period. A candlestick chart looks like this: The History of Candlestick Charts Munehisa Homma created candlestick charts back in the 1700 s. He is said to have made a fortune trading rice, making over 100 consecutive winning trades with the help of his nifty candlestick charts. Obviously, Munehisa found a great way to keep track of the price of rice. These candlestick charts are very popular today. Many traders today have found use for candlestick charts. Homma s techniques for predicting markets has changed, but the basic theory is still the same. Each candle represents the price movement of the market over a period of time. For example, these candlesticks may represent 1 hour of trading, 1 day of trading, 4 hours of trading or one month of trading.
The candlestick is made up of three major parts the body and the upper and lower wicks. The upper wick represents the highest price traded during the time period. The lower wick represents the lowest price traded during the time period.
The body of the candle will always display the relationship between the opening (first) price and the closing (last) price during that time period. The body of this candle is white, indicating that price closed higher at the end of the trading period. A candle that closes higher than the opening is also known as a bullish candle. When the market closes at a lower price at the end of the time period, the body of the candle is often filled with a dark color (in this case it is black) to indicate a lower close. This type of candle is known as a bearish candle.
We can see in this chart that the market has been moving higher. Only the most recent (black) candle has closed lower than it opened.
What Do Candlestick Charts Tell Me? The chart above is the 1 hour chart for the GBP/CHF (British Pound/Swiss Franc). The candles that close higher at the end of the time period are colored green, and those candles that close lower than they open are colored red.
Each of the candles above tells you at least four things about the market during that hour: 1. The open price the first price the currency pair traded. 2. The highest price the top of the upper wick. 3. The lowest price the bottom of the lower wick. 4. The closing price the last price the currency pair traded. Thus, a quick glance at one of the candles on this chart will tell us the opening price, the highest price, the lowest price and the closing price On the above chart the 1 hour chart we will see a new candle every hour. Many traders use candlestick charts to attempt to predict where price will go in the future and this is how many traders make money. It doesn t always work out, of course, but candlestick charts are a valuable tool for those traders interested in making money from price fluctuations in the future. Other tools may also be used to help us predict the future for a market. For many traders other tools such as technical indicators may be helpful.
Charting Software Asking a trader for her favourite charting software is like asking someone to name the best rock band of all time some people like the Beatles and other people like the Rolling Stones, and still others may tell you that System of a Down is the best band of all time. There are many charting software packages to choose from that will allow you to see the forex markets in candlestick charts you can use to view candlestick charts of currency pairssome are even free. Here are some of the most popular software providers that will give you a free demo account if you download their charting software. I do not recommend one over the other. They are all pretty good. Ninja Trader MetaTrader from Metaquotes Oanda GFT FXCM I highly recommend that you download charting software and start a demo account so you can see how this works first hand. Getting paid to trade Forex is extremely competitive a few traders make most of the money trading, and a few brokers are competing to open most of the forex trading accounts. This is why some brokers offer rebates, or cash back, on your trades. One great place to get rebates is at Traders Choice FX www.traderschoicefx.com they offer rebates from several forex brokers.
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