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Successful Forex Trading: Forex Hates Procrastinators

What have you put off today? Something important you had to do that you ended up not doing? Well i am sorry to say this but Forex doesn't like you very much, it won't actually come out and say this, but it will definatley show you by eating all your money.
Why do lazy people flounder in the forex market?
1. They put off getting a broker too long and then often make a bad choice.
2. They don't do any research or engage in education and therefore end up gambling.
3. They clutter up informative blogs and forums with their incessant whines about how forex is a scam and can anyone lend them $20 because they are good for it.
4. They are often emotional about trades and will either get too excited after a good trade or try to take revenge on the market after a bad loss.
Does this look like a successful traders mindset to you? Of course it isn't. Are you guilty of any of these things? If you are get it sorted ASAP, not or my sake, but for your own. It isn't my money you are gambling away. "But i thought forex is investing not gambling?" Thank you! I don't gamble in forex, i invest, many other traders i know invest as well. Whats the difference? Education my friend, education. We know what we are doing, and make educated decisions about where we want our money, a forex gambler wakes up in the morning and just decides then and there where he is going to flush away some more money. They don't research, they don't even know what a chart looks like, they just go with uneducated gut feelings.
But let's stop talking about forex gamblers before i have a stroke, what about successful traders?
1. They research brokers and then choose one and stick to it until the broker gives them reason not to.
2. They are always learning. What is a better indicator to use? What have i done wrong in the last week? This is the kind of thing that sharpens their trading sword so sharp it could cut space and time.
3. They don't post often, they might not ever post on a forum or blog. To them forex is about learning and they would rather listen then speak. Humble eh?
4. They keep their cool. They know that a win can turn into a loss and the other way around within the next 5 minutes. They have the experience and they have already set up their trades to accomodate for a turn in fortune. They are in control. Well mostly.
So the main point of all this text is to realize that if you can't even bother having a shower when you wake up in the morning, how are you ever going to be successful in something as demanding, but equally as rewarding as forex? You aren't beca

Forex Secrets - Support and Resistance Levels in Forex Market

Support and resistance are the known cornerstones in Forex technical, wherein:
1. a current Forex rate (CFR) is surrounded by levels of:
a). resistance being superior to CFR;
b). support being inferior to CFR.
2. a level breakthrough triggers a leap to a consecutive support/resistance;
3. a false breakthrough is responsible for a rate backstroke (say, from resistance to support).
Thus, having data on resistance and support levels and being armed with R/S true/false criteria, a trader grows faultless-entry skilled to ensure smooth level-to-level trading.
To be found below is a graphic drawing of a flat followed by an R/S up/down breakthrough.
The chart 1. (For view picture see notes in end of article)
In actual sample GBPUSD trade dated January, 31, 2006 the support breakthrough has triggered a bullish in-session trend.
Simple, isn’t it? Affirmative at a glance, but 95% of traders loosing their forex deposits are calling for natural questions:
1. What’s the reason, the world traders are getting entangled in so a seemingly simple regularity?
2. What’s the way of correct detection of R/S levels for currencies to use to jet off from?
3. What attributes are inherent to true/false breach differentiation?
It is, thus, to be concluded that a trader will never achieve steady FX gains unless the answer is found to the above three simple questions.
CLASSICAL BOOKS ON RESISTANCE AND SUPPORT LEVELS
Forex scholars’ books, when analyzed, are giving grounds why 95% of traders turn deposit-killers. The point is that under different technical scholars:
a). fairly different understanding is being attached to support and resistance;
b). no distinct criteria (except Demark’s technique) is in service to finding a support and a resistance;
c). there is no clear-cut interfacing between R/S levels on different timeframes.
Below is sort of understanding classification:
1. A. Elder. R/S are understood by SOME SCHOLARS to be horizontal lines drawn along price highs and lows
support and resistance are horizontal (or almost horizontal) lines linking several minimums (maximums).
The chart 2. Support and resistance (For view picture see notes in end of article)
b). J. MURPHY also indicates that “points 2 and 4 represent uptrend support levels. The figure depicts uprising support and resistance under an uptrend with points 2 and 4 being support levels which use to be coincident with earlier lows. Points 1 and 3 indicate resistance levels, which use to be coincident with earlier highs” (see: “Technical analysis of the Futures Markets”
Fig. 3a and 3b. Uptrend and downtrend support-resistance levels (For view picture see notes in end of article)
2. SOME SCHOLARS believe support-resistance to be sloped lines drawn along price highs and lows (trend lines, actually) as below:
Fig. 4. Trend line-fashion support-resistance pattern (For view picture see notes in end of article)
a). T. DEMARK
Fig. 5. Bid pivot points (TD-points) building up a resistance level (For view picture see notes in end of article)
The TD-points are peculiar of price values being not exceeded within 2 adjacent days. The points are specially emphasized on the chart.
Note that the price movement above the TD-line is mirrored by same after the down break of this line.
Price projection Z is made by way of the following calculation:
- difference is taken between Y being maximum price above the TD-line and X being special price immediately below the TD-line;
- the obtained value is subtracted from A-B line breakthrough price.
b). L. BORCELINO is also a user of inclined lines as support/resistance (view:
Fig. 6. Quoting L. Borcelino: “As evident form these examples, trendlines, drawn across preceding highs and lows, constitute perspective support and resistance projection”. (For view picture see notes in end of article)
3. E. NAYMAN’S combined commitment of inclined and horizontal R/S levels (view: “Trader’s Minor EncyclopediaJ
“A resistance line connects market important maximums (highs, peaks)”, And further on: “R/S lines drawing should be preferably done through price concentration areas, rather than through highs/lows extremes” (???).
Per minimum price trend line (a support):
Fig. 7 (For view picture see notes in end of article)
Example of E. Nayman using resistance/support levels at trade station:
Fig. 8 (For view picture see notes in end of article)
4. MOVING AVERAGES based resistance/support levels.
a). E. NAYMAN: ”Bollinger Bands are sort of peculiar support/resistance lines
Fig. 9 (For view picture see notes in end of article)
5. ROUND NUMBERS being support/resistance levels
a). E. LEFEVRE (view: “Memories of an Exchange Profiteer” underlined: “Rates, having, for the first time, traveled 100, 200 or 300 points, are almost sure to cover additional 30 to 50 pips”
b). D. SCHWAGGER: “One is to be especially cautious about dollar holdups. With USD 781,25 best working on T-bonds and USD425 – on soybeans, temptation is raising to find “optimum” holdup for each market. It is advantageous to establish a round number to comfortably use it all of the markets.
CLASSIFICATION OF WEAK AND STRONG R/S LEVELS AS VIEWED BY FOREX SCHOLARS
J. MURPHY classifies support and resistance (view “Technical Analysis of Futures Markets”, New York Institute of Finance è Prentice Hall, 1986) proceeding from: price in-domain residence period (1); volume of trade (2) and price domain age (3).
1. The longer the price reciprocation period within a certain support/resistance area, the more critical the area. By way of an example, if a certain stagnation area observed a 3-week price up/down movement with subsequent rally thereof, this support domain is more important than that having observed a 3-day price reciprocation.
2. Volume of trade is another means to evaluate importance of support/resistance. If, say, a support formation did involve a huge volume of trade, it means a huge number of contracts passing from hands to hands, hence the support levels is ranking high and visa versa: the less the volume of trade, the lower-ranking the support.
3. Still another support/resistance importance indicator is its age in relation to the present moment. Since we are dealing with traders’ reaction to market moves and to positions they have entered or have failed to enter, it is fairly clear, that the younger the event and the reaction thereto, the more important the event.
Seven years later (in 1993), A. ELDER has confirmed 2 of 3 J. Murphy’s postulates dated back to 1986. His classification of resistance/support levels is guided by:
- number of test tangencies it sustained (the greater the number – the stronger the level). Within a fortnight an immediate support/resistance is formed; within 2 months the level grows accustomed to by traders, thus attaining medium power; within 2 years actually a stereotype is built radiating strong support and resistance.
- price scatter dominating a support/resistance level (the wider the range thereof – the stronger the level). A wide-range turning-point price consolidation is similar to a high fence surrounding valuable property. A congestion zone equal to 1 % of current price (4 points with S&P500 at 400 level) yields insignificant support/resistance, whereas a 3% area is responsible for medium levels with a 7% area possessing sufficient power to be a strong trend killer.
- The greater the volume of trade in a support/resistance area, the stronger the levels. Huge volume within a congestion zone is indicative of numerous emotional jobbers’ involvement. As opposite, minor volumes point out traders’ indifference towards the level being intersected, hence being attribute of the level’s deteriorated health.
Weak support/resistance levels are capable of bringing a trend to a halt, while strong ones may appear trend reversers. Traders buy support and sell resistance, thus turning their impact into a self-justifying projection.
SCHOLARS’ VIEW ON SUPPORT/RESISTANCE SEATING POINTS
1. T. DEMARK recommends:
- plotting resistance upon bid TD-points
- plotting support upon ask TD-points.
2. D. SCHWAGER (view: “Technical Analysis. Complete Course”) insists on drawing resistance and support “in the vicinity” of prior lows and highs.
“Support and resistance are to be viewed as approximate areas rather, than exact levels. It is to be emphasized that any previous high is not at all a premonition of perspective prices dry up thereat or there under. Instead, it is indicative of a resistance to be expected near that level. By analogy, a previous low is not at all illustrative of further price declines halting thereat or there above. Instead, it is indicative of a support to be projected close to that level.
Depicted below is a support zone governed by relative prior highs and lows concentration: gold, futures.
Fig. 10. (For view picture see notes in end of article)
Continued by D. Schwager: “Some technical analysts use to treat previous highs and lows as being endowed with, sort of, holy significance. A previous high, being 1078, is deemed by them a strong resistance. In case the market displays a spike higher, say, as far as 1085, they reason the resistance to have been breached. It’s not correct. Support and resistance are but to be looked upon as cloud-shaped areas rather than exact levels.”
3. J. MURPHY resorts to plotting support and resistance in a local peak-wise fashion (i.e. by local highs and lows): “A resistance level usually coincides with the previous peak level”.
Fig. 11. (For view picture see notes in end of article)
Fig. 12. (For view picture see notes in end of article)
4. A. ELDER: “Resistance and support are to be preferably plotted (see Fig. 13) through congestion zone margins (CZM) rather than through highs and lows. CZMs constitute traders’ mind-changing areas, whereas highs and lows are only reflective of panic among weakest jobbers”.
Fig.13. (For view picture see notes in end of article)
Continued by A. Elder: “Beware of support/resistance false breaching, indicated as “F” in the above figure. Breaches are followed by amateurs, with professionals being opposite travel jobbers. Now, pay some attention to the chart’s right corner, where prices have bumped into strong resistance. It’s high time to hunt for shorting with a stop-loss to be placed slightly above the resistance level”.
To be noted is a pronounced regularity, not referred to by A. Elder: the support/resistance levels drawn through previous local peaks are not extended by him after false breaching thereof.
4. D. SCHWAGER gives the following explanation when resorting to projection of 2 (!) inclined support and resistance levels:
- “Standard lines are usually drawn through price extrema (highs, lows), attributable to traders’ emotions, therefore these points may not reflect the market’s real trend”.
- “An inner trendline is to be plotted closest to the bulk of relative lows and relative highs, ignoring extreme points”
D. Schwager himself is the recognizer of the subjective nature inner trendline method, but in so doing he jumps to a very important conclusion that ordinary trend lines are:
- similarly subjective (!);
- far less helpful (!), than inner trendlines.
“One of inner trendlines’ shortcomings is their inevitably random nature, even greater than that possessed by ordinary trendlines, being restricted by extreme highs and lows, at least”.
“In practice, not infrequently, several options prove available as regards inner trend line plotting procedure (see Fig. 14). Nevertheless, my experience advises inner trend lines to be of greater avail than ordinary trend lines when spotting potential support/resistance areas”.
BRIEF CONCLUSIONS:
1. Each forex scholar offers his own interpretation of support/resistance levels, meaning different entities thereby (inclined, horizontal, inclined-horizontal, MA-based, round numbers-based, etc.).
2. There exists no clear-cut technique to define points to plot support/resistance levels through (except that of Demark’s).
3. In real time trading, that said, these levels discovery on Forex charts automatically entails absolutely different conclusions.
Fig. 14. (For view picture see notes in end of article)
TESTING AND PRACTICAL INCONSISTENCY OF CLASSICAL SUPPORT/RESISTANCE DETECTION METHODS
Jeffry Owen Katz and Donna L. McCormick have disclosed results of their testing of the above scholars’ recommendation procedures in their “Encyclopedia of Trading Strategies”:
TEST PROCEDURE 2
A channel breakthrough-operated system. Closing prices are utilized only; next day market price entry at session opening; commission and slippage being accounted for.
The above test has been performed exactly the way the previous one, but with no account to slippage (3 ticks) and commission (USD15 per dealing cycle). Although the model displayed perfect operation with no account to dealing expenditures, it has turned out a complete fiasco in practice.
Even the best-in-sample solution has proved loss-responsible only, and, as expected, the system’s beyond-sampling poor operation came into being.
Note: In compliance with E. Nayman’s theoretical outlook, a channel upward breach is alleged to be a STRONG (!!!) trading signal at an uptrend.
TEST PROCEDURE 6
It is a closing price breakthrough system with next day per stop-order entry. The model longs via a stop-order at the point of breaching a resistance appointed by recent highs and shorts via a stop-order at the point of breaching a resistance appointed by recent lows.
As expected, the system exhibited much poorer operation with low profit and deteriorated statistics within sampling. The model proved killer to the per-deal average of USD798, with profit rating being 37%.
TEST PROCEDURE 7
The procedure involved volatility punch with next-day opening entry. The model longs upon next-day opening with provision that today’s closing appears superior to the volatility upper edge. The model shorts in case of the price falling below the above edge.
The optimization period embraced 240 dealings only with 45% being profit-bringing.
TEST PROCEDURE 9
Involved is volatility punch triggering a per stop-order entry. The model effects a market stop-order entry immediately after passing a breach point.
The sampling period incorporated 1465 dealings, each being of 6-day average duration. The system has ensured 40% profit with average gain of USD 931 each. Under all parameter combinations only longs were winning. Both shorts and longs proved loosing outside sampling limits. Only 29% were winning out of the total of 610 dealings.
BRIEF CONCLUSIONS:
Testing data, supplied by Jeffry Owen Katz and Donna L. McCormick, constitute convincing grounds that forex scholars’ trading systems involving support/resistance breakthrough (the way these are described by the scholar) are rather likely to result in loss than in profit. This is one of the reasons for 95% of traders to turn their forex deposits killers.
In as much as the support/resistance related theory is so mixed up and subjective, it is only to be guessed what sort of support/resistance reading-matter may be offered by modern forex brokers’ websites.
Fig. 15 (For view picture see notes in end of article)
d). these recommendations aftermaths are apparent: the GBP has punched 1 point to 1,9001 and swiveled down to 1,8871; the EUR reached 1,2958 and reversed to 1,2853.
Brokers’ recommended support/resistance on the EUR/USD and GBPUSD as of June, 12, 2006 morning:
- EUR/USD: support 1.2780, 1.2740, 1.2685/90 1.2600, resistance 1.2890, 1.2930/40, 1.3000.
- GBP/USD support 1.8740, 1.8670, 1.8560, resistance 1.8890, 1.8940, 1.9000
EUR/USD support 1.2820 resistance 1.22940
GBP/USD support 1.8805 resistance 1.8950
The June, 12, 2006 information on technical levels of EUR/USD and GBP/USD is missing with the support/resistance levels themselves being quoted in incidental unsystematic fashion.
EURUSD:

- support: 1.2840, 1.2800, 1.2770/50, 1.2720, 1.2670, 1.2630, 1.2600/1.2580, 1.2540, 1.2500,
1.2460, 1.2400/1.2390, 1.2350, 1.2300, 1.2250.

- resistance: 1.2890/1.2900, 1.2960, 1.3000, 1.3040, 1.3100, 1.3150, 1.3200/10.
GBPUSD

- support: 1.8840, 1.8800, 1.8740/30, 1.8700, 1.8670/60, 1.8630, 1.8590, 1.8535, 1.8500,
1.8450, 1.8400, 1.8360, 1.8300, 1.8270.

- resistance: 1.8870/80, 1.8915/20, 1.8940/50, 1.8990/1.9000, 1.9060.
EURUSD:
RES 4: $1.2990 RES 3: $1.2965 RES 2: $1.2940 RES 1: $1.2915

CURRENT PRICE: $1.2890

SUP 1: $1.2830 SUP 2: $1.2795 SUP 3: $1.2755 SUP 4: $1.2685
GBPUSD
RES 4: $1.9080 RES 3: $1.9000 RES 2: $1.8960 RES 1: $1.8915
CURRENT PRICE: $1.8895

SUP 1: $1.8815 SUP 2: $1.8725 SUP 3: $1.8725 SUP 4: $1.8515
Are You not getting mixed up? Each broker presents his own support/resistance levels different from others’. With the above diversity of levels being recommended any true/false breach of any technical level proves out of question.
Should we attempt to simultaneously depict all the support/resistance levels furnished by various Forex brokers, we’ll ultimately find ourselves facing a picket fence thereof.
The arrangement is reminiscent of J. Schwager’s “Technical Analysis. Complete course”, raising a question: “Is technical charting to be referred to as a prediction engine or as folk arts?”
Probably, the best way out here is:
1. In view of huge number of Forex scholars’ opinions, let everyone answer this question independently with the purpose of finding out the way to faultlessly pinpoint support/resistance levels.
2. Let everyone decide whether he is going to believe the support/resistance levels, released daily by various Brokers and Dealers, provided that:
a). one has no idea of the definition principles thereof;
b). the above levels being offered at websites by non-traders or by ex-losers.
Otherwise the natural result will remain equal to 95% of losers worldwide.
SUPPORT/RESISTANCE LEVELS CONSTRUCTION UNDER MASTERFOREX-V TRADING CONCEPT
1. Support and resistance levels are to be split into those of flat and trend:
a). support/resistance levels are horizontal when in flat;
b). support/resistance levels are inclined when in trend.
2. Various kinds of support/resistance are intrinsic to various trend types (if You are considering 4 trend types, You will face 4 R/S grids; if 5 trend types are being dealt with, there will emerge 5 R/S grids respectively).
3. A larger trend is of greater significance in respect to a minor one, whereas minor trend support/resistance levels are of more accurate nature than those of larger one. This issue has not at all been touched upon either by forex technical “scholars”, or by modern “analysts”.
4. All the 4 trend-type support/resistance detection procedure is elaborated in the fashion enabling the Masterforex-V Academy hundreds traders to daily set up support/resistance levels with 1-2 points deviation, due to forex quotes difference from various Brokers. This aspect has not been considered by forex technical scholars either.
5. It appeared indispensable to simultaneously analyze the minimum of 2 ally currencies’ support/resistance levels (say, GBPUSD, EURUSD) since there is the formula:
“True R/S level breach by the forex pair 1 + False R/S level breach by the forex pair 2 = EITHER False R/S level breach by the forex pair 1 OR True R/S level breach by the forex pair 2”
This aspect has not been considered by Forex technical scholars either.
6. Minor timeframes intermediate R/S levels ARE DIFFERENT from those being manifested under Forex trendwise travel. This aspect has not been subject to investigation by Forex technical scholars either.
7. The available technical analysis scholar literature on support/resistance levels contains plentitude of helpful and … data. The objective is to effect independent synthesis of T. Demark’s, A. Elder’s, E. Nayman’s, J. Murphy’s, D. Schwager’s techniques with the above Masterforex-V principles in order to attain proper understanding of the way prior binary regularities tailor further movement perspectives.
8. A combination of 4 trends and more is helpful in 1-4 point-accurate detecting forex trading session local extrema.
With the above said, it proves strange to hear the statement of Ch. Lebau and D. Lucas (see: Computer-aided analysis of Futures Markets, reading: “We do not believe in exact price prediction popular practice”.
BUT THEN:
- What’s the way the Masterforex-V Academy students manage to profit now and then?
- Do they independently establish support/resistance levels on multiple timeframes of numerous
ally currencies?
- Do they check their established levels against a primary source (wherefrom the Brokers’ analysts
use to crib a support/resistance)?
- Do they understand principles of true/false breaching of each level and of a bounce there from?
- Are they capable of calculating in-session currencies travel margins to a destination, where after
the above currencies bounce off and exhibit corrective reversal?
Answers you can find in our web site.

FOREX Global Trading

1. What is FOREX global trading?

FOREX stands for Foreign Exchange Market. It is based on an international marketplace where

currencies are bought and sold. Only the participants in the FOREX market determine the price

of one currency against another. In other words, the prices of currencies are based upon

supply and demand. This is similar to the idea behind stock price determinations. The

difference? Well you could call it a difference, but I call it an advantage. Currency prices

can not be affected by large buyers in the FOREX marketplace. In the traditional stock

market, when stocks are bought up by institutional buyers, stock prices fluctuate. This is

not a factor in the FOREX global trading market place because it is the largest liquid

financial market available. Between 1 and 1.5 Trillion dollars are traded everyday in the

FOREX market. It's impossible for an institutional buyer to make a splash. This is a huge

advantage for the "little guy" who doesn't have a huge budget. If you take the time to learn

how to play the FOREX game, anyone can make a fortune. Success is based on following the

rules of the market and knowing the signs to look for.

2. How does FOREX global trading work?

Currency transactions do not take place on a centralized exchange like the NYSE. It's a

global market and therefore trades take place all over the world through telecommunications.

You can trade on the FOREX global market 24 hours a day from Sunday afternoon untill friday

afternoon. For GMT time, this is translated to 12am on Monday to 10:00pm on Friday. The

process is a fairly simple one. You buy and sell currencies through dealers. The link I

provide at the bottom of the article will steer you in the right direction for finding a

qualified dealer. Think of a dealer as a broker. The dealers provide quotes for all major

currencies and you decide which currently is a sound investment at any given time. A big

advantage to working with dealers in FOREX global trading is the ability to obtain a line of

credit off of a very small initial rate. You can get a line of credit off of a $500 payment

with many dealers. This leverages your ability for huge gains in the FOREX marketplace. The

tactic is called marginal trading, and although it can be risky, once you know how to play the

game it is the ideal way to "take the house's money". The appeal of marginal trading is that

investments can be made with relatively small startup capital. You don't need a big money

supply to be a big winner in the FOREX global trading business. This also allows for bigger

investments to be made with fewer money transfer costs.

Marginal trading is broken up into "lots". A "lot" is an amount close to $100,000 that can be

financed with as little money as .5% down. This means for $500 you can leverage a $100,000

investment. - WOW! That is buying power. Unlike traditional investment methods like flipping

real estate, it doesn't take time to build up your wealth. You can leverage your money to

grow as quickly as you feel comfortable growing.

3. What are some investment strategies for FOREX global trading?

The investment strategies for FOREX trading don't differ too much from tradition stock market

trading. Strategies are categorized into two divisions - Fundamental Analysis and Technical

Analysis.

Funamental Analysis will look at a particular regions currency and take into consideration

such things as their countries economy, their bank's current interest rate, inflation rates,

unemployment levels and a host of other factors. It is important to keep in mind that any

anticipations based on fundamental analysis, should be considered against the perceptions of

other investors in the FOREX marketplace. Afterall, it is more than likely that the current

currency price reflects all perceived knowledge of a country's economical situation.

Technical Analysis is based on graph reading and interpreting signals from financial statistics. The link I give at the bottom of this article gives great insight into this strategy of investing in the FOREX global market. I personally am a big believer in Technical Analysis over Fundamental Analysis. Numbers are open to only so much interpretation and perception. Technical Analysis is a much more black and white way for many investors to choose their winners in the FOREX global market. This is solely my opinion. You can read on through my link below for a far more granular, in depth look at numerous strategies that work and the most efficient ways to employ them.

Again, Congratulations on embarking on one of the most financially rewarding paths you may

have ever found. There is a fortune to gain in the FOREX global market. The most prudent

advice I can give you is to keep learning until you can't learn any more. It's a smarter,

more efficient way to build youself up to financial freedom while trading in the FOREX global

market. Don't go into the marketplace blind. Gain the insight that will reward you tenfold by

continuing your FOREX global trading education. I wish you all the success in the world.

Earn Money Automatically With Forex Trading

One of the biggest markets for trading entities is the Forex market. Recently much information has surfaced in books and on the internet about this exciting new venture for individuals interested in making a little money on the side, or making a career out of it.
While these sources are fantastic ways to learn how to be a professional trader, there are some very simple guidelines to follow as you learn from these sources and go onto becoming a successful trader in the Forex market. While you read these articles, going to a bookstore and reading book after book is a very sound way to learn and become profitable in your business ventures.
I would argue that the only proper way to do forex trading would be to first wait for the economy to stabilize, as the global economy right now is in turmoil and countries can suddenly increase or decrease their wealth which completely changes the Forex market at the time. Also be careful to keep your life in order. Any form of trading is a risky venture. It ALWAYS involves a risk of losing money, so keep that in mind when you invest, that you should never put your job or house on the line for something like this.
1. Choose a method of learning, or branch out. What I mean is, go to a bookstore, search online, buy an automated robot, whatever you choose to do to get started, you must go at it with the intention of spending hours of studying and learning from previous traders. Even when you get an automated forex software program you can’t just sit there and expect it to do everything for you, you must do your research and carefully set it up. There are tons of options in even the most automated programs you must look into and carefully choose from.
2. Manage your life before you manage your forex trading. Don’t be rash and believe in all of those get rich quick schemes, they are only playing off of your inability to make calm, calculated decisions when you’re infatuated with the idea of making money quickly. You need to have a plan laid out before you spend any money, you need a stable income to pay your rent, and DO NOT expect to suddenly make as much money as they advertise, give it at least 6 months before you can turn a profit.
3. Walk, do not run into trading. If you risk everything, you do just that, you RISK losing all you have. If you only play around with 10% of your wealth, if you lose it all and decide to try something else, it’s not that big of a deal as if you had spent 50% of your money.
4. The market will always be around as long as people have money. It will also not change, so any initial research you do now, will last you your entire life, so imagine it as investing in a company that continues to grow and grow as you sit on it. So build up your knowledge and sit on it and learn as your revenue grows.

Introduction to Currency Trading

The foreign exchange market (forex or FX for short) is one of the most exciting, fast-paced markets around. Until recently, forex trading in the currency market had been the domain of large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals. The emergence of the internet has changed all of this, and now it is possible for average investors to buy and sell currencies easily with the click of a mouse through online brokerage accounts.

Daily currency fluctuations are usually very small. Most currency pairs move less than one cent per day, representing a less than 1% change in the value of the currency. This makes foreign exchange one of the least volatile financial markets around. Therefore, many currency speculators rely on the availability of enormous leverage to increase the value of potential movements. In the retail forex market, leverage can be as much as 250:1. Higher leverage can be extremely risky, but because of round-the-clock trading and deep liquidity, foreign exchange brokers have been able to make high leverage an industry standard in order to make the movements meaningful for currency traders.

Extreme liquidity and the availability of high leverage have helped to spur the market's rapid growth and made it the ideal place for many traders. Positions can be opened and closed within minutes or can be held for months. Currency prices are based on objective considerations of supply and demand and cannot be manipulated easily because the size of the market does not allow even the largest players, such as central banks, to move prices at will.

The forex market provides plenty of opportunity for investors. However, in order to be successful, a currency trader has to understand the basics behind currency movements.

The goal of this forex tutorial is to provide a foundation for investors or traders who are new to the foreign currency markets. We'll cover the basics of exchange rates, the market's history and the key concepts you need to understand in order to be able to participate in this market. We'll also venture into how to start trading foreign currencies and the different types of strategies that can be employed.

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What Is Forex?
The foreign exchange market is the "place" where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want to buy cheese from France, either you or the company that you buy the cheese from has to pay the French for the cheese in euros (EUR). This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars (USD) into euros. The same goes for traveling. A French tourist in Egypt can't pay in euros to see the pyramids because it's not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate.

The need to exchange currencies is the primary reason why the forex market is the largest, most liquid financial market in the world. It dwarfs other markets in size, even the stock market, with an average traded value of around U.S. $2,000 billion per day. (The total volume changes all the time, but as of April 2004, the Bank for International Settlements (BIS) reported that the forex market traded U.S. $1,900 billion per day.)

One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - across almost every time zone. This means that when the trading day in the U.S. ends, the forex market begins anew in Tokyo and Hong Kong. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly.

Spot Market and the Forwards and Futures Markets
There are actually three ways that institutions, corporations and individuals trade forex: the spot market, the forwards market and the futures market. The forex trading in the spot market always has been the largest market because it is the "underlying" real asset that the forwards and futures markets are based on. In the past, the futures market was the most popular venue for traders because it was available to individual investors for a longer period of time. However, with the advent of electronic trading, the spot market has witnessed a huge surge in activity and now surpasses the futures market as the preferred trading market for individual investors and speculators. When people refer to the forex market, they usually are referring to the spot market. The forwards and futures markets tend to be more popular with companies that need to hedge their foreign exchange risks out to a specific date in the future.

What is the spot market?
More specifically, the spot market is where currencies are bought and sold according to the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, sentiment towards ongoing political situations (both locally and internationally), as well as the perception of the future performance of one currency against another. When a deal is finalized, this is known as a "spot deal". It is a bilateral transaction by which one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. Although the spot market is commonly known as one that deals with transactions in the present (rather than the future), these trades actually take two days for settlement.

What are the forwards and futures markets?
Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead they deal in contracts that represent claims to a certain currency type, a specific price per unit and a future date for settlement.

In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves.

In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange. In the U.S., the National Futures Association regulates the futures market. Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterpart to the trader, providing clearance and settlement.

Both types of contracts are binding and are typically settled for cash for the exchange in question upon expiry, although contracts can also be bought and sold before they expire. The forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets in order to hedge against future exchange rate fluctuations, but speculators take part in these markets as well. (For a more in-depth introduction to futures, see Futures Fundamentals.)

Note that you'll see the terms: FX, forex, foreign-exchange market and currency market. These terms are synonymous and all refer to the forex market.

Reading a Forex Quote and Understanding the Jargon

One of the biggest sources of confusion for those new to the currency market is the standard for quoting currencies. In this section, we'll go over currency quotations and how they work in currency pair trades.

Reading a Quote
When a currency is quoted, it is done in relation to another currency, so that the value of one is reflected through the value of another. Therefore, if you are trying to determine the exchange rate between the U.S. dollar (USD) and the Japanese yen (JPY), the forex quote would look like this:

USD/JPY = 119.50

This is referred to as a currency pair. The currency to the left of the slash is the base currency, while the currency on the right is called the quote or counter currency. The base currency (in this case, the U.S. dollar) is always equal to one unit (in this case, US$1), and the quoted currency (in this case, the Japanese yen) is what that one base unit is equivalent to in the other currency. The quote means that US$1 = 119.50 Japanese yen. In other words, US$1 can buy 119.50 Japanese yen. The forex quote includes the currency abbreviations for the currencies in question.


Direct Currency Quote vs. Indirect Currency Quote
There are two ways to quote a currency pair, either directly or indirectly. A direct currencyquote is simply a currency pair in which the domestic currency is the base currency; while an indirect quote, is a currency pair where the domestic currency is the quoted currency. So if you were looking at the Canadian dollar as the domestic currency and U.S. dollar as the foreign currency, a direct quote would be CAD/USD, while an indirect quote would be USD/CAD. The direct quote varies the foreign currency, and the quoted, or domestic currency, remains fixed at one unit. In the indirect quote, on the other hand, the domestic currency is variable and the foreign currency is fixed at one unit.

For example, if Canada is the domestic currency, a direct quote would be 0.85 CAD/USD, which means with C$1, you can purchase US$0.85. The indirect quote for this would be the inverse (1/0.85), which is 1.18 USD/CAD and means that USD$1 will purchase C$1.18.

In the forex spot market, most currencies are traded against the U.S. dollar, and the U.S. dollar is frequently the base currency in the currency pair. In these cases, it is called a direct quote. This would apply to the above USD/JPY currency pair, which indicates that US$1 is equal to 119.50 Japanese yen.

However, not all currencies have the U.S. dollar as the base. The Queen's currencies - those currencies that historically have had a tie with Britain, such as the British pound, Australian Dollar and New Zealand dollar - are all quoted as the base currency against the U.S. dollar. The euro, which is relatively new, is quoted the same way as well. In these cases, the U.S. dollar is the counter currency, and the exchange rate is referred to as an indirect quote. This is why the EUR/USD quote is given as 1.25, for example, because it means that one euro is the equivalent of 1.25 U.S. dollars.

Most currency exchange rates are quoted out to four digits after the decimal place, with the exception of the Japanese yen (JPY), which is quoted out to two decimal places.

Cross Currency
When a currency quote is given without the U.S. dollar as one of its components, this is called a cross currency. The most common cross currency pairs are the EUR/GBP, EUR/CHF and EUR/JPY. These currency pairs expand the trading possibilities in the forex market, but it is important to note that they do not have as much of a following (for example, not as actively traded) as pairs that include the U.S. dollar, which also are called the majors. (For more on cross currency, see Make The Currency Cross Your Boss.)

Bid and Ask
As with most trading in the financial markets, when you are trading a currency pair there is a bid price (buy) and an ask price (sell). Again, these are in relation to the base currency. When buying a currency pair (going long), the ask price refers to the amount of quoted currency that has to be paid in order to buy one unit of the base currency, or how much the market will sell one unit of the base currency for in relation to the quoted currency.

The bid price is used when selling a currency pair (going short) and reflects how much of the quoted currency will be obtained when selling one unit of the base currency, or how much the market will pay for the quoted currency in relation to the base currency.

The quote before the slash is the bid price, and the two digits after the slash represent the ask price (only the last two digits of the full price are typically quoted). Note that the bid price is always smaller than the ask price. Let's look at an example:

USD/CAD = 1.2000/05 Bid = 1.2000 Ask= 1.2005

If you want to buy this currency pair, this means that you intend to buy the base currency and are therefore looking at the ask price to see how much (in Canadian dollars) the market will charge for U.S. dollars. According to the ask price, you can buy one U.S. dollar with 1.2005 Canadian dollars.

However, in order to sell this currency pair, or sell the base currency in exchange for the quoted currency, you would look at the bid price. It tells you that the market will buy US$1 base currency (you will be selling the market the base currency) for a price equivalent to 1.2000 Canadian dollars, which is the quoted currency.

Whichever currency is quoted first (the base currency) is always the one in which the transaction is being conducted. You either buy or sell the base currency. Depending on what currency you want to use to buy or sell the base with, you refer to the corresponding currency pair spot exchange rate to determine the price.

Spreads and Pips
The difference between the bid price and the ask price is called a spread. If we were to look at the following quote: EUR/USD = 1.2500/03, the spread would be 0.0003 or 3 pips, also known as points. Although these movements may seem insignificant, even the smallest point change can result in thousands of dollars being made or lost due to leverage. Again, this is one of the reasons that speculators are so attracted to the forex market; even the tiniest price movement can result in huge profit.

The pip is the smallest amount a price can move in any currency quote. In the case of the U.S. dollar, euro, British pound or Swiss franc, one pip would be 0.0001. With the Japanese yen, one pip would be 0.01, because this currency is quoted to two decimal places. So, in a forex quote of USD/CHF, the pip would be 0.0001 Swiss francs. Most currencies trade within a range of 100 to 150 pips a day.

Currency Quote Overview
USD/CAD = 1.2232/37
Base Currency	Currency to the left (USD)
Quote/Counter Currency	Currency to the right (CAD)
Bid Price	1.2232	Price for which the market maker will buy the base currency. Bid is always smaller than ask.
Ask Price	1.2237	Price for which the market maker will sell the base currency.
Pip	One point move, in USD/CAD it is .0001 and 1 point change would be from 1.2231 to 1.2232	The pip/point is the smallest movement a price can make.
Spread	Spread in this case is 5 pips/points; difference between bid and ask price (1.2237-1.2232).

Currency Pairs in the Forwards and Futures Markets
One of the key technical differences between the forex markets is the way currencies are quoted. In the forwards or futures markets, foreign exchange always is quoted against the U.S. dollar. This means that pricing is done in terms of how many U.S. dollars are needed to buy one unit of the other currency. Remember that in the spot market some currencies are quoted against the U.S. dollar, while for others, the U.S. dollar is being quoted against them. As such, the forwards/futures market and the spot market quotes will not always be parallel one another.

For example, in the spot market, the British pound is quoted against the U.S. dollar as GBP/USD. This is the same way it would be quoted in the forwards and futures markets. Thus, when the British pound strengthens against the U.S. dollar in the spot market, it will also rise in the forwards and futures markets.

On the other hand, when looking at the exchange rate for the U.S. dollar and the Japanese yen, the former is quoted against the latter. In the spot market, the quote would be 115 for example, which means that one U.S. dollar would buy 115 Japanese yen. In the futures market, it would be quoted as (1/115) or .0087, which means that 1 Japanese yen would buy .0087 U.S. dollars. As such, a rise in the USD/JPY spot rate would equate to a decline in the JPY futures rate because the U.S. dollar would have strengthened against the Japanese yen and therefore one Japanese yen would buy less U.S. dollars.

Now that you know a little bit about how currencies are quoted, let's move on to the benefits and risks involved with trading forex.

Foreign Exchange Risk and Benefits

In this section, we'll take a look at some of the benefits and risks associated with the forex market. We'll also discuss how it differs from the equity market in order to get a greater understanding of how the forex market works.

The Good and the Bad
We already have mentioned that factors such as the size, volatility and global structure of the foreign exchange market have all contributed to its rapid success. Given the highly liquid nature of this market, investors are able to place extremely large trades without affecting any given exchange rate. These large positions are made available to forex traders because of the low margin requirements used by the majority of the industry's brokers. For example, it is possible for a trader to control a position of US$100,000 by putting down as little as US$1,000 up front and borrowing the remainder from his or her forex broker. This amount of leverage acts as a double-edged sword because investors can realize large gains when rates make a small favorable change, but they also run the risk of a massive loss when the rates move against them. Despite the foreign exchange risks, the amount of leverage available in the forex market is what makes it attractive for many speculators.

The currency market is also the only market that is truly open 24 hours a day with decent liquidity throughout the day. For traders who may have a day job or just a busy schedule, it is an optimal market to trade in. As you can see from the chart below, the major trading hubs are spread throughout many different time zones, eliminating the need to wait for an opening or closing bell. As the U.S. trading closes, other markets in the East are opening, making it possible to trade at any time during the day.

Time Zone	Time (ET)
Tokyo Open	7:00 pm
Tokyo Close	4:00 am
London Open	3:00 am
London Close	12:00 pm
New York Open	8:00 am
New York Close	5:00 pm

While the forex market may offer more excitement to the investor, the risks are also higher in comparison to trading equities. The ultra-high leverage of the forex market means that huge gains can quickly turn to damaging losses and can wipe out the majority of your account in a matter of minutes. This is important for all new traders to understand, because in the forex market - due to the large amount of money involved and the number of players - traders will react quickly to information released into the market, leading to sharp moves in the price of the currency pair.

Though currencies don't tend to move as sharply as equities on a percentage basis (where a company's stock can lose a large portion of its value in a matter of minutes after a bad announcement), it is the leverage in the spot market that creates the volatility. For example, if you are using 100:1 leverage on $1,000 invested, you control $100,000 in capital. If you put $100,000 into a currency and the currency's price moves 1% against you, the value of the capital will have decreased to $99,000 - a loss of $1,000, or all of your invested capital, representing a 100% loss. In the equities market, most traders do not use leverage, therefore a 1% loss in the stock's value on a $1,000 investment, would only mean a loss of $10. Therefore, it is important to take into account the risks involved in the forex market before diving in.

Differences Between Forex and Equities
A major difference between the forex and equities markets is the number of traded instruments: the forex market has very few compared to the thousands found in the equities market. The majority of forex traders focus their efforts on seven different currency pairs: the four majors, which include (EUR/USD, USD/JPY, GBP/USD, USD/CHF); and the three commodity pairs (USD/CAD, AUD/USD, NZD/USD). All other pairs are just different combinations of the same currencies, otherwise known as cross currencies. This makes currency trading easier to follow because rather than having to cherry-pick between 10,000 stocks to find the best value, all that FX traders need to do is “keep up” on the economic and political news of eight countries.

The equity markets often can hit a lull, resulting in shrinking volumes and activity. As a result, it may be hard to open and close positions when desired. Furthermore, in a declining market, it is only with extreme ingenuity that an equities investor can make a profit. It is difficult to short-sell in the U.S. equities market because of strict rules and regulations regarding the process. On the other hand, forex offers the opportunity to profit in both rising and declining markets because with each trade, you are buying and selling simultaneously, and short-selling is, therefore, inherent in every transaction. In addition, since the forex market is so liquid, traders are not required to wait for an uptick before they are allowed to enter into a short position - as they are in the equities market.

Due to the extreme liquidity of the forex market, margins are low and leverage is high. It just is not possible to find such low margin rates in the equities markets; most margin traders in the equities markets need at least 50% of the value of the investment available as margin, whereas forex traders need as little as 1%. Furthermore, commissions in the equities market are much higher than in the forex market. Traditional brokers ask for commission fees on top of the spread, plus the fees that have to be paid to the exchange. Spot forex brokers take only the spread as their fee for the transaction. (For a more in-depth introduction to currency trading, see Getting Started in Forex and A Primer On The Forex Market.)

By now you should have a basic understanding of what the forex market is and how it works. In the next section, we'll examine the evolution of the current foreign exchange system.

Forex History and Market Participants

Given the global nature of the forex exchange market, it is important to first examine and learn some of the important historical events relating to currencies and currency exchange before entering any trades. In this section we’ll review the international monetary system and how it has evolved to its current state. We will then take a look at the major players that occupy the forex market - something that is important for all potential forex traders to understand.

The History of the Forex
Gold Standard System
The creation of the gold standard monetary system in 1875 marks one of the most important events in the history of the forex market. Before the gold standard was implemented, countries would commonly use gold and silver as means of international payment. The main issue with using gold and silver for payment is that their value is affected by external supply and demand. For example, the discovery of a new gold mine would drive gold prices down.

The underlying idea behind the gold standard was that governments guaranteed the conversion of currency into a specific amount of gold, and vice versa. In other words, a currency would be backed by gold. Obviously, governments needed a fairly substantial gold reserve in order to meet the demand for currency exchanges. During the late nineteenth century, all of the major economic countries had defined an amount of currency to an ounce of gold. Over time, the difference in price of an ounce of gold between two currencies became the exchange rate for those two currencies. This represented the first standardized means of currency exchange in history.

The gold standard eventually broke down during the beginning of World War I. Due to the political tension with Germany, the major European powers felt a need to complete large military projects. The financial burden of these projects was so substantial that there was not enough gold at the time to exchange for all the excess currency that the governments were printing off.

Although the gold standard would make a small comeback during the inter-war years, most countries had dropped it again by the onset of World War II. However, gold never ceased being the ultimate form of monetary value. (For more on this, read The Gold Standard Revisited, What Is Wrong With Gold? and Using Technical Analysis In The Gold Markets.)

Bretton Woods System
Before the end of World War II, the Allied nations believed that there would be a need to set up a monetary system in order to fill the void that was left behind when the gold standard system was abandoned. In July 1944, more than 700 representatives from the Allies convened at Bretton Woods, New Hampshire, to deliberate over what would be called the Bretton Woods system of international monetary management.

To simplify, Bretton Woods led to the formation of the following:

1. A method of fixed exchange rates;
2. The U.S. dollar replacing the gold standard to become a primary reserve currency; and
3. The creation of three international agencies to oversee economic activity: the International Monetary Fund (IMF), International Bank for Reconstruction and Development, and the General Agreement on Tariffs and Trade (GATT).

One of the main features of Bretton Woods is that the U.S. dollar replaced gold as the main standard of convertibility for the world’s currencies; and furthermore, the U.S. dollar became the only currency that would be backed by gold. (This turned out to be the primary reason that Bretton Woods eventually failed.)

Over the next 25 or so years, the U.S. had to run a series of balance of payment deficits in order to be the world’s reserved currency. By the early 1970s, U.S. gold reserves were so depleted that the U.S. treasury did not have enough gold to cover all the U.S. dollars that foreign central banks had in reserve.

Finally, on August 15, 1971, U.S. President Richard Nixon closed the gold window, and the U.S. announced to the world that it would no longer exchange gold for the U.S. dollars that were held in foreign reserves. This event marked the end of Bretton Woods.

Even though Bretton Woods didn’t last, it left an important legacy that still has a significant effect on today’s international economic climate. This legacy exists in the form of the three international agencies created in the 1940s: the IMF, the International Bank for Reconstruction and Development (now part of the World Bank) and GATT, the precursor to the World Trade Organization. (To learn more about Bretton Wood, read What Is The International Monetary Fund? and Floating And Fixed Exchange Rates.)

Current Exchange Rates
After the Bretton Woods system broke down, the world finally accepted the use of floating foreign exchange rates during the Jamaica agreement of 1976. This meant that the use of the gold standard would be permanently abolished. However, this is not to say that governments adopted a pure free-floating exchange rate system. Most governments employ one of the following three exchange rate systems that are still used today:

1. Dollarization;
2. Pegged rate; and
3. Managed floating rate.

Dollarization
This event occurs when a country decides not to issue its own currency and adopts a foreign currency as its national currency. Although dollarization usually enables a country to be seen as a more stable place for investment, the drawback is that the country’s central bank can no longer print money or make any sort of monetary policy. An example of dollarization is El Salvador's use of the U.S. dollar. (To read more, see Dollarization Explained.)

Pegged Rates
Pegging occurs when one country directly fixes its exchange rate to a foreign currency so that the country will have somewhat more stability than a normal float. More specifically, pegging allows a country’s currency to be exchanged at a fixed rate with a single or a specific basket of foreign currencies. The currency will only fluctuate when the pegged currencies change.

For example, China pegged its yuan to the U.S. dollar at a rate of 8.28 yuan to US$1, between 1997 and July 21, 2005. The downside to pegging would be that a currency’s value is at the mercy of the pegged currency’s economic situation. For example, if the U.S. dollar appreciates substantially against all other currencies, the yuan would also appreciate, which may not be what the Chinese central bank wants.

Managed Floating Rates
This type of system is created when a currency’s exchange rate is allowed to freely change in value subject to the market forces of supply and demand. However, the government or central bank may intervene to stabilize extreme fluctuations in exchange rates. For example, if a country’s currency is depreciating far beyond an acceptable level, the government can raise short-term interest rates. Raising rates should cause the currency to appreciate slightly; but understand that this is a very simplified example. Central banks typically employ a number of tools to manage currency.

Market Participants
Unlike the equity market - where investors often only trade with institutional investors (such as mutual funds) or other individual investors - there are additional participants that trade on the forex market for entirely different reasons than those on the equity market. Therefore, it is important to identify and understand the functions and motivations of the main players of the forex market.

Governments and Central Banks
Arguably, some of the most influential participants involved with currency exchange are the central banks and federal governments. In most countries, the central bank is an extension of the government and conducts its policy in tandem with the government. However, some governments feel that a more independent central bank would be more effective in balancing the goals of curbing inflation and keeping interest rates low, which tends to increase economic growth. Regardless of the degree of independence that a central bank possesses, government representatives typically have regular consultations with central bank representatives to discuss monetary policy. Thus, central banks and governments are usually on the same page when it comes to monetary policy.

Central banks are often involved in manipulating reserve volumes in order to meet certain economic goals. For example, ever since pegging its currency (the yuan) to the U.S. dollar, China has been buying up millions of dollars worth of U.S. treasury bills in order to keep the yuan at its target exchange rate. Central banks use the foreign exchange market to adjust their reserve volumes. With extremely deep pockets, they yield significant influence on the currency markets.

Banks and Other Financial Institutions
In addition to central banks and governments, some of the largest participants involved with forex transactions are banks. Most individuals who need foreign currency for small-scale transactions deal with neighborhood banks. However, individual transactions pale in comparison to the volumes that are traded in the interbank market.

The interbank market is the market through which large banks transact with each other and determine the currency price that individual traders see on their trading platforms. These banks transact with each other on electronic brokering systems that are based upon credit. Only banks that have credit relationships with each other can engage in transactions. The larger the bank, the more credit relationships it has and the better the pricing it can access for its customers. The smaller the bank, the less credit relationships it has and the lower the priority it has on the pricing scale.

Banks, in general, act as dealers in the sense that they are willing to buy/sell a currency at the bid/ask price. One way that banks make money on the forex market is by exchanging currency at a premium to the price they paid to obtain it. Since the forex market is a decentralized market, it is common to see different banks with slightly different exchange rates for the same currency.

Hedgers
Some of the biggest clients of these banks are businesses that deal with international transactions. Whether a business is selling to an international client or buying from an international supplier, it will need to deal with the volatility of fluctuating currencies.

If there is one thing that management (and shareholders) detest, it is uncertainty. Having to deal with foreign-exchange risk is a big problem for many multinationals. For example, suppose that a German company orders some equipment from a Japanese manufacturer to be paid in yen one year from now. Since the exchange rate can fluctuate wildly over an entire year, the German company has no way of knowing whether it will end up paying more euros at the time of delivery.

One choice that a business can make to reduce the uncertainty of foreign-exchange risk is to go into the spot market and make an immediate transaction for the foreign currency that they need.

Unfortunately, businesses may not have enough cash on hand to make spot transactions or may not want to hold massive amounts of foreign currency for long periods of time. Therefore, businesses quite frequently employ hedging strategies in order to lock in a specific exchange rate for the future or to remove all sources of exchange-rate risk for that transaction.

For example, if a European company wants to import steel from the U.S., it would have to pay in U.S. dollars. If the price of the euro falls against the dollar before payment is made, the European company will realize a financial loss. As such, it could enter into a contract that locked in the current exchange rate to eliminate the risk of dealing in U.S. dollars. These contracts could be either forwards or futures contracts.



Speculators
Another class of market participants involved with foreign exchange-related transactions is speculators. Rather than hedging against movement in exchange rates or exchanging currency to fund international transactions, speculators attempt to make money by taking advantage of fluctuating exchange-rate levels.

The most famous of all currency speculators is probably George Soros. The billionaire hedge fund manager is most famous for speculating on the decline of the British pound, a move that earned $1.1 billion in less than a month. On the other hand, Nick Leeson, a derivatives trader with England’s Barings Bank, took speculative positions on futures contracts in yen that resulted in losses amounting to more than $1.4 billion, which led to the collapse of the company.

Some of the largest and most controversial speculators on the forex market are hedge funds, which are essentially unregulated funds that employ unconventional investment strategies in order to reap large returns. Think of them as mutual funds on steroids. Hedge funds are the favorite whipping boys of many a central banker. Given that they can place such massive bets, they can have a major effect on a country’s currency and economy. Some critics blamed hedge funds for the Asian currency crisis of the late 1990s, but others have pointed out that the real problem was the ineptness of Asian central bankers. (For more on hedge funds, see Introduction To Hedge Funds - Part One and Part Two.)Either way, speculators can have a big sway on the currency markets, particularly big ones.

Now that you have a basic understanding of the forex market, its participants and its history, we can move on to some of the more advanced concepts that will bring you closer to being able to trade within this massive market. The next section will look at the main economic theories that underlie the forex market.

Economic Theories, Models, Feeds & Data

There is a great deal of academic theory revolving around currencies. While often not applicable directly to day-to-day trading, it is helpful to understand the overarching ideas behind the academic research.

The main economic theories found in the foreign exchange deal with parity conditions. A parity condition is an economic explanation of the price at which two currencies should be exchanged, based on factors such as inflation and interest rates. The economic theories suggest that when the parity condition does not hold, an arbitrage opportunity exists for market participants. However, arbitrage opportunities, as in many other markets, are quickly discovered and eliminated before even giving the individual investor an opportunity to capitalize on them. Other theories are based on economic factors such as trade, capital flows and the way a country runs its operations. We review each of them briefly below.

Major Theories: Purchasing Power Parity
Purchasing Power Parity (PPP) is the economic theory that price levels between two countries should be equivalent to one another after exchange-rate adjustment. The basis of this theory is the law of one price, where the cost of an identical good should be the same around the world. Based on the theory, if there is a large difference in price between two countries for the same product after exchange rate adjustment, an arbitrage opportunity is created, because the product can be obtained from the country that sells it for the lowest price.

The relative version of PPP is as follows:


Where 'e' represents the rate of change in the exchange rate and 'π₁' and 'π₂'represent the rates of inflation for country 1 and country 2, respectively.

For example, if the inflation rate for country XYZ is 10% and the inflation for country ABC is 5%, then ABC's currency should appreciate 4.76% against that of XYZ.



Interest Rate Parity
The concept of Interest Rate Parity (IRP) is similar to PPP, in that it suggests that for there to be no arbitrage opportunities, two assets in two different countries should have similar interest rates, as long as the risk for each is the same. The basis for this parity is also the law of one price, in that the purchase of one investment asset in one country should yield the same return as the exact same asset in another country; otherwise exchange rates would have to adjust to make up for the difference.

The formula for determining IRP can be found by:


Where 'F' represents the forward exchange rate; 'S' represents the spot exchange rate; 'i₁' represents the interest rate in country 1; and 'i₂' represents the interest rate in country 2.

International Fisher Effect
The International Fisher Effect (IFE) theory suggests that the exchange rate between two countries should change by an amount similar to the difference between their nominal interest rates. If the nominal rate in one country is lower than another, the currency of the country with the lower nominal rate should appreciate against the higher rate country by the same amount.

The formula for IFE is as follows:


Where 'e' represents the rate of change in the exchange rate and 'i₁' and 'i₂'represent the rates of inflation for country 1 and country 2, respectively.

Balance of Payments Theory
A country's balance of payments is comprised of two segments - the current account and the capital account - which measure the inflows and outflows of goods and capital for a country. The balance of payments theory looks at the current account, which is the account dealing with trade of tangible goods, to get an idea of exchange-rate directions.

If a country is running a large current account surplus or deficit, it is a sign that a country's exchange rate is out of equilibrium. To bring the current account back into equilibrium, the exchange rate will need to adjust over time. If a country is running a large deficit (more imports than exports), the domestic currency will depreciate. On the other hand, a surplus would lead to currency appreciation.

The balance of payments identity is found by:

Where BCA represents the current account balance; BKA represents the capital account balance; and BRA represents the reserves account balance.

Real Interest Rate Differentiation Model
The Real Interest Rate Differential Model simply suggests that countries with higher real interest rates will see their currencies appreciate against countries with lower interest rates. The reason for this is that investors around the world will move their money to countries with higher real rates to earn higher returns, which bids up the price of the higher real rate currency.

Asset Market Model
The Asset Market Model looks at the inflow of money into a country by foreign investors for the purpose of purchasing assets such as stocks, bonds and other financial instruments. If a country is seeing large inflows by foreign investors, the price of its currency is expected to increase, as the domestic currency needs to be purchased by these foreign investors. This theory considers the capital account of the balance of trade compared to the current account in the prior theory. This model has gained more acceptance as the capital accounts of countries are starting to greatly outpace the current account as international money flow increases.

Monetary Model
The Monetary Model focuses on a country's monetary policy to help determine the exchange rate. A country's monetary policy deals with the money supply of that country, which is determined by both the interest rate set by central banks and the amount of money printed by the treasury. Countries that adopt a monetary policy that rapidly grows its monetary supply will see inflationary pressure due to the increased amount of money in circulation. This leads to a devaluation of the currency.

These economic theories, which are based on assumptions and perfect situations, help to illustrate the basic fundamentals of currencies and how they are impacted by economic factors. However, the fact that there are so many conflicting theories indicates the difficulty in any one of them being 100% accurate in predicting currency fluctuations. Their importance will likely vary by the different market environment, but it is still important to know the fundamental basis behind each of the theories.

Economic Data
Economic theories may move currencies in the long term, but on a shorter-term, day-to-day or week-to-week basis, economic data has a more significant impact. It is often said the biggest companies in the world are actually countries and that their currency is essentially shares in that country. Economic data, such as the latest gross domestic product (GDP) numbers, are often considered to be like a company's latest earnings data. In the same way that financial news and current events can affect a company's stock price, news and information about a country can have a major impact on the direction of that country's currency. Changes in interest rates, inflation, unemployment, consumer confidence, GDP, political stability etc. can all lead to extremely large gains/losses depending on the nature of the announcement and the current state of the country.

The number of economic announcements made each day from around the world can be intimidating, but as one spends more time learning about the forex market it becomes clear which announcements have the greatest influence. Listed below are a number of economic indicators that are generally considered to have the greatest influence - regardless of which country the announcement comes from.

Employment Data
Most countries release data about the number of people that currently are employed within that economy. In the U.S., this data is known as non-farm payrolls and is released the first Friday of the month by the Bureau of Labor Statistics. In most cases, strong increases in employment signal that a country enjoys a prosperous economy, while decreases are a sign of potential contraction. If a country has gone recently through economic troubles, strong employment data could send the currency higher because it is a sign of economic health and recovery. On the other hand, high employment can also lead to inflation, so this data could send the currency downward. In other words, economic data and the movement of currency will often depend on the circumstances that exist when the data is released.

Interest Rates
As was seen with some of the economic theories, interest rates are a major focus in the forex market. The most focus by market participants, in terms of interest rates, is placed on the country's central bank changes of its bank rate, which is used to adjust monetary supply and institute the country's monetary policy. In the U.S., the Federal Open Market Committee (FOMC) determines the bank rate, or the rate at which commercial banks can borrow and lend to the U.S. Treasury. The FOMC meets eight times a year to make decisions on whether to raise, lower or leave the bank rate the same; and each meeting, along with the minutes, is a point of focus. (For more on central banks read Get to Know the Major Central Banks.)

Inflation
Inflation data measures the increases and decreases of price levels over a period of time. Due to the sheer amount of goods and services within an economy, a basket of goods and services is used to measure changes in prices. Price increases are a sign of inflation, which suggests that the country will see its currency depreciate. In the U.S., inflation data is shown in the Consumer Price Index, which is released on a monthly basis by the Bureau of Labor Statistics.

Gross Domestic Product
The gross domestic product of a country is a measure of all of the finished goods and services that a country generated during a given period. The GDP calculation is split into four categories: private consumption, government spending, business spending and total net exports. GDP is considered the best overall measure of the health of a country's economy, with GDP increases signaling economic growth. The healthier a country's economy is, the more attractive it is to foreign investors, which in turn can often lead to increases in the value of its currency, as money moves into the country. In the U.S., this data is released by the Bureau of Economic Analysis once a month in the third or fourth quarter of the month.

Retail Sales
Retail sales data measures the amount of sales that retailers make during the period, reflecting consumer spending. The measure itself doesn't look at all stores, but, similar to GDP, uses a group of stores of varying types to get an idea of consumer spending. This measure also gives market participants an idea of the strength of the economy, where increased spending signals a strong economy. In the U.S., the Department of Commerce releases data on retail sales around the middle of the month.



Durable Goods
The data for durable goods (those with a lifespan of more than three years) measures the amount of manufactured goods that are ordered, shipped and unfilled for the time period. These goods include such things as cars and appliances, giving economists an idea of the amount of individual spending on these longer-term goods, along with an idea of the health of the factory sector. This measure again gives market participants insight into the health of the economy, with data being released around the 26th of the month by the Department of Commerce.

Trade and Capital Flows
Interactions between countries create huge monetary flows that can have a substantial impact on the value of currencies. As was mentioned before, a country that imports far more than it exports could see its currency decline due to its need to sell its own currency to purchase the currency of the exporting nation. Furthermore, increased investments in a country can lead to substantial increases in the value of its currency.

Trade flow data looks at the difference between a country's imports and exports, with a trade deficit occurring when imports are greater than exports. In the U.S., the Commerce Department releases balance of trade data on a monthly basis, which shows the amount of goods and services that the U.S. exported and imported during the past month. Capital flow data looks at the difference in the amount of currency being brought in through investment and/or exports to currency being sold for foreign investments and/or imports. A country that is seeing a lot of foreign investment, where outsiders are purchasing domestic assets such as stocks or real estate, will generally have a capital flow surplus.

Balance of payments data is the combined total of a country's trade and capital flow over a period of time. The balance of payments is split into three categories: the current account, the capital account and the financial account. The current account looks at the flow of goods and services between countries. The capital account looks at the exchange of money between countries for the purpose of purchasing capital assets. The financial account looks at the monetary flow between countries for investment purposes.

Macroeconomic and Geopolitical Events
The biggest changes in the forex often come from macroeconomic and geopolitical events such as wars, elections, monetary policy changes and financial crises. These events have the ability to change or reshape the country, including its fundamentals. For example, wars can put a huge economic strain on a country and greatly increase the volatility in a region, which could impact the value of its currency. It is important to keep up to date on these macroeconomic and geopolitical events.

There is so much data that is released in the forex market that it can be very difficult for the average individual to know which data to follow. Despite this, it is important to know what news releases will affect the currencies you trade. (For more insight, check out Trading On News Releases and Economic Indicators To Know.)

Now that you know a little more about what drives the market, we will look next at the two main trading strategies used by traders in the forex market – fundamental and technical analysis.