Analysis in Forex
There are 2 basic types of analysis you can take when approaching the forex:
1. Fundamental analysis
2. Technical analysis.
There has always been a constant debate as to which analysis is better, but to tell you thetruth, you need to know a little bit of both. So let’s break each one down and then come back and put them together.
Fundamental Analysis
Fundamental analysis is a way of looking at the market through economic, social and political forces that affect supply and demand. In other words, you look at whose economy is doing well, and whose economy sucks. The idea behind this type of analysis is that if a country’s economy is doing well, their currency will also be doing well. This is because the better a country’s economy, the more trust other countries have in that currency. For example, the U.S. dollar has been gaining strength because the U.S. economy is gaining strength. As the economy gets better, interest rates get higher to control inflation and as a result, the value of the dollar continues to increase. In a nutshell, that is basically what fundamental analysis is. Later on in the course you will learn which specific news events drive currency prices the most. For now, just know that the fundamental analysis of the Forex is a way of analyzing a currency through the strength of that country’s economy.
Technical Analysis
The most IMPORTANT thing you will ever learn in technical analysis is the trend! Many, many, many, many, many, many people have a saying that goes, “The trend is your friend”. The reason for this is that you are much more likely to make money when you can find a trend and trade in the same direction. Technical analysis can help you identify
these trends in its earliest stages and therefore provide you with very profitable trading
opportunities. Now I know you’re thinking to yourself, “Geez, these guys are smart. They use crazy words like "technical" and "fundamental" analysis. I can never learn this stuff!” Don't worry yourself too much. After you're done with the School of Pipsology, you too will be just as....uhmmm..."smart?" as us.
So which type of analysis is better?
Ahh, the million dollar question. Throughout your journey as an aspiring Forex trader you will find strong advocates for both fundamental and technical trading. You will have those who argue that it is the fundamentals alone that drive the market and that any patterns found on a chart are simply coincidence. On the other hand, there will be those who argue that it is the technicals that traders pay attention to and because traders pay attention to it, common market patterns can be found to help predict future price movements. Do not be fooled by these one sided extremists! One is not better than the other... Technical analysis is the study of price movement. In one word, technical analysis = charts. The idea is that a person can look at historical price movements, and, based on the price action, can determine at some level where the price will go. By looking at charts, you can identify trends and patterns which can help you find good trading opportunities. In order to become a true Forex master you will need to know how to effectively use both types of analysis. Don't believe me? Let me give you an example of how focusing on only one type of analysis can turn into a disaster.
• Let’s say that you’re looking at your charts and you find a good trading opportunity. You get all excited thinking about the money that’s going to be raining down from the sky. You say to yourself, “Man, I’ve never seen a more perfect trading opportunity. I love my charts.”
Wednesday, July 8, 2009
How To Make Forex Order
There are some basic order types that all brokers provide and some others that sound
weird. The basic ones are:
• Market order
A market order is an order to buy or sell at the current market price. For example,EUR/USD is currently trading at 1.2140. If you wanted to buy at this exact price, you would click buy and your trading platform would instantly execute a buy order at that exact price. If you ever shop on Amazon.com, it's (kinda) like using their 1-Click ordering. You like thecurrent price, you click once and it's yours! The only difference is you are buying or selling one currency against another currency instead of buying Britney Spears CDs.
• Limit order
A limit order is an order placed to buy or sell at a certain price. The order essentially contains two variables, price and duration. For example, EUR/USD is currently trading at 1.2050. You want to go long if the price reaches 1.2070. You can either sit in front of your monitor and wait for it to hit 1.2070 (at which point you would click a buy market order), or you can set a buy limit order at 1.2070 (then you could walk away from your computer to attend your ballroom dancing class). If the price goes up to 1.2070, your trading platform will automatically execute a buy order at that exact price. You specify the price atwhich you wish to buy/sell a certain currency pair and also specify how long you want the order to remain active (GTC or GFD).
• Stop-loss order
A stop-loss order is a limit order linked to an open trade for the purpose of preventing additional losses if price goes against you. A stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order. For example, you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200. This means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 and close out your position for a 30 pip loss (eww!). Stop-losses are extremely useful if you don't want to sit in front of your monitor all day worried that you will lose all your money. You can simply set a stop-loss order on any open positions so you won't miss your basket weaving class.
• GTC (Good ‘til canceled)
A GTC order remains active in the market until you decide to cancel it. Your broker will not cancel the order at any time. Therefore it's your responsibility to remember that you have the order scheduled.
• GFD (Good for the day)
A GFD order remains active in the market until the end of the trading day. Because foreign exchange is a 24-hour market, this usually means 5pm EST since that that's U.S. markets close, but I’d recommend you double check with your broker.
• OCO (Order cancels other)
An OCO order is a mixture of two limit and/or stop-loss orders. Two orders with price and duration variables are placed above and below the current price. When one of the orders is executed the other order is canceled. Example: The price of EUR/USD is 1.2040. You want to either buy at 1.2095 over the resistance level in anticipation of a breakout or initiate a selling position if the price falls below 1.1985. The understanding is that if 1.2095 is reached, you will buy order will be triggered and the 1.1985 sell order will be automatically canceled.
weird. The basic ones are:
• Market order
A market order is an order to buy or sell at the current market price. For example,EUR/USD is currently trading at 1.2140. If you wanted to buy at this exact price, you would click buy and your trading platform would instantly execute a buy order at that exact price. If you ever shop on Amazon.com, it's (kinda) like using their 1-Click ordering. You like thecurrent price, you click once and it's yours! The only difference is you are buying or selling one currency against another currency instead of buying Britney Spears CDs.
• Limit order
A limit order is an order placed to buy or sell at a certain price. The order essentially contains two variables, price and duration. For example, EUR/USD is currently trading at 1.2050. You want to go long if the price reaches 1.2070. You can either sit in front of your monitor and wait for it to hit 1.2070 (at which point you would click a buy market order), or you can set a buy limit order at 1.2070 (then you could walk away from your computer to attend your ballroom dancing class). If the price goes up to 1.2070, your trading platform will automatically execute a buy order at that exact price. You specify the price atwhich you wish to buy/sell a certain currency pair and also specify how long you want the order to remain active (GTC or GFD).
• Stop-loss order
A stop-loss order is a limit order linked to an open trade for the purpose of preventing additional losses if price goes against you. A stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order. For example, you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200. This means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 and close out your position for a 30 pip loss (eww!). Stop-losses are extremely useful if you don't want to sit in front of your monitor all day worried that you will lose all your money. You can simply set a stop-loss order on any open positions so you won't miss your basket weaving class.
• GTC (Good ‘til canceled)
A GTC order remains active in the market until you decide to cancel it. Your broker will not cancel the order at any time. Therefore it's your responsibility to remember that you have the order scheduled.
• GFD (Good for the day)
A GFD order remains active in the market until the end of the trading day. Because foreign exchange is a 24-hour market, this usually means 5pm EST since that that's U.S. markets close, but I’d recommend you double check with your broker.
• OCO (Order cancels other)
An OCO order is a mixture of two limit and/or stop-loss orders. Two orders with price and duration variables are placed above and below the current price. When one of the orders is executed the other order is canceled. Example: The price of EUR/USD is 1.2040. You want to either buy at 1.2095 over the resistance level in anticipation of a breakout or initiate a selling position if the price falls below 1.1985. The understanding is that if 1.2095 is reached, you will buy order will be triggered and the 1.1985 sell order will be automatically canceled.
How To Trade in Forex
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.
Example of making money by buying Euros
Trader's Action EUR USD You purchase 10,000 euros at the EUR/USD exchange rate of 1.18
Two weeks later, you exchange your 10,000 euros back into US dollars at the exchange rate of 1.2500.
you earn a profit of $700. 0 +700
EUR $10,000 x 1.18 = US $11,800
EUR $10,000 x 1.25 = US $12,500
An exchange rate is simply the ratio of one currency valued against another currency. For example, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one Swiss franc, or how many Swiss francs you need to buy one U.S. dollar. How to Read an FX 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.
Long/Short
First, you should determine whether you want to buy or sell. If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price. In trader's talk, this is called "going long" or taking a "long position". Just remember: long = buy.
If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price. This is called "going short" or taking a "short position". Short = sell. Bid/Ask 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.
In the following examples, we're going to use fundamental analysis to help us decide whether to buy or sell a specific currency pair. If you always fell asleep during your economics class or just flat out skipped economics class, don’t worry! We will cover fundamental analysis in a later lesson. For right now, try to pretend you know what’s going on…
EUR/USD
In this example Euro is the base currency and thus the “basis” for the buy/sell. If you believe that the US economy will continue to weaken, which is bad for the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will rise versus the US dollar. if you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold Euros in the expectation that they will fall versus the US dollar.
USD/JPY
In this example the US dollar is the base currency and thus the “basis” for the buy/sell. If you think that the Japanese government is going to weaken the Yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will rise versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and converting all their U.S. dollars back to Yen, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
GBP/USD
In this example the GBP is the base currency and thus the “basis” for the buy/sell. If you think the British economy will continue to do better than the United States in terms of economic growth, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will rise versus the US dollar. If you believe the British's economy is slowing while the United State's economy remains strong like bull, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
USD/CHF
In this example the USD is the base currency and thus the “basis” for the buy/sell. If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that the US housing market bubble burst will hurt future economic growth, which will weaken the dollar, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc. I don't have enough money to buy $10,000 euros. Can I still trade?
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 the foreign exchange market is quantified in “lots”. 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 EUR, so they usually come in "lots" of $10,000 or $100,000 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 1 lot ($100,000) for buying the Pound with a 1% margin at the price of
1.5000 and wait for the exchange rate to climb. This means you now control $100,000
worth of British Pound with $1,000. 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). So for an initial capital investment
of $1,000, you have made 50% return. Return equals your $500 profit divided by your
$1,000 you risked to trade.
Your Actions GBP USD
Your Money
You buy 100,000 pounds at the GBP/USD exchange
rate of 1.5000
+100,000 -150,000 $1,000
You blink for two seconds and the GBP/USD
exchange rate rises to 1.5050 and you sell.
-100,000 +150,500** $1,500
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.
We will also be discussing margin more in-depth in the next lesson, but hopefully you're
able to get a basic idea of how margin works.
source: School of Pipsology
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.
Example of making money by buying Euros
Trader's Action EUR USD You purchase 10,000 euros at the EUR/USD exchange rate of 1.18
Two weeks later, you exchange your 10,000 euros back into US dollars at the exchange rate of 1.2500.
you earn a profit of $700. 0 +700
EUR $10,000 x 1.18 = US $11,800
EUR $10,000 x 1.25 = US $12,500
An exchange rate is simply the ratio of one currency valued against another currency. For example, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one Swiss franc, or how many Swiss francs you need to buy one U.S. dollar. How to Read an FX 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.
Long/Short
First, you should determine whether you want to buy or sell. If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price. In trader's talk, this is called "going long" or taking a "long position". Just remember: long = buy.
If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price. This is called "going short" or taking a "short position". Short = sell. Bid/Ask 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.
In the following examples, we're going to use fundamental analysis to help us decide whether to buy or sell a specific currency pair. If you always fell asleep during your economics class or just flat out skipped economics class, don’t worry! We will cover fundamental analysis in a later lesson. For right now, try to pretend you know what’s going on…
EUR/USD
In this example Euro is the base currency and thus the “basis” for the buy/sell. If you believe that the US economy will continue to weaken, which is bad for the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will rise versus the US dollar. if you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold Euros in the expectation that they will fall versus the US dollar.
USD/JPY
In this example the US dollar is the base currency and thus the “basis” for the buy/sell. If you think that the Japanese government is going to weaken the Yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will rise versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and converting all their U.S. dollars back to Yen, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
GBP/USD
In this example the GBP is the base currency and thus the “basis” for the buy/sell. If you think the British economy will continue to do better than the United States in terms of economic growth, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will rise versus the US dollar. If you believe the British's economy is slowing while the United State's economy remains strong like bull, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
USD/CHF
In this example the USD is the base currency and thus the “basis” for the buy/sell. If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that the US housing market bubble burst will hurt future economic growth, which will weaken the dollar, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc. I don't have enough money to buy $10,000 euros. Can I still trade?
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 the foreign exchange market is quantified in “lots”. 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 EUR, so they usually come in "lots" of $10,000 or $100,000 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 1 lot ($100,000) for buying the Pound with a 1% margin at the price of
1.5000 and wait for the exchange rate to climb. This means you now control $100,000
worth of British Pound with $1,000. 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). So for an initial capital investment
of $1,000, you have made 50% return. Return equals your $500 profit divided by your
$1,000 you risked to trade.
Your Actions GBP USD
Your Money
You buy 100,000 pounds at the GBP/USD exchange
rate of 1.5000
+100,000 -150,000 $1,000
You blink for two seconds and the GBP/USD
exchange rate rises to 1.5050 and you sell.
-100,000 +150,500** $1,500
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.
We will also be discussing margin more in-depth in the next lesson, but hopefully you're
able to get a basic idea of how margin works.
source: School of Pipsology
Subscribe to:
Posts (Atom)