FOREX 101

Every time you open a newspaper, or see news on the net; reports tend to measure the state of the economy by the performance of the stock market. Yet the majority of people is not involved in the stock market and is somewhat clueless of what the whole thing means.  Well True_George has dabbled into the market and I can tell ya, that the stock market is not the defining factor of the state of the economy. That there are other markets that given the odds are more lucrative then stocks. The thing about the stock market is that it has rules that restrict participation. The other markets that are open 24 hours and give someone more free reign on how they play it. I says why not be part of the American economy and participate in the market systems. It could be your heyday.  Let’s look at one such market; The Foreign Exchange (Forex).

The Foreign exchange market (Forex, FX or currency market) is a world with a non-centralized over the counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock with the exception of weekends.

The purpose of the foreign exchange market “Forex” is to assist international trade and investment. The foreign exchange market allows business to convert one currency to another.  Technology allows for the Forex markets to be accessible to everyone no matter the time zones or the time of day (24 hours).  Instead of being controlled by national banks and governments, the main factor that drives today’s Forex market is Supply and Demand.

Benefits of Forex

Leverage and low commissions

Normally no commissions only spread and free platform.

Ample leverage, low margin requirements depending on specific countries and regulations. Leverage if used properly increases potential profit.

No $25,000 minimum pattern day trader capital requirements as in U.S equities.

Strong liquidity ($5.3 trillion per day); lower risk when using protective stop orders. Forex markets have a 24 hour electronic trading time. There are three main sessions: Aisa-Europe-United States with a 24 hour market gap risk reduced unless a position is held over the weekend.

Eastern Time:

ASIAN SESSION6:00 pm-3:00 am
EUROPEAN SESSION2:00 am – 10 am
UNITED STATES SESSION8:00 am – 3:00 pm
DEAD ZONE4:00 pm – 5:00 pm

Opening in Wellington followed by Sidney progressing through Tokyo and Singapore through Frankfurt onto London closing Friday Evening in New York

It is true diversification up or down.

Currency Pairs

Two individual currencies in the spot market are linked together as a single trading instrument

TermDefinition
Base CurrencyThe first currency in the pair with a value always equal to 1
Quote CurrencyThe second currency in the pair
Currency PriceThe amount of the quote currency it takes to buy 1 unit of the base currency

EUR (base currency)  USD (quote currency) = 1.20123 (currency price: 1.20123 US dollars to buy 1 Euro)

TERMDEFINITION
Major PairThe majors are the most liquid currencies traded agains the USD: EURUSD; GBPUSD; AUDUSD; NZDUSD; USDJPY; USDCHF; USDCAD
Cross PairA currency pair when the USD is not included: EURGBP; CHFJPY etc  
Exotic PairA currency pair make up of thinly traded currencies (wide spread): DKK; NOK; PLN; CZK; HUF etc

P I P (Percentage In Point)

A PIP is the smallest in price currency traders use even though the actual smallest increment is known as fractional PIPs

Knowing the location of the PIP is key to determining how far a currency pair has moved

In general all currency pairs EXCEPT those that involve the Japanese Yen will have the PIP in the FOURTH decimal spot.

The Japanese Yen pairs have the PIP in the SECOND decimal point.

Note: Stocks use pennies; Futures use ticks; and Forex use PIPs

PIPs are approximately 1/100th of a cent ( 1 percent)

PIPS

Most Pairs1.12345
 10,000 pips1000 pips100 pips10 pips1 pip.1 pip
Yen Pairs101.123

Types of Lots

A unit of measurement in regards to position size similar to a share in equities, or a contract in futures.

LOT NAMELOT SIZE
Standard Lot100,000 units of the base
Mini Lot10,000 units of the base
Micro-Lot1,000 units of the base

Forex platforms vary on how they accept position size. Some take lot sizes, others take the amount of currency. Example; one platform might accept 1 standard lot whereas another accept 100,000 of the same currency.

PIP value is calculated by taking the amount of currency multiplied by the price of the currency pair counted into the traders account currency.

The value of 1 PIP for most currency pairs is given below. This is usually the approximate value.

LOT NAMEPIP VALUE PER LOT SIZE
Standard Lot100,000 units of base = $10.00
Mini-Lot10,000 units of base = $1.00
Micro-Lot1,000 units of base = $.10

Only currency pairs with U.S dollar quotes

Non Centralized Market Structure

The Forex market does not have a central exchange when all transaction occur. Instead it is a network of banks, brokers and other participants trading currencies to assert trade, speculation and hedge.

While this market is highly liquid and very efficient it does have limitations:

  1. Forex brokers are the counter party to a trade
  2. Brokers will not have the exact same price at the exact same time; however competitive pressures keep prices very close.
  3. A trader cannot see volume

Most brokers take the quotes from multiple banks within the spread and set the market. The trades is typically filled by RFED

An ECN (electronic network brokers) broker simply matches the trader order to an opposing order within its liquidity pool. The order is typically filled by the price provider.

EUR USD                       GBP  USD

84 ⁶   85⁹                         06⁸    08⁸

Buy 1.2 sell                  buy 2.0 sell

Roll over

Forex brokers typically extend the settlement of a currency position. This is known as rollover.

The rollover allows a trader to hold a position without taking delivery of the actual currency.

The currency position is simultaneously closed at the end of the trading day and reopened at the beginning of the new trading day (this occurs at 5pm EST)

Very few brokers may shut down for a short time period at the end of the trading day. Check that with the broker.

Interest is either credited or deducted from your account by holding positions into the next trading day.

Central bank set specific rates for currencies:

As long as the interest rate is positive buying and holding a currency into the next trading day provides a payment; it is like buying a currency and having that capital allocated into a local government board which pays a local interest rate set by its central bank

If the interest rate is negative, the opposite is true and buying a currency implies a cost.

Rollover Example

Let’s say you brought GBPNZD

  1. You would LONG GBP and you would SHORT NZD

 By being long GBP you would earn interest rate of .50 %

By being short NZD you would have to pay 3.5% intreast rate

You would be a net buyer of 3% interest rate

Let’s say you SOLD GBP NZD

You would SHORT GBP and you would be LONG NZD

You would be a net receiver of 3% interest rate

Rollover & Brokers

Brokers always keep some profit out of the roll over process in the form of arbitrage

Some brokers may allow the Forex without intreast rates debited nor credited in “swap free” accounts.

Some brokers refer to the rollover as “FINANCING” and will start crediting or debiting your account as soon as you open your position

Major Currency pairs

SymbolCurrenciesNicknameTypical SpreadTypical daily rate ATR
EUR USDEuro / US DollarEuro/Fiber.5-240-350
USD JPYUS Dollar / Japanese YenDollar / Yen.5-240-300

Notable Characteristics or Pairs

In general a currency is more liquid and active when its country is in normal business hours.

Cross pairs are great for non-correlated trading opportunities as well as delivery strength or weakness of individual currencies.

USD, JPY & CHF are generally “Safe haven” currencies and usually rise when the global economic or socioeconomic risk

Treat every currency pair as its own unique instrument pair. It has corelators to other pairs but it will have its own indirectable personality. A good trader knows the characteristics of his currency pairs.

The Dollar Index

The most heavily traded single currency in the world is the US Dollar.

It is the currency used most in international transactions and it is widely held as a reserve currency.

The US dollar is involved in approximately 80% of transactions worldwide.

The US dollar’s value is commonly tracked by comparing its performance against a basket of other currencies.

The US dollar index can be seen in multiple forms,

US Dollar Index ($DXY pronounced “dixie”).

US Dollar Index futures (@DX = 10 3XN)

Understanding supply and demand for the Dollar Index can help the Forex trader

US Dollar Index ($ DXY)

The US Dollar index ($DXY) is made of 6 currencies against the US Dollar

6 Currencies against the USD
JPY CAD CHF SEK GBP EUR12.6  % 9.1 % 3.6 % 4.2 % 11.9 % 58.6 %

US Dollar

The US Dollar Index is made up of a basket of 4 currencies against the Dollar

CurrencyWeight
EUR GBP JPY AUD25 % 25 % 25 % 25 %

USD PAIRS

EUR USD

GBP USD

AUD USD

NZD USD

USD JPY

USD CAD

USD CHF

Daily approx 80 % of of all transactions occur in these 7 currencies.

Arguably the four most popular:

EUR USD: Often times refereed to as the Euro-Dollar is the the world’s most traded currency pair. You have arguably the world’s largest economy (the USA) paired with the world’s second largest economy (European Union). The biggest drives of the EUR USD is the United States Federal Reserve Bank (FNB) and the European Central Bank (ECB) and in particular the interest rates set by both central banks.

Currently the United States set the interest rate at 2.50 % and the European Union set their interest rate at 0.00 %

USD JPY: Referred to as the Dollar-Yen. The Bank of Japan (BOJ) had to combat inflation and growth for many years starting in the late 80’s and  which resulted in imposing a rear zero or even negative interest rate at different points in time. Because of this the Yen is widely recognize as a “safe haven” and is typically used as one half of a carry trade. Currently the USD is at 2.50 % and JPY is at -.10 %

Carry TradeIf you go long with a currency that has a lower rate then the trader will get paid the higher rate

In times of economic uncertainty you will see the Yen Rise in value to it’s “safe haven” status. The USD is also seen as a “safe haven” currency and at times can complicate these moves.

Ultimately in times of global uncertainty institutions will tend to go more “risk off” and this will be immediately reflected in the value of the Yen.

GBP USD: Refereed to as the Pound, Cable or Sterling; it was used as the world’s reserve currency before the USD took over.

While the United Kingdom is still part of the European Union they maintained their own sovereign currency. With Brexit the GBP can experience sudden and dramatic moves.

The biggest drives of the GBP USD are the Bank of England (BOE) and the U.S Federal Reserve Bank (FNB), and in particular the interest rates set by both central banks. Currently the GBP is at  .75 %  and the USD is at 2.50 %

USD CHF: The USD CHF mostly reflects $DXY futures. Similar to the yen, the Swiss Franc has a mirror status as a “safe haven.” Switzerland changed dramatically since 2015 when it unexpectedly de-pegged it’s currency from 1.20 Euros to its free floating value of .85 CHF

The Swiss National Bank (SNB) reduced their rates from .50 % to – .75 % and shortly thereafter opened it’s once secretive numbered bank accounts to the United States Internal Revenue Service.

Currently the USD is at 2.5 % and the CHF is at -.75 %

AUD USD; USD CAD; NZD USD: Are considered COMMODITY currencies.

AUD USD: Refereed to as the Aussis or Aussis-Dollar. Australia is a major mining country primary in gold, copper and iron ore. Hench when gold moves it can have a major effect on the AUD. The Reserve Bank of Australia (RBA) currently has rates set at 1.25 % to the USD of 2.50 %. Chia is a major import partner for AUD

USD CAD: Refereed to as the Loonie or Dollar-Cad. Canada is a major exporter of oil, natural gas, and timber. The price of crude oil have a major impact on the CAD. When the USD was a major importer of oil the USD CAD could have major price swings due to changes in the US inventories. Now that the US is an oil exportor it can complicate moves in the USD CAD

The USD is currently 2.5 % and the Bank of Canada (BOC) is at 1.75 %. Keep in mind that both countries have similar economies and due to the US economy is larger price movements can still be challanging to predict.

NZD USD: Referred to as the Kiwi or Dollar-Kiwi. Agriculture is key to the New Zealand economy. Price movements of soft commodities are key. Especially milk. The NZD has weekly milk auctions as the USD has weekly treasury bond auctions.

The Reserve Bank of New Zealand (RBNZ) currently has rates at 1.75 % and the USD is currently at 2.5%. As with the AUD NZD is a major import partner to China. 

Major Pairs

EUR USD

GBP USD

AUD USD

NZD USD

USD JPY

USD CAD

USD CHF

Currency Cross pairs

A currency cross pair is a currency pair which does not include USD. A cross pair can be quite useful it allows you to trade any change in economies easier.

If an economic release for the USD pushes the USD up and the EUR is strong, a currency cross pair may help you take advantage of the SUR. Possibly the EUR CHF.

Keep in mind it is important to be aware of all economic changes in the countries of the chosen currencies and their respective supply and demand zones. Not day so it can lead to less desirable results.

A currency pair can be divided into three groups.

Major Cross pairs: Cross pairs with the majors

Obscure cross pair: A major cross pair that generally does not have the EUR, JPY, GBP

Exotic Cross pair: Cross pair that has an emerging market. For xample CHIN JPY; EUR TRY; EUR CHIN

Keep in mind that when trading currencies even though volume is not reported we want to be trading those currencies with the most liquidity to avoid volatility spikes.

Forex Major Cross pairs

USDEUR
EUR USDEUR USD
GBP USDEUR GBP
AUD USDEUR AUD
NZD USDEUR NZD
USD CADEUR JPY
USD JPYEUR CAD
USD CHFEUR CHF
GBPCHFAUD
GBP USDEUR CHFAUD USD
GBP JPYGBP CHFAUD CAD
GBP AUDAUD CHFAUD NZD
GBP NZDNZD CHFAUD JPY
GBP CADCAD CHFAUD CHF
GBP CHFUSD CHFEUR AUD
EUR GPBCHF JPYGBP NZD
NZDCADJPY
NZD USDEUR CADEUR JPY
NZD CADGBP CADGBP JPY
NZD JPYAUD CADAUD JPY
NZD CHFNZD CADNZD JPY
AUD NZDUSD CADUSD JPY
EUR NZDCAD JPYCAD JPY
GBP NZDCAD CHFCHF JPY

Volatility (price movement)

If an economic release for the USD pushes the USD up and the EUR is strong it may result in the flat price action of EUR USD. A currency cross pair may help you take advantage of the EUR possible EUR CHF

EUR USD has an inverse relation to EUR CHF

Keep in mind it is very important to be aware of all economic changes in countries of the chosen currencies and their repetitive supply and demand zones. Not doing so may lead to less then desirable results.

FOREX PAIRS VOLATITY

SLOW MOVING PAIRSATR 01ATR 06PIPMMR (MARGIN)
NZD JPY7647.92$264.23
AUD NZD6535.66$209.23
EUR GBP6544$1.30$583.00
AUD CAD5036$1.0$198.70
SLIGHTLY FASTER MOVING PAIRSATR 01ATR 06PIPMMR (MARGIN)
AUD JPY10052.92$279.08
CHF JPY8450.92$403.37
AUD USD5938$1.00$209.30
EUR CHF5048$1.01$338.23
INTERMEDIATE VOLATITYATR 01ATR 06PIPMMR (MARGIN)
EUR USD7040$1.0$225.48
USD CHF5948$1.01$300.00
USD JPY8152.92$400.00
EUR JPY10864.92$451.00
CAD JPY8755.92$299.21
USD CAD7057.75$200.00
USD SGD4540.73$500.00
HIGH VOLATILITYATR 01ATR 06PIPMMR (MARGIN)
GBP AUD232121.70$634.87
GBP NZD171108.66$634.50
GBP CAD149100.75$634.63
GBP JPY14788.92$634.60
EUR AUD12574.70$338.27
EUR CAD10565.75$225.51
GBP USD10271$1.00$634.63
GBP CHF9876$1.01$634.63

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