Forex FX - Tutorial

Forex FX – Tutorials Pt 7

1. How to trade in Forex Market – Fx Market

Trading in financial markets, as also in forex market, it’s to predict correctly the market movement.

It sounds easy.

NO IT IS NOT

If a trader believes the underline value (financial instrument) – the currency pair will rise, he will buy the pair at the Ask price.

If a trader believes the underline value (financial instrument) – the currency pair will decline, he will sell the pair at the Bid price.

 2. The basic transactions in Forex market

Is to buy when you believe the currency pair will rise and you sell when you believe the currency pair will fall.

The driving forces for the currency exchange rates are various and they can no be predicted or estimated.

There are is the influence of macroeconomic environment (the  international economics factors and indicators, interest rate, inflation, growth of National Gross Product etc) socio political factors (conflicts, diplomatic events) and finally the unexpected, the unknown.

3. How we close a trade

We can take a currency exchange trade by entering the opposite position on equal amount of money of the initial position.

It can be very easily understood, if we have bought Euro with selling US Dollars, we can close the first trade by doing exactly the opposite, we will sell Euro with buying US Dollars.

This transaction of closing a position is called the offesting or liquidating transaction.

4. How we can calculate profits and losses

Usually, when we entering the offsetting or liquidating trade we can calculate our profits and losses by using the following formula:

Price (currency pair)            Price when buying

When selling the base    -     the base currency =  PROFIT OR LOSS

Currency                             

Example 1

We assume,  an individual investor believes Euro will rise over US Dollar and he buys the EUR / USD pair at 1,3450 and after two days closes the initial trade, by entering the opposite, sells Euro at the 1, 3460. We assume the transaction size is 100.000 USD and the net profit, will be 100 USD.

Calculations

(1, 3460 – 1, 3450) x 100, 000 = ,001 x 100, 000 = 100 USD

Example 2

We assume, an individual investor believes Euro will decline against the US Dollar and he sells the EUR / USD pair at 1, 3890 and after ten minutes he closes the initial trade, by entering the opposite, buys Euro at the 1, 3870. As the example 1 we assume the transaction size is 100, 000 USD and the net profit, will be 200 USD.

Calculations

(1, 3890 – 1, 3870) x 100, 000 = ,002 x 100, 000 = 200 USD

                                                                                      Elias Stoikos

Relative articles

1. Introduction to Forex

2. Forex Tutorial Part 2

3. Forex Tutorial Part 3

4. Forex Tutorial Part 4

5. Forex Tutorial Part 5

6. Forex Tutorial Part 6

Forex FX - Tutorial Part 6

Forex FT – Online Tutorial Part 6

1. The Margin of Forex FX trading

Banks and all the other dealers of currency exchange deals for opening a forex account to individual investors (retail customers) need collateral to ensure that investor can pay in the event of a loss.

In financial derivatives and in commodities trading world we use to call this collateral as “margin”. In the forex market is also known as minimum security.  Actually, this collateral intends to cover any currency trading losses of the individual investor. 

One of the fundamental characteristics of the forex FX market is the big leverage (I will provide a large number of financial leverage in future posts), very simple an individual through financial leverage can expose his position 2, 4, 7 and 100 times the initial deposit.

S.O.S. Mayday – S.O.S. Mayday – S.O.S. Mayday

Leverage is a very serious and dangerous issue!!!

Leverage offers opportunities but also it was the main reason for many losses even the fail out of international banking corporations and countries.

Summary

Leverage allows the individual investor to participate in markets by enable them to hold a much larger position than their account value.

2. The maintenance margin

Very simply maintenance margin is the amount of money an investor must deposit to hold his position. All banks and dealers running risk management applications to manage the exposure of them, on part of this exposure is also the exposure of their clients.

Another approach of the margin definition, in my humble opinion the correct approach is to use for both of them the Security Deposit definition.

So margin or Security deposit is the amount needed to open or maintain a position.

3. Margin Call

In case your position is against the market, you are losing. The dealer needs to ensure that you can pay the loss. So, dealers will call (email, electronic notice) and inform you to close the your position (I’m going to offer a detailed post about positions – orders and closing positions in forex dealings).

                                                                                         

                                                                                       Elias Stoikos

Related Articles 

1. Introduction to Forex

2. Forex Online Tutorial Part 2

3. Forex Online Tutorial Part 3

4. Forex Online Tutorial Part 4

5. Forex Online Tutorial Part 5

Forex FX - Tutorial

FOREX  FX – Online Tutorial Pt. 5

What it costs to participate on an off – exchange foreign currency market.

Actually, there is a no absolute answer. It depends, from the dealers.

Usually, there is no commission; there is only the mark – up.

But, in real world there are dealers who charge commissions for buying and selling pairs. Also, in case your account is managed by a third person there may by also additional charges for any kind of management fees.

What is commission?

A fixed amount of money you need to place so your forex market orders to be executed.

For example each time you buy or sell a currency exchange rate pair your account will be charged for 2 USD, 3 € etc.   

In case of a managed account according to financial industry practices, forex account manager use to charge (1) an initial charge with the opening of an account, for example 2% charge on the first deposit, (2) a sharing of the profits, for example 10% of the profits and (3) same of them use to charge commission fees when they execute buy and sell orders on behalf of you.

What is mark up cost?

In the previous forex tutorials I have presented the exchange rate quote example of the EUR / USD 1, 4310/22 spread, this spread is reported online by a major bank.

Same dealers tend to widen the offered spread, between bid and ask price, to their clients.

In the above discussed spread the EUR / USD 1, 4310/22 is reported by a major bank, a dealer may widen the spread and offer to his clients the EUR / USD 1, 4310/26 quote. The dealer has marked up the spread by ,0004 on each side.

According to this tactic, dealers widen the spread and make profit.

Conclusion

You need to study very carefully your forex account agreement and to understand how dealer will charge you for the trades.

Only through knowledge a private individual can build a competitive advantage and achieve serious financial goals in foreign currency exchange market.

                                                                                      Elias Stoikos

Relative Articles 

1. Introduction to Forex

2. Forex Online Tutorial Part 2

3. Forex Online Tutorial Part 3

4. Forex Online Tutorial Part 4

Relative Resources 

1. Forex στο wikipedia

   

Forex FX - tutorial

Forex FX - Online Tutorial Pt. 4 

1. Foreign Currency Quotations – How we quote foreign currencies

In foreign currency exchange market (forex, FX) the participants institutional investors and private individuals participate in forex transactions to take profits cause currency exchange fluctuations or to hedge their currency assets.  

Currency exchange rates must be quoted to facilitate transactions and trading.

Currencies are designated by three letter symbols. The most important and the most traded currencies are the following:

(1). EUR – Euros

(2). USD – United States Dollar

(3). GBP – Great Britain Pound

(4). JPY – Japanese Yen

(5). CAD – Canadian Dollar

(6). AUD – Australian Dollar

(7). CHF – Switzerland franc

(8). NZD – New Zealand Dollar

(9). SKR – Swedish Kroner

The Currency Pairs

Foreign currency quotes are made in currency pairs cause the participants are buying a currency and they are selling another.

As an example we have the following currency pair:

EUR / USD

The first currency is the base currency “Euro” and the second currency is the quote currency.

EUR / USD 

Euro is the base currency

USD is the quote currency

The price, or rate that is quoted is the amount of the second currency required to purchase one unit of the first currency.

Currency exchange pairs are quoted at bid – ask spreads.

The first part – the base currency is the amount of second currency – quote currency you will receive in exchange for on unite of the base currency.

The second part of the pair is the amount of quote currency you have to pay for a unit of a base currency.  

Using an actual forex quote we have EUR / USD spread of

Pair                   Bid Price                   Ask Price

EUR / USD           1, 4310                    1, 4322         

This means that you can buy a Euro at Ask Price (1, 4322) and you can sell a Euro at the Bid Price (1, 4310).

3. How we use foreign exchange quotes for currency rates trading

Exercise 1 – Real forex quote

  

Pair                        Bid Price                     Ask Price

EUR / USD           1, 4310                    1, 4322          

According to the above pair

(A) You can buy the pair at the Ask price

Which means you buy a Euro for selling United States Dollars for 1, 4322 USD.

(B) You can sell the pair at the Bid Price

Which means you sell a Euro for buying United States Dollars for 1, 4310 USD.

I need to highlight that a large number of online dealers may not quote the full exchange rate for both sides for both currencies. We have discussed above the currency exchange pair as:

Pair                       Bid Price                     Ask Price

EUR / USD           1, 4310                    1, 4322         

This pair can be reported by dealers or financial information providers as:  EUR/USD 1, 4310/22.

Obviously, individual participants must be very careful and also to train themselves as best as it’s possible.

Only through knowledge a private individual can build a competitive advantage and achieve serious financial goals in foreign currency exchange market.

                                                                                        Elias Stoikos

Relative Articles 

1. Forex Introduction

2. Forex Tutorial Part 2

3. Forex Tutorial Part 3

Relative resources 

1. Forex in wikipedia

Forex tutorial

Forex Fx online tutorial Pt 3 

How the foreign currency market works?

The foreign currency market (forex, FX) does not have a place, no building, no trading floor. Actually is a network of telephone lines and electronic trading platforms.

There is “no exchange”.

The off – exchange foreign currency market operates in two levels.

The first level or the primary market or the “interbank market” for currencies where Institutional Investors – banks, insurance companies, large industrial corporations and other financial institutions manage the risks associated with the volatility (fluctuations) in currency rates.

The accessibility to interbank market is restricted only to institutions that trade in large quantities and they have a very high net worth. In interbank market there are no retail – customers (investors, traders).

During the last years, cause of technological developments in financial web based applications a secondary over the counter (OTC) market has been developed that permits retail customers (private individuals / investors, traders) to participate in foreign currency transactions.  This secondary over the counter (OTC) market operates in parallel with the interbank market, both markets share the same characteristics.

The size of Forex market – How big is the FX market?

According to wikipedia, the daily turnover is about 3,94 trillion USD. Forex daily turnover is about 80 times larger than the combined volume of all US equity markets.

The off exchange forex market is a huge and liquid financial market that operates 24 hours a day, for five (5) days a week.

As I have mentioned on previous articles the foreign exchange market (forex, FX) has no physical location or central exchange.

Forex is a real 24 hours market. Transactions in foreign currency start every day from Wellington New Zealand and Sydney – Australia and moves around the globe as the business day starts in each financial center, first Tokyo, then London and finally New York.

Forex market cause to it’s unique characteristic to operate 24 hours per day offers a unique opportunity to private individuals (retail customers) to respond to currency fluctuations caused by economic, social and political events 24 hours from Monday to Friday.

I need to highlight the differences in market liquidity in relation with the currency rate that participants trade or the liquidity in relation with the opening of specific financial center. Usually when London is open the liquidity is larger.

I will cover this topic about liquidity in relation with financial centers and specific (or group) currency exchange rate in a future article.

Synopsis

We need to highlight that foreign exchange currencies market (forex, FX)

(1). It’s huge

(2). It operates 24 hours a day for 5 days a week

(3). Has no physical location or trading floor

(4). It’s over the counter (OTC) – it’s a network of telephone lines and trading platforms

(5). There are two markets – the primary market where large financial institutions hadge their exposure to currency transactions and – the secondary where private individuals can participate.

(6). Both markets, the primary and secondary, share common characteristics.

Forex is a large and liquid market. There is a plenty of available opportunities for profit taking through trading but also unlimited (απειλές) for losses.

Only through knowledge a private individual can build a competitive advantage and achieve serious financial goals in foreign currency exchange market.

Elias Stoikos

Relative aricles 

1. Introduction to Forex

2. Forex tutorial Part 2

3. Forex Tutorial Part 3

Relative resources 

1. Forex on wikipedia

Forex Fx - Tutorial

Forex Fx - Tutorial Part 2

Participation in the Foreign Exchange Market

As it was presented with simple English on the Introduction to Forex article, there is a fluctuation in the exchange rates. The value of one currency or falls relative to another, market participants decide to buy or sell currencies to make profit.

1. The market participants

The major participants in foreign exchange markets are institutional investors (banks, industrial companies, trading companies, hedge funds, mutual funds, closed – end funds etc). The advance of the web application and mobile phone application technology during the last years is the fundamental factor for a large participation of retail investors. Retail investors participate in forex markets as speculators and hoping to make profit by the chances in currency rates.

1. On an exchange regulated by the Commodity Futures Trading Commission (CFTC), for example Chicago Mercantile Exchange offers currency futures and options on currency futures (for more information about currency derivatives you can study the Currency Futures Article and Currency Options Article).

2.  On an exchange regulated by the Securities Exchange Commission (SEC) for example the Philadelphia Stock Exchange offers options on currency futures (for more information about currency derivatives you can study the Currency Options Article).

3.    In the off- exchange market, called also as over – the – counter (OTC) market. In this market a retail investor trades directly with a counter party and there is no exchange or central clearing house to support the transaction.

4.  Using Electronic Traded Funds (ETF's), in case the retail customer (private individual) can trade without worrying about margin and when to roll over a contract. Through Currency ETFs investors can participate in general trends of the currency markets and take advantage of the overall profit potential of the currency market without having to open a separate account for currency trades.

5.   Through a hedge fund, in case there is enough cash and the individual investor can buy a (να το βρω πως το λένε) of a Currency Oriented Hedge Fund.

6.     Through currency oriented mutual funds.

2. Which is the best?

There is a large number of advantages and disadvantages of each option. In my point of view and according to my experience, there is not a dogmatic and absolute best solution.

The way an individual approaches a market varies and depends from a large number of possible factors.

These factors are the driving forces for his / hers investment decisions. They constitute his / hers investment profile.

Same of these factors are related with the physical characteristic of an investor.

(1). Age

(2). Sex

(3). The age of his / hers children

Others are related with social and economic characteristics as:

(1). Education

(2). Income

(3). Previous investment experience

(4). Assets

(5). enough time to study (analyze markets) and to create a trading

      strategy.

(6). Accessibility to financial information etc

Others are related with psychological characteristics as: 

(1). Ability to manage emotions during trading

(2). Motivation to acquire the necessary knowledge to survive the tough forex market

(3). Ability to overcome previous loss trades (ability to learn by mistakes)

Foreign Currency market offers a large number of opportunities, it’s not wise to iqnore tham and to not participate. Currency markets can be valuable as goldmines but also a hell of unlimited losses.  

You can be a winner or a great looser. In my life I have made great trades and very bad, at the end of the day honestly I can say :

“Markets offer unique opportunities, unforgettable experiences and unlimited gates to profit but if you want to survive and to achieve your financial goals you need to know.

Only through study you can build a competitive advantage.

Knowledge is the first path in an endless adventure of financial success”.

                                                                                Elias Stoikos   

Relative Articles 

Introduction to Forex - Online Tutorial

Forex Online Tutorial Part. 3

Forex Tutorial Part. 4

Relative Resources

Forex in wikipedia

Forex - Online Tutorial

The Forex  FX - Online Tutorial

1. Introduction 

Retail participation in off- exchange foreign currency (forex, foreign exchange, FX) market has increased dramatically the past few years. In case you would like to participate in the largest market on earth (forex) you must be familiar with basic knowledge about these currencies markets. 

Like a large number of other investments, off – exchange foreign currency trading is characterized by a high level of risk and may be not be suitable to your financial habits or financial needs. In fact, trading in off – exchange foreign currency markets can cause lose all of your initial investments and also you may be liable for additional losses. As investor you need to arm yourself with the understanding of the associated risk with these markets.

My articles on this blog do not motivate you as reader to participate or do not to participate in off – exchange foreign currency trading. On this blog I express my ideas, I provide helpful articles for investors and as honestly as it can be, I present the fundamental issues and major trends on foreign – currency markets.    

2. The Foreign Currency Markets

The foreign currency exchange rates

The foreign currency exchange rates are the costs to exchange one country’s currency for another country’s currency.

For example, if you go to Greek islands on vacation, you will have to pay for your hotel, meals, and admissions to museums, souvenirs and for other expenditures in Euro. Since your money is in US dollars, you have to use (sell) some of your dollars to buy Euros.

Assume you go to a US bank before you leave and buy $ 1,000 worth of Euros.  If you get 724 Euros (€ 724) for your $ 1,000, each dollar is worth 0,724 Euros. Then the 0,724 (,724) is the exchange rate for converting dollars to euros.

In Mykonos (Greek Island) € 724 are not enough cash, so you will have to exchange more US dollars for Euros while you are in Greece. Assume you buy $ 1,000 worth of US Dollars of Euros from a bank in Mykonos and you get only € 718 for your $ 1,000. The exchange rate for converting US dollars to pounds has dropped from .724 to .7183. This means the US dollars are worth less compared to Euro than they were before your holidays.

Assume that you have € 100 left when you return back in USA. You go to a bank and use Euros to buy US Dollars. Assume bank gives you $ 140,12, each Euro is worth 1,4012 US Dollars. This is the exchange rate for converting Euros to US Dollars.

3. The convertibility of Exchange Rate

You can convert the exchange rate for buying a currency to the exchange rate for selling a currency, and vise versa, by dividing 1 by the known rate.

As an example, if the exchange rate for buying Euros with US Dollars is 0,724 (,724) the exchange rate for buying US Dollars with Euros is 1, 38121 (1 ÷ ,724 = 1,38121).

Similarly, if the exchange rate for buying US Dollars with Euros is 1,38121 , the exchange rate for buying Euros with US Dollars is ,724 (1 ÷ 1,38121 = ,724).

This is how financial on-line (web sites) or off line literature (newspapers, magazines) report currency exchange rates.   

4. The market wisdom

Practically is impossible for an investor to buy or sell the currency at the same reported price on media and to receive the quoted price in the newspapers.

This happens because banks and other market participants make money by selling the currency to customers for more than they paid to buy it and by buying the currency from customers for less than they will receive when they sell it.

The above mentioned difference is called SPREAD and is the cornerstone of the off – exchange foreign (forex) currency markets.

Only through study you can build a competitive advantage.

Knowledge is the first path in an endless adventure of financial success”.

                                                                                

                                                                                    Elias Stoikos   

               

Relative Articles 


1. Forex Online Tutorial Part. 2

2. Forex Online Tutorial Part. 3

3. Forex Online Tutorial Part 4



Relative Links

1. Forex in wikipedia