Ask yourself on what basis you'll make your trading
decisions -- fundamental analysis or technical analysis?
Fundamentals are the broad grouping of news and information
that reflects the macroeconomic and political fortunes of the
countries whose currencies are traded. Most of the time, when
you hear someone talking about the fundamentals of a cur-
rency, he's referring to the economic fundamentals. Economic
fundamentals are based on:
Economic data reports
Interest rate levels
Monetary policy
International trade flows
International investment flows
The term technicals refers to technical analysis, a form of
market analysis most commonly involving chart analysis,
trend-line analysis, and mathematical studies of price behav-
ior, such as momentum or moving averages, to mention just a
couple.
We don't know of too many currency traders who don't follow
some form of technical analysis in their trading. Even the
stereotypical seat-of-the-pants, trade-your-gut traders are
likely to at least be aware of technical price levels identified
by others. If you've been an active trader in other financial
markets, chances are, you've engaged in some technical
analysis or at least heard of it.
Followers of each discipline have always debated which
approach works better. Rather than take sides, we suggest fol-
lowing an approach that blends the two disciplines. In our
experience, macroeconomic factors such as interest rates,
relative growth rates, and market sentiment determine the
big-picture direction of currency rates. But currencies rarely
move in a straight line, which means there are plenty of short-
term price fluctuations to take advantage of -- and some of
them can be substantial.
Choosing Your Trading Style
When you determine how much risk capital you have avail-
able for trading, you'll have a better idea of what size account
you can trade and what position size you can handle. Most
online trading platforms typically offer generous leverage
ratios that allow you to control a larger position with less
required margin. But just because they offer high leverage
doesn't mean you have to fully utilize it.
Making time for market analysis
The full version of Currency Trading For Dummies talks about
the amount of data and news that flows through the forex
market on a daily basis -- and it can be truly overwhelming.
So how can an individual trader possibly keep up with all the
data and news?
The key is to develop an efficient daily routine of market
analysis. Thanks to the Internet and online currency broker-
ages, independent traders can access a variety of information.
Your daily regimen of market analysis should focus on:
Overnight forex market developments: Who said what,
which data came out, and how the currency pairs reacted.
Daily updates of other major market movements over
the prior 24 hours and the stories behind them: If oil
prices or U.S. Treasury yields rose or fell substantially,
find out why.
Data releases and market events (for example, the
retail sales report, Fed speeches, central bank rate
announcements) expected for that day: Ideally, you'll
monitor data and event calendars one week in advance,
so you can be anticipating the outcomes along with the
rest of the market.
Multiple-time-frame technical analysis of major cur-
rency pairs: There is nothing like the visual image of
price action to fill in the blanks of how data and news
affected individual currency pairs.
Current events and geopolitical themes: Stay abreast on
issues of major elections, political scandals, military con-
flicts, and policy initiatives in the major currency nations.
able for trading, you'll have a better idea of what size account
you can trade and what position size you can handle. Most
online trading platforms typically offer generous leverage
ratios that allow you to control a larger position with less
required margin. But just because they offer high leverage
doesn't mean you have to fully utilize it.
Making time for market analysis
The full version of Currency Trading For Dummies talks about
the amount of data and news that flows through the forex
market on a daily basis -- and it can be truly overwhelming.
So how can an individual trader possibly keep up with all the
data and news?
The key is to develop an efficient daily routine of market
analysis. Thanks to the Internet and online currency broker-
ages, independent traders can access a variety of information.
Your daily regimen of market analysis should focus on:
Overnight forex market developments: Who said what,
which data came out, and how the currency pairs reacted.
Daily updates of other major market movements over
the prior 24 hours and the stories behind them: If oil
prices or U.S. Treasury yields rose or fell substantially,
find out why.
Data releases and market events (for example, the
retail sales report, Fed speeches, central bank rate
announcements) expected for that day: Ideally, you'll
monitor data and event calendars one week in advance,
so you can be anticipating the outcomes along with the
rest of the market.
Multiple-time-frame technical analysis of major cur-
rency pairs: There is nothing like the visual image of
price action to fill in the blanks of how data and news
affected individual currency pairs.
Current events and geopolitical themes: Stay abreast on
issues of major elections, political scandals, military con-
flicts, and policy initiatives in the major currency nations.
Real-world and lifestyle considerations
Before you can begin to identify the trading style and approach
that works best for you, give some serious thought to what
resources you have available to support your trading. As with
many of life's endeavors, when it comes to financial-market
trading, there are two main resources that people never seem
to have enough of: time and money. Deciding how much of each
you can devote to currency trading helps to establish how you
pursue your trading goals.
If you're a full-time trader, you have lots of time to devote to
market analysis and actually trading the market. But because
currencies trade around the clock, you still have to be mindful
of which session you're trading, and of the daily peaks and
troughs of activity and liquidity. (See Chapter 1 for trading-
session specifics.) Just because the market is always open
doesn't mean it's necessarily always a good time to trade.
If you have a full-time job, your boss may not appreciate your
taking time to catch up on the charts or economic data
reports while you're at work. That means you'll have to use
your free time to do your market research. Be realistic when
you think about how much time you'll be able to devote on a
regular basis, keeping in mind family obligations and other
personal circumstances.
When it comes to money, we can't stress enough that trading
capital has to be risk capital and that you should never risk
any money that you can't afford to lose. The standard defini-
tion of risk capital is money that, if lost, will not materially
affect your standard of living. It goes without saying that bor-
rowed money is not risk capital -- you should never use bor-
rowed money for speculative trading.
that works best for you, give some serious thought to what
resources you have available to support your trading. As with
many of life's endeavors, when it comes to financial-market
trading, there are two main resources that people never seem
to have enough of: time and money. Deciding how much of each
you can devote to currency trading helps to establish how you
pursue your trading goals.
If you're a full-time trader, you have lots of time to devote to
market analysis and actually trading the market. But because
currencies trade around the clock, you still have to be mindful
of which session you're trading, and of the daily peaks and
troughs of activity and liquidity. (See Chapter 1 for trading-
session specifics.) Just because the market is always open
doesn't mean it's necessarily always a good time to trade.
If you have a full-time job, your boss may not appreciate your
taking time to catch up on the charts or economic data
reports while you're at work. That means you'll have to use
your free time to do your market research. Be realistic when
you think about how much time you'll be able to devote on a
regular basis, keeping in mind family obligations and other
personal circumstances.
When it comes to money, we can't stress enough that trading
capital has to be risk capital and that you should never risk
any money that you can't afford to lose. The standard defini-
tion of risk capital is money that, if lost, will not materially
affect your standard of living. It goes without saying that bor-
rowed money is not risk capital -- you should never use bor-
rowed money for speculative trading.
Calculating profit and loss with pips
Here are some major currency pairs and crosses, with the pip
underlined:
EUR/USD: 1.2853
USD/CHF: 1.2267
USD/JPY: 117.23
EUR/JPY: 150.65
Focus on the EUR/USD price first. Looking at EUR/USD, if the
price moves from 1.2853 to 1.2873, it's just gone up by 20 pips.
If it goes from 1.2853 down to 1.2792, it's just gone down by 61
pips. Pips provide an easy way to calculate the P&L. To turn
that pip movement into a P&L calculation, all you need to
know is the size of the position. For a 100,000 EUR/USD posi-
tion, the 20-pip move equates to $200 (EUR 100,000 × 0.0020 =
$200). For a 50,000 EUR/USD position, the 61-point move trans-
lates into $305 (EUR 50,000 × 0.0061 = $305).
Whether the amounts are positive or negative depends on
whether you were long or short for each move. If you were
short for the move higher, that's a in front of the $200, if
you were long, it's a +. EUR/USD is easy to calculate, especially
for USD-based traders, because the P&L accrues in dollars.
If you take USD/CHF, you've got another calculation to make
before you can make sense of it. That's because the P&L is
going to be denominated in Swiss francs (CHF) because CHF is
the counter currency. If USD/CHF drops from 1.2267 to 1.2233
and you're short USD 100,000 for the move lower, you've just
caught a 34-pip decline. That's a profit worth CHF 340 (USD
100,000 × 0.0034 = CHF 340). Yeah but how much is that in real
money? To convert it into USD, you need to divide the CHF
340 by the USD/CHF rate. Use the closing rate of the trade
(1.2233), because that's where the market was last, and you
get USD 277.94.
Even the venerable pip is in the process of being updated as
electronic trading continues to advance. Just a couple para-
graphs earlier, we tell you that the pip is the smallest incre-
ment of currency price fluctuations. Not so fast.
underlined:
EUR/USD: 1.2853
USD/CHF: 1.2267
USD/JPY: 117.23
EUR/JPY: 150.65
Focus on the EUR/USD price first. Looking at EUR/USD, if the
price moves from 1.2853 to 1.2873, it's just gone up by 20 pips.
If it goes from 1.2853 down to 1.2792, it's just gone down by 61
pips. Pips provide an easy way to calculate the P&L. To turn
that pip movement into a P&L calculation, all you need to
know is the size of the position. For a 100,000 EUR/USD posi-
tion, the 20-pip move equates to $200 (EUR 100,000 × 0.0020 =
$200). For a 50,000 EUR/USD position, the 61-point move trans-
lates into $305 (EUR 50,000 × 0.0061 = $305).
Whether the amounts are positive or negative depends on
whether you were long or short for each move. If you were
short for the move higher, that's a in front of the $200, if
you were long, it's a +. EUR/USD is easy to calculate, especially
for USD-based traders, because the P&L accrues in dollars.
If you take USD/CHF, you've got another calculation to make
before you can make sense of it. That's because the P&L is
going to be denominated in Swiss francs (CHF) because CHF is
the counter currency. If USD/CHF drops from 1.2267 to 1.2233
and you're short USD 100,000 for the move lower, you've just
caught a 34-pip decline. That's a profit worth CHF 340 (USD
100,000 × 0.0034 = CHF 340). Yeah but how much is that in real
money? To convert it into USD, you need to divide the CHF
340 by the USD/CHF rate. Use the closing rate of the trade
(1.2233), because that's where the market was last, and you
get USD 277.94.
Even the venerable pip is in the process of being updated as
electronic trading continues to advance. Just a couple para-
graphs earlier, we tell you that the pip is the smallest incre-
ment of currency price fluctuations. Not so fast.
Profit and Loss
Margin balances and liquidations
When you open an online currency trading account, you'll
need to pony up cash as collateral to support the margin
requirements established by your broker. That initial margin
deposit becomes your opening margin balance and is the
basis on which all your subsequent trades are collateralized.
Unlike futures markets or margin-based equity trading, online
forex brokerages do not issue margin calls (requests for more
collateral to support open positions). Instead, they establish
ratios of margin balances to open positions that must be
maintained at all times.
Here's an example to help you understand how required
margin ratios work. Say you have an account with a leverage
ratio of 100:1 (so $1 of margin in your account can control a
$100 position size), but your broker requires a 100% margin
ratio, meaning you need to maintain 100% of the required
margin at all times. The ratio varies with account size, but a
100% margin requirement is typical for small accounts. That
means to have a position size of $10,000, you'd need $100 in
your account, because $10,000 divided by the leverage ratio of
100 is $100. If your account's margin balance falls below the
required ratio, your broker probably has the right to close out
your positions without any notice to you. If your broker liqui-
dates your position, that usually means your losses are locked
in and your margin balance just got smaller.
Be sure you completely understand your broker's margin
requirements and liquidation policies. Requirements may differ
depending on account size and whether you're trading stan-
dard lot sizes (100,000 currency units) or mini lot sizes (10,000
currency units). Some brokers' liquidation policies allow for
all positions to be liquidated if you fall below margin require-
ments. Others close out the biggest losing positions or portions
of losing positions until the required ratio is satisfied again. You
can find the details in the fine print of the account opening con-
tract that you sign. Always read the fine print to be sure you
understand your broker's margin and trading policies.
When you open an online currency trading account, you'll
need to pony up cash as collateral to support the margin
requirements established by your broker. That initial margin
deposit becomes your opening margin balance and is the
basis on which all your subsequent trades are collateralized.
Unlike futures markets or margin-based equity trading, online
forex brokerages do not issue margin calls (requests for more
collateral to support open positions). Instead, they establish
ratios of margin balances to open positions that must be
maintained at all times.
Here's an example to help you understand how required
margin ratios work. Say you have an account with a leverage
ratio of 100:1 (so $1 of margin in your account can control a
$100 position size), but your broker requires a 100% margin
ratio, meaning you need to maintain 100% of the required
margin at all times. The ratio varies with account size, but a
100% margin requirement is typical for small accounts. That
means to have a position size of $10,000, you'd need $100 in
your account, because $10,000 divided by the leverage ratio of
100 is $100. If your account's margin balance falls below the
required ratio, your broker probably has the right to close out
your positions without any notice to you. If your broker liqui-
dates your position, that usually means your losses are locked
in and your margin balance just got smaller.
Be sure you completely understand your broker's margin
requirements and liquidation policies. Requirements may differ
depending on account size and whether you're trading stan-
dard lot sizes (100,000 currency units) or mini lot sizes (10,000
currency units). Some brokers' liquidation policies allow for
all positions to be liquidated if you fall below margin require-
ments. Others close out the biggest losing positions or portions
of losing positions until the required ratio is satisfied again. You
can find the details in the fine print of the account opening con-
tract that you sign. Always read the fine print to be sure you
understand your broker's margin and trading policies.
Major cross-currency pairs
Although the vast majority of currency trading takes place in
the dollar pairs, cross-currency pairs serve as an alternative
to always trading the U.S. dollar. A cross-currency pair, or
cross or crosses for short, is any currency pair that does not
include the U.S. dollar. Cross rates are derived from the
respective USD pairs but are quoted independently.
Crosses enable traders to more directly target trades to spe-
cific individual currencies to take advantage of news or events.
For example, your analysis may suggest that the Japanese yen
has the worst prospects of all the major currencies going for-
ward, based on interest rates or the economic outlook. To take
advantage of this, you'd be looking to sell JPY, but against
which other currency? You consider the USD, potentially
buying USD/JPY (buying USD/selling JPY) but then you con-
clude that the USD's prospects are not much better than the
JPY's. Further research on your part may point to another cur-
rency that has a much better outlook (such as high or rising
interest rates or signs of a strengthening economy), say the
Australian dollar (AUD). In this example, you would then be
looking to buy the AUD/JPY cross (buying AUD/selling JPY) to
target your view that AUD has the best prospects among major
currencies and the JPY the worst.
the dollar pairs, cross-currency pairs serve as an alternative
to always trading the U.S. dollar. A cross-currency pair, or
cross or crosses for short, is any currency pair that does not
include the U.S. dollar. Cross rates are derived from the
respective USD pairs but are quoted independently.
Crosses enable traders to more directly target trades to spe-
cific individual currencies to take advantage of news or events.
For example, your analysis may suggest that the Japanese yen
has the worst prospects of all the major currencies going for-
ward, based on interest rates or the economic outlook. To take
advantage of this, you'd be looking to sell JPY, but against
which other currency? You consider the USD, potentially
buying USD/JPY (buying USD/selling JPY) but then you con-
clude that the USD's prospects are not much better than the
JPY's. Further research on your part may point to another cur-
rency that has a much better outlook (such as high or rising
interest rates or signs of a strengthening economy), say the
Australian dollar (AUD). In this example, you would then be
looking to buy the AUD/JPY cross (buying AUD/selling JPY) to
target your view that AUD has the best prospects among major
currencies and the JPY the worst.
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