Forex versus Futures

"Hey Mr. Futures, don't our short shorts look cool?"

Liquidity

In the spot Forex market, almost $2 trillion is traded daily, making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. The futures market traders a puny $30 billion per day. Thirty billion?!! Peanuts! The futures markets can't compete with its limited liquidity. The Forex market is always liquid, meaning positions can be liquidated and stop orders executed without slippage except in extremely volatile market conditions.

24-Hour Market

At 2:15 p.m. EST Sunday, trading begins as markets open in Sydney and Singapore. At 7 p.m. EST the Tokyo market opens, followed by London at 2 a.m. EST. And finally, New York opens at 8 a.m. EST and closes at 5 p.m. EST. So, before New York trading closes the Sydney and Singapore markets are back open - it’s a 24 hour seamless market! As a trader, this allows you to react to favorable or unfavorable news by trading immediately. If important data comes in from England or Japan while the U.S. futures market is closed, the next day's opening could be a wild ride. (Overnight markets in futures currency contracts exist, but they are thinly traded, not very liquid, and are difficult for the average investor to access).

Commission Free Trading

You know what’s great about trading currencies? You pay NO commissions! Because you deal directly with the market maker via a purely electronic online exchange, you eliminate both ticket costs and middleman brokerage fees. There is still a cost to initiating any trade, but that cost is reflected in the bid/ask spread that is also present in futures or equities trading. Brokers are compensated for their services through the bid-ask spread instead of via commissions.

Price Certainty

When trading Forex, you get rapid execution and price certainty under normal market conditions. In contrast, the futures and equities markets do not offer price certainty or instant trade execution. Even with the advent of electronic trading and limited guarantees of execution speed, the prices for fills for futures and equities on market orders are far from certain. The prices quoted by brokers often represent the LAST trade, not necessarily the price for which the contract will be filled.

Guaranteed Limited Risk

Traders must have position limits for the purpose of risk management. This number is set relative to the money in a trader’s account. Risk is minimized in the spot FX market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the available trading capital in your account. All open positions will be closed immediately, regardless of the size or the nature of positions held within the account. In the futures market, your position may be liquidated at a loss, and you will be liable for any resulting deficit in the account. That sucks.

24-Hour Market

The Forex market is a seamless 24-hour market. Most brokers are open from Sunday at 2PM EST until Friday at 4 PM EST with customer service available 24/7. With the ability to trade during the U.S., Asian, and European market hours, you can customize your own trading schedule.

Commission Free Trading

Most Forex brokers charge no commission or additional transactions fees to trade currencies online or over the phone. Combined with the tight, consistent, and fully transparent spread, Forex trading costs are lower than those of any other market. The brokers are compensated for theirs services through the bid/ask prices.

Instantaneous Execution of Market Orders

Your trades are instantly executed under normal market conditions. You also have price certainty on every market order under normal market conditions. What you click is the price you get. You’re able to execute directly off real-time streaming prices (Yeeeaah!). There's no discrepancy between the displayed price shown on the platform and the execution price to enter your trade. Keep in mind that most brokers only guarantee stop, limit, and entry orders are only guaranteed under normal market conditions. Fills are instantaneous most of the time, but under extraordinarily volatile market conditions order execution may experience delays.

Short-Selling without an Uptick

Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or which way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. So you always have equal access to trade in a rising or falling market.

Look at Mr. Forex. He's so confident and sexy. Mr. Stocks has no chance!

More Reasons to Like Forex

No Middlemen

Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen. Any party located in between the trader and the buyer or seller of the security or instrument traded will cost them money. The cost can be either in time or in fees. Spot currency trading does away with the middlemen and allows clients to interact directly with the market-maker responsible for the pricing on a particular currency pair. Forex traders get quicker access and cheaper costs.

Buy/Sell programs do not control the market

How many times have you heard that "fund A" was selling "X" or buying "Z"? Rumor had it that the funds were taking profits because of the end of the financial year or because today is "triple witching day", all as an explanation of why this stock is up or the market in general is down or positive on the session. The stock market is very susceptible to large fund buying and selling.

In spot trading, the liquidity of the Forex market makes the likelihood of any one fund or bank to control a particular currency very slim. Banks, hedge funds, governments, retail currency conversion houses and large net-worth individuals are just some of the participants in the spot currency markets where the liquidity is unprecedented.

Analysts and brokerage firms are less likely to influence the market

Have you watched TV lately? Heard about a certain Internet stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as "buy" when the stock was rapidly declining? It is the nature of these relationships. No matter what the government does to step in and discourage this type of activity, we have not heard the last of it.

IPO's are big business for both the companies going public and the brokerage houses. Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear.

Foreign exchange, as the prime market, generates billions in revenue for the world's banks and is a necessity of the global markets. Analysts in foreign exchange don't drive the deal flow, they just analyze the forex market.

8,000 stocks versus 4 major currency pairs

There are approximately 4,500 stocks listed on the New York Stock exchange. Another 3,500 are listed on the NASDAQ. Which one will you trade? Got the time to stay on top of so many companies? In spot currency trading, there are dozens of currencies traded, but the majority of the market trades the 4 major pairs. Aren’t four pairs much easier to keep an eye on than thousands of stocks? I’d say so.

Opening a new online trading account with a Forex broker can be done in three simple steps:

1. Selecting an account type
2. Registration
3. Activating your account

Before trading a dime of your hard earned money, you may want to think about opening demo account. Actually, open up two or three demos - why not? It’s all FREE! Try out several different brokers to get a feel for the right one for you.

Account Types

When you're ready to open a live account, you have the choice of opening a Forex trading account under your personal name or a business name. Also, you will have to decide whether or not you want to open a "standard" account or a "mini" account (or "micro" account if available). Inexperienced traders or traders with a small amount of capital to trade should always open a mini account. Only experienced traders with lots of money should open a standard account.

Always read the fine print.

Some brokers have a “managed account” option in their applications. If you want the broker to trade your account for you, pick this, but obviously you’re here to learn how to trade the Forex for yourself. Besides, opening a managed account typically requires a pretty big minimum deposit - $25,000 or higher - and the broker also takes a portion of the profits.

Also, make sure you open a Forex spot account and not a “forwards” or “futures” account.

Registration

You will have to submit paperwork in order to open an account and the forms will vary from broker to broker. They are usually provided in PDF format and can be viewed and printed using Adobe Acrobat Reader program.

Account Activation

Once the broker has received all the necessary paperwork, you should receive an email with instructions on completing your account activation. After these steps have been completed, you will receive a final email with your username, password, and instructions on how to fund your account.

So all that’s left is for you to login and start trading. Pretty easy huh?

But wait a darn minute!

STOP!

We strongly advise you spend some time at our entire School of Pipsology before you start risking real money.

Why?

Because if you don’t, you will lose all of your money and freak out!

You’re probably thinking, “So if I read through your School of Pipsology first, I will not lose any money?”

No, we’re not saying that. You will still probably lose money...

But you’ll lose LESS, much less, and probably feel fine that you lost money. Go through our entire School of Pipsology and you'll understand what we mean.

Online Trading Platform

Most, if not all, Forex brokers allow you to trade over the Internet relatively easy. The backbone of any trading platform is their ordering system. So trading software is very important. Get a feel for the options that are available by trying out a demo account at a few online brokers.

Closely examine the broker’s screen layout. It should include:

• the ability to view real-time currency exchange rate quotes,
• an account summary showing your current account balance with realized and unrealized profit and loss, margin available, and any margin locked in open positions.

Most trading platforms are either Web based (in Java), or a client-based program you can install on your computer, and which version you choose is your personal preference:

• Web based software is hosted on your broker’s web site. You won’t have to install any software on your own computer, and you’ll be able to log in from any computer that has an Internet connection.
• A client-based software program, or one that you download and install, will only allow you to trade on your own computer (unless you install the program on every computer you use).

Usually, the "download and install" program runs faster, but most programs are operating system specific. For example, most brokers only offer their trading platform application to run on Microsoft Windows. If heaven forbid you are a Mac user (!), you won’t be able to install the application and will have to use your broker’s Web based or Java-based trading platform. These two (the Web or Java-based) will run on any computer since they run through your internet browser.

Java-based software programs are preferred by most brokers, who think they are more safe and reliable. Java-based software tends to be less vulnerable to attack from viruses and hackers during transmissions than "download and install" software.

But always be sure to open a demo account and test out the broker's platform before opening a real account!

Don’t forget your high speed Internet connection

The Forex market is a fast moving market and you will need up-to-the second information to make informed trading decisions. Make sure you have a high speed Internet connection. If you don’t, you might as well not even bother trading. Dial-up will absolutely not work for Forex! If you plan to trade online you will need a modern computer and high speed Internet connection, and we can’t stress this enough!

Bells and Whistles

Any Forex broker worth his salt should offer you real-time quotes and allow you to quickly enter and exit the market. These are minimal requirements of any trading software. Upgraded software packages are usually offered as an extra monthly fee by brokers.

Most brokers now offer integrated charting and technical analysis packages with their trading platforms. The level of integration with the trading platforms varies and is worth understanding carefully.

Mini/Micro Accounts

Most brokers offer very small “mini-accounts” and even smaller "micro-account" for as little as a couple hundred bucks. These little cute accounts are a great way to get started and test your trading skills and gain experience.

Broker Policies

Before selecting an online Forex broker, you should closely examine their features and policies. These include:

• Available Currency Pairs
  You should confirm that the prospective broker offers, at minimum, the seven major currencies (AUD, CAD, CHF, EUR, GBP, JPY, and USD).
• Transaction Costs
  Transaction costs are calculated in pips. The lower the number of pips required per trade by the broker, the greater the profit that the trader makes. Comparing pip spreads of half dozen brokers will reveal different transaction costs. For example, the bid/ask spread for EUR/USD is usually 3 pips, but if you can find 2 pips, that’s even better.
• Margin Requirement
  The lower the margin requirement (meaning the higher the leverage), the greater the potential for higher profits and losses. Margin percentages vary from .25% and up. Low margin requirements are great when your trades are good, but not so great when you are wrong. Be realistic about margins and remember that they swing both ways.
• Minimum Trading Size Requirement
  The size of one lot may differ from broker to broker, spanning 1,000, 10,000, and 100,000 units. A lot consisting of 100,000 units is called a “standard” lot. A lot consisting of 10,000 units is called a “mini” lot. A lot consisting of 1,000 units is called a “micro” lot. Some brokers even offer fractional unit sizes (called odd lots) which allow you create your own unit size.
• Rollover Charges
  Rollover charges are determined by the difference between the interest rate of the country of the base currency and the interest rates of the other country. The greater the interest rate differential between the two currencies in the currency pair, the greater the rollover charge will be. For example, when trading GBP/USD, if the British pound has the greater interest differential with the U.S. dollar, then the rollover charge for holding British pound positions would be the most expensive. On the other hand, if the Swiss Franc were to have the smallest interest differential to the U.S. dollar, then overnight charges for USD/CHF would be the least expensive of the currency pairs.
• Margin Account Interest Rate
  Most brokers pay interest on a trader’s margin account. The interest rates normally fluctuate with the prevailing national rates. If you decide to take an extended break from trading, the money in your margin account will be accruing interest. Keep in mind that most brokers DO NOT allow you to accrue interest unless your margin requirement is at least 2% (50:1).
• Trading Hours
  Nearly all brokers align their hours of operation to coincide with the hours of operation of the global Forex market: 5:00 pm EST Sunday through 4:00 pm EST Friday.

Other Policies

Be sure to scrutinize a prospective broker’s “fine print” section to be fully aware of all the nuances that a specific broker may impose on a new trader.

Finding the right broker is a critical part of the process. It’s not easy and requires some real work on your part. Don’t pick the first one that looks good to you. Keep looking and trying different demo accounts.

Summary

What to look for in an online Forex broker/dealer:

1. Low Spreads.
   In Forex trading the ‘spread’ is the difference between the buy and sell price of any given currency pair. Lower spreads save you money.
2. Low minimum account openings.
   For those that are new to Forex trading and for those that don’t have millions of dollars in risk capital to trade, being able to open a micro trading account with only $250 (we recommend at least $1,000) is a great feature for new traders.
3. Instant automatic execution of your orders.
   This is very important when choosing a Forex broker. Don’t settle with a firm that re-quotes you when you click on a price or a firm that allows for price ‘slippage’. This is very important when trading for small profits. You want what we call a WYSIWYG (pronounced wiz-ee-wig) broker! This means you want instant execution of your orders and the price you see and "click" is the price that you should get...WYSIWYG = What You See Is What You Get!
4. Free charting and technical analysis
   Choose a broker that gives you access to the best charting and technical analysis available to active traders. Look for a broker that provides free professional charting services and allows traders to trade directly on the charts.
5. Leverage
   Leverage can either make you super rich or super broke. Most likely, it will be the latter. As an inexperienced trader, you don't want too much leverage. A good rule of thumb is to not use more than 100:1 leverage for Standard (100k) accounts and 200:1 for Mini (10k) accounts.

Choosing a Forex Broker

Before trading Forex you need to set up an account with a Forex broker. So what exactly is a broker? In simplest terms, a broker is an individual or a company that buys and sells orders according to the trader's decisions. Brokers earn money by charging a commission or a fee for their services.

You may feel overwhelmed by the number of brokers who offer their services online. Deciding on a broker requires a little bit of research on your part, but the time spent will give you insight into the services that are available and fees charged by various brokers.

Is the Forex broker regulated?

When selecting a prospective Forex broker, find out with which regulatory agencies it is registered with. The Forex market is labeled as an “unregulated” market, and it basically is. Regulation is typically reactive, meaning only after you’ve been bamboozled out of your entire savings will something be done.

In the United States a broker should be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) and a NFA member. The CFTC and NFA were made to protect the public against fraud, manipulation, and abusive trade practices.

You can verify Commodity Futures Trading Commission (CFTC) registration and NFA membership status of a particular broker and check their disciplinary history by phoning NFA at (800) 621-3570 or by checking the broker/firm information section (BASIC) of NFA's Web site at www.nfa.futures.org/basicnet/.

Among the registered firms, look for those with clean regulatory records and solid financials. Stay away from non-regulated firms!

The NFA is stepping up their efforts in educating investors about retail forex trading. They’ve created a brochure fit for a Pulitzer Prize called, "Trading in the Retail Off-Exchange Foreign Currency Market”. The NFA recommends you read it before taking the forex plunge.

They’ve also developed a Forex Online Learning Program, an interactive self-directed program explaining how retail forex contracts are traded, the risks inherent in forex trading and steps individuals should take before opening a forex account. Both the brochure and the online learning program are available at no charge to the public.

Customer Service

Forex is a 24-hour market, so 24-hour support is a must! Can you contact the firm by phone, email, chat, etc.? Do the reps seem knowledgeable? The quality of support can vary drastically from broker to broker, so be sure to check them out before opening an account.

Here’s a good tip: choose several online brokers and contact their help desks. Seeing how quickly they respond to your questions can be key in gauging how they will respond to your needs. If you don't get a speedy reply and a satisfactory answer to your question, you certainly wouldn't want to trust them with your business. Just be aware that as in other types of businesses, pre-sales service might be better than post-sales service.

You are probably wondering how a small investor like yourself can trade such large amounts of money. Think of your broker as a bank who basically fronts you $100,000 to buy currencies and all he asks from you is that you give him $1,000 as a good faith deposit, which he will hold you for but not necessarily keep. Sounds too good to be true? Well this is how forex trading using leverage works.

The amount of leverage you use will depend on your broker and what you feel comfortable with.

Typically the broker will require a minimum account size, also known as account margin or initial margin. Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded.

For example, for every $1,000 you have, you can trade 1 lot of $100,000. So if you have $5,000 they may allow you to trade up to $500,000 of Forex.

The minimum security (margin) for each lot will vary from broker to broker. In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.

What the heck is a Margin Call?

In the event that money in your account falls below margin requirements (usable margin), your broker will close some or all open positions. This prevents your account from falling into a negative balance, even in a highly volatile, fast moving market.

Example #1
Let’s say you open a regular Forex account with $2,000 (not a smart idea). You open 1 lot of the EUR/USD, with a margin requirement of $1000. Usable Margin is the money available to open new positions or sustain trading losses. Since you started with $2,000, your usable margin is $2,000. But when you opened 1 lot, which requires a margin requirement of $1,000, your usable margin is now $1,000.

If your losses exceed your usable margin of $1,000 you will get a margin call.

Example #2
Let’s say you open a regular Forex account with $10,000. You open 1 lot of the EUR/USD, with a margin requirement is $1000. Remember, usable margin is the money you have available to open new positions or sustain trading losses. So prior to opening 1 lot, you have a usable margin of $10,000. After you open the trade, you now have $9,000 usable margin and $1,000 of used margin.

If your losses exceed your usable margin of $9,000, you will get a margin call.

Make sure you know the difference between usable margin and used margin.

If the equity (the value of your account) falls below your usable margin due to trading losses, you will either have to deposit more money or your broker will close your position to limit your risk and his risk. As a result, you can never lose more than you deposit.

If you are going to trade on a margin account, it’s vital that you know what your broker’s policies are on margin accounts.

You should also know that most brokers require a higher margin during the weekends. This may take the form of 1% margin during the week and if you intend to hold the position over the weekend it may rise to 2% or higher.

The topic of margin is a touchy subject and some argue that too much margin is dangerous. It all depends on the individual. The important thing to remember is that you thoroughly understand your broker’s policies regarding margin and that you understand and are comfortable with the risks involved.

Some brokers describe their leveraging in terms of a leverage ratio and other in terms of a margin percentage. The simple relationship between the two terms is:

Leverage = 100 / Margin Percent

Margin Percent = 100 / Leverage

Leverage is conventionally displayed as a ratio, such 100:1 or 200:1.

How the heck do I calculate profit and loss?

So now that you know how to calculate pip value, let’s look at how you calculate your profit or loss.

Let’s buy US dollars and Sell Swiss Francs.

The rate you are quoted is 1.4525 / 1.4530. Because you are buying US you will be working on the 1.4530, the rate at which traders are prepared to sell.

So you buy 1 lot of $100,000 at 1.4530.

A few hours later, the price moves to 1.4550 and you decide to close your trade.

The new quote for USD/CHF is 1.4550 / 14555. Since you're closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the 1.4550 price. The price traders are prepared to buy at.

The difference between 1.4530 and 1.4550 is .0020 or 20 pips.

Using our formula from before, we now have (.0001/1.4550) x $100,000 = $6.87 per pip x 20 pips = $137.40

Remember, when you enter or exit a trade, you are subject to the spread in the bid/offer quote.

When you buy a currency you will use the offer price and when you sell you will use the bid price.

So when you buy a currency, you pay the spread as you enter the trade but not as you exit. And when you sell a currency you don't pay the spread when you enter but only when you exit.

Spot Forex is traded in lots. The standard size for a lot is $100,000. There is also a mini lot size and that is $10,000. As you already know, currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments, you need to trade large amounts of a particular currency in order to see any significant profit or loss.

Let’s assume we will be using a $100,000 lot size. We will now recalculate some examples to see how it affects the pip value.

USD/JPY at an exchange rate of 119.90
(.01 / 119.80) x $100,000 = $8.34 per pip

USD/CHF at an exchange rate of 1.4555
(.0001 / 1.4555) x $100,000 = $6.87 per pip

In cases where the US Dollar is not quoted first, the formula is slightly different.

EUR/USD at an exchange rate of 1.1930
(.0001 / 1.1930) X EUR 100,000 = EUR 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip

GBP/USD at an exchange rate or 1.8040
(.0001 / 1.8040) x GBP 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.

Your broker may have a different convention for calculating pip value relative to lot size but whichever way they do it, they'll be able to tell you what the pip value is for the currency you are trading is at the particular time. As the market moves, so will the pip value depending on what currency you are currently trading.

Here is where we’re going to do a little math. You've probably heard of the terms "pips" and "lots" thrown around, and here we're going to explain what they are and show you how they are calculated.

Take your time with this information, as it is required knowledge for all Forex traders. Don’t even think about trading until you are comfortable with pip values and calculating profit and loss.

What the heck is a Pip?

The most common increment of currencies is the Pip. If the EUR/USD moves from 1.2250 to 1.2251, that is ONE PIP. A pip is the last decimal place of a quotation. The Pip is how you measure your profit or loss.

As each currency has its own value, it is necessary to calculate the value of a pip for that particular currency. In currencies where the US Dollar is quoted first, the calculation would be as follows.

Let’s take USD/JPY rate at 119.80 (notice this currency pair only goes to two decimal places, most of the other currencies have four decimal places)

In the case of USD/JPY, 1 pip would be .01

Therefore,

USD/JPY:

119.80
.01 divided by exchange rate = pip value
.01 / 119.80 = 0.0000834

This looks like a very long number but later we will discuss lot size.

USD/CHF:

1.5250
.0001 divided by exchange rate = pip value
.0001 / 1.5250 = 0.0000655

USD/CAD:

1.4890
.0001 divided by exchange rate = pip value
.0001 / 1.4890 = 0.00006715

In the case where the US Dollar is not quoted first and we want to get the US Dollar value, we have to add one more step.

EUR/USD:

1.2200

.0001 divided by exchange rate = pip value
so
.0001 / 1.2200 = EUR 0.00008196

but we need to get back to US dollars so we add another calculation which is

EUR x Exchange rate
So
0.00008196 x 1.2200 = 0.00009999

When rounded up it would be 0.0001

GBP/USD:

1.7975

.0001 divided by exchange rate = pip value
So

.0001 / 1.7975 = GBP 0.0000556

But we need to get back to US dollars so we add another calculation which is

GBP x Exchange rate

So
0.0000556 x 1.7975 = 0.0000998

When rounded up it would be 0.0001

You’re probably rolling your eyes back and thinking do I really need to work all this out and the answer is NO. Nearly all forex brokers will work all this out for you automatically. It’s always good for you to know how they work it out.

In the next section, we will discuss how these seemingly insignificant amounts can add up.

In 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

*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”. We will be discussing these in depth in our next lesson. 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 euro, so they usually come in "lots" of 10,000 (Mini) or 100,000 (Standard) 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 one lot (100,000), buying with the British pound at 1% margin and wait for the exchange rate to climb. When you buy one lot (100,000) of GBP/USD at a price of 1.5000, you are buying 100,000 pounds, which is worth US$150,000 (100,000 units of GBP * 1.50 (exchange rate with USD)). If the margin requirement was 1%, then US$1500 would be set aside in your account to open up the trade (US$150,000 * 1%). You now control 100,000 pounds with US$1500. 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).

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.

Rollover

Since every currency trade involves borrowing one currency to buy another, interest rollover charges are part of forex trading. Interest is paid on the currency that is borrowed, and earned on the one that is bought. If a client is buying a currency with a higher interest rate than the one he/she is borrowing, the net differential will be positive (i.e. USD/JPY) - and the client will earn funds as a result. Ask your broker or dealer about specific details regarding rollover.

Also note that many retail brokers do adjust their rollover rates based on different factors (e.g., account leverage, interbank lending rates). Please check with your broker for more information on rollover rates and crediting/debiting procedures.

Don't know what the interest rates are for each currency? Here is a chart to help you out. Accurate as of 04/19/09.

Demo Trading

You can open a demo account for free with most Forex brokers. This account has the full capabilities of a "real" account. Why is it free? It's because the broker wants you to learn the ins and outs of their trading platform, and have a good time trading without risk, so you'll fall in love with them and deposit real money. The demo account allows you to learn about the Forex markets and test your trading skills with ZERO risk.

YOU SHOULD DEMO TRADE FOR AT LEAST 6 MONTHS BEFORE YOU EVEN THINK ABOUT PUTTING REAL MONEY ON THE LINE.

I REPEAT - YOU SHOULD DEMO TRADE FOR AT LEAST 6 MONTHS BEFORE YOU EVEN THINK ABOUT PUTTING REAL MONEY ON THE LINE.

"Don't Lose Your Money" Declaration

Place your hand on your heart and say...

"I will demo trade for at least 6 months before I trade with real money."

Now touch your head with your index finger and say...

Prior to 1975, the Treasury raised funds on an irregular basis through the sale of tax anticipation bills. Nelson (1977) provides a description of these bills.
Treasury's cash balances. Many cash management bills help finance the Treasury's requirements until tax payments are received. For this reason they frequently have maturities that fall after one of the five major federal tax dates. Sixty issues of cash management bills were sold in the decade from 1983 through 1992. Of these, 29 had maturities of less than one month, 21 had maturities between one month and three months, and 10 had maturities between three months and one year.

Control of Money Market

We have shown in the previous paragraph the value of the liquidity report to limit cumulative positive or negative cash flows and to control different Forex operators in their adherence to established limits. There is an additional advantage associated with this report. In many cases, the liquidity report will reflect fundamental funding techniques of a specific country. This information can be useful to review personnel in the headquarters of international banks. A positive cash flow in one- to three-month local currency (DM). This is not surprising because a German branch naturally makes loans in German marks which it expects to collect a few months later; the collections create the positive cash flow in the DM column. We also see negative cash flows for U.S. dollars in Block I. They can only be the result of dollar deposits received which must be repaid over the next few months, thus creating the negative cash flows in the US$ column. At this point, the examiner of the liquidity report may be concerned because the German branch is apparently lending marks and borrowing dollars, which would make it necessary to maintain a very sizable net overbought position in marks against dollars.

Foreign Exchange Operations

However, as we study Block 2, we recognize an outflow of marks in the one- to three-month area and an approximately corresponding inflow of dollars. These cash flows are the result of forward Forex trading exchange transactions. Now the whole report begins to make sense.
The branch made loans in marks, borrowed dollars, converted these dollars into marks in the spot exchange market, and covered in the forward exchange market view, i.e., sold forward marks and purchased forward dollars. This means that the branch has no net exchange position and a cumulative cash flow position which results, by and large, from demand deposits. The cash flows from assets and liabilities and exchange purchases and sales are almost balanced. The explanation for this funding approach must be that the branch finds it cheaper to borrow dollars and swap them into marks than simply to borrow marks.

Miscellaneous Controls Aggregate Limit

We have described tools to limit and control the credit, rate, and liquidity risks. The aggregate limit proposed here does not control any particular risk which would not be controlled already by one of the above-mentioned limits. The aggregate limit is a limit for total unliquidated exchange contracts outstanding with all other banks, corporations, and individuals. It is strictly a volume indicator and functions as a red flag whenever there is an increase in unliquidated exchange contracts. For example, if the aggregate contracts outstanding increase without a corresponding increase in earnings and without any other good explanation, and if this increase in volume is accompanied by a general increase in operating costs such as telephone and telex expenses, a careful examination of the entire operation seems advisable.
On the other hand, there may be a good reason for changes in outstanding balances and, therefore, in limits. For example, the volume of unliquidated exchange contracts rose substantially when floating rates became a reality after August 1971. Importers and exporters who had previously handled their exchange needs on a spot basis whenever they needed a certain currency then began to protect their interests through forward purchases and sales. A spot contract is settled within a few business days, but a forward contract, by definition, is not settled until several months in the future. Therefore, the aggregate limit for unliquidated exchange contracts had to be substantially increased, and there was a very good reason to do so.

The Eurorate

If we know that the difference between the spot and forward rates reflects the difference between the interest rate yield of the U.S. dollar and the foreign currency, the question becomes, "which interest rate?" Obviously, choosing an arbitrary rate of interest for one currency to compare with an arbitrary rate of interest for another would create an unreliable and inconsistent forward market. A universal standard is required. The Forex market has chosen the Eurorate, a reasonable choice because this is the rate that the interbrain applies to loans of foreign currency deposits.

Interest Rates

Specifically, Eurorates are the interest rates one bank charges another to borrow foreign currency for the short term (overnight to one year). If the U.S. dollar is the foreign currency, the Eurodollar rate applies. If the foreign currency is the Japanese yen, the borrower is charged the Euroyen rate, if it is the Deutsche mark, the Euromark rate applies, and so forth. The terminology should be clarified. The Eurodollar is not an interest rate. It is the term used for a forex trading currency deposit, in which the currency happens to be U.S. dollars. The rate charged for Eurodollars is the LIBOR, or the London Interbank Offered Rate. Eurodollars are lent at the LIB OR because the Eurorate market originated in London with U.S. dollar deposits.

Futures Rates and Forward Exchange Rate

You may notice little difference between the interbank currency forward exchange market, in which foreign currency deposits are bought and sold on time, and the interbank Eurorate market, in which foreign currency deposits are lent and borrowed on time. There is, in fact, virtually no difference between these two markets. The variance between spot and forward is actually the difference between the LIB OR and the corresponding Eurorate. In fact, some dealer to dealer quotes for forward pricing involve simply quoting LIB OR plus or minus the points. The rest is extrapolated. We can summarize the interrelations between forward exchange rates and futures rates by stating.

FX Reserves Falls to 2 Million USD ($)

In against of increment in overseas currencies as well as assets collection, there is a fall on 31st augest’2007 of 2ML dollar ($) - 228,847 ML dollar ($) in forex reserve. As per the weekly publication of Reserve Bank of India assets and overseas currency came up to 4 ML ($) on the back of 221,509 ML ($) increment. Whereas gold reserves turned down at 6 ML ($) and stopped at 6,881 ML ($).during the same time, ‘Special Drawing Rights’ as well as reserve rank in the IMF stand flat at 2 million US Dollar and 455 ML correspondingly.
Assets and funds of overseas are expressed in the terms Unites States Dollar included the outcome of approval and reduction of non-US currencies as Euro, Yen and Sterling, detained in reserves.

Currencies Update

Forex Currency Chart

Currencies Against to $
EUR 1.38636
AUD 1.18805
NZD 1.40409
HKD 7.78907
JPY 114.954
GBP 0.500255
INR 40.4841

Market Updates

Asia's developing economies will expand faster than earlier estimated in 2007 and 2008, and are well placed to weather any U.S. slowdown and turmoil in global credit markets, the Asian Development Bank said. Growth in Asia excluding Japan and Australia is predicted to be 8.3 percent this year, beating a March estimate of 7.6 percent, the Manila-based lender said in a report released in Singapore today. The region will expand 8.2 percent in 2008, faster than an earlier forecast of 7.7 percent, according to the ADB, which is funded by governments to promote development in the region. Rising incomes in China and India, the world's two fastest- growing major economies, are boosting consumer and corporate spending. External debt has fallen since 1997 Asian financial crisis while forex exchange reserves have risen sevenfold to $3.6 trillion, and the ADB said the region is better placed to cope with adverse developments.
``Developing Asia's defenses against external shocks are solid and it can weather a slowdown in the U.S.,'' ADB chief economist Ifzal Ali said. ``It has stout financial defenses and some scope for policy adjustment.'' The global credit crisis sparked by the collapse of the U.S. sub-prime-mortgage market shook equity markets valuation around the world, sending benchmark indexes plunging as investors withdrew from riskier investments. “Morgan Stanley Capital International” Asia Pacific Index tumbled 15 % from its July 24 record high to a 7month low on 17 Aug.. It has since rebounded 11 %

Growth Risks

While volatility in credit market is making the outlook for growth more ``hazy,'' the lender said the region's growth will depend on how domestic challenges are met. ``While the jury is still out on the events unfolding in credit markets and the broader global economy, a sharp dive in Asia's economic growth still seems unlikely,'' according to the Asian Development Outlook 2007 Update report.
Still, the region will not be immune to a U.S. recession. Asia's developing countries are almost double as dependent on exports as the rest of the globe, with 60 percent of their trade abroad eventually destined for the U.S., Europe and Japan.
``A steep downturn in the U.S., with knock-on effects in Japan and the euro zone, would mark a significant deterioration in the external environment and would undoubtedly cut into regional growth going into 2008,'' Ali wrote. Any impact would be ``modest and short-lived,'' he said.

U.S. Contagion

A recession in the world's forex institute largest economy would reduce the Asian region's growth rate by as much as 2 percentage points, the ADB said. Global economic expansion might suffer an unassuming slow-down to about 4.75 % should growth in the United States slip below 2% from an average of 2.3 % in the first half, predictor at ‘Morgan Stanley & Co.’ Contagion from a U.S. recession would cut global growth to 3.5 percent or less.
More currency flexibility is needed to help policy makers address forex trading economic imbalances, today's report said. ``Some countries are trying to juggle too many objectives given the instruments at their disposal,'' the ADB said. ``While exchange-rate regimes are certainly more flexible than they once were, there is scope for still-greater flexibility.'' “Robust'' momentum in the economies of China and India is driving Asia's expansion, curbing the impact of any easing of demand for the region's goods.

Inflation Concern

The ADB raised its 2007 forecast for economic growth in China to 11.2 percent from 10 percent estimated six months ago. It increased its prediction for expansion in India to 8.5 percent from 8 percent estimated in March.
Chinese and Indian policy makers will remain alert on inflation pressures, the ADB said. China moves up the interest rates on Sept. 14 for the 5th time ever since from March to curb the greatest increase rate since ‘96 and to cool a rolling stock-market.

Asian Market of Forex Trading

Asian stocks cut down the most in a week; lead by ‘Mitsubishi UFJ Financial Group Inc’, after ‘Bank of America Corporation’. Said fall-out from U.S. sub-prime-mortgage wounded will hurt earnings. ‘Mitsubishi UFJ’ headed for the major drop in a month and ‘National Australia Bank Ltd’. Slid to a 6 week low on worry about the forex credit crisis, which has encouraged a run on funds at United Kingdom lender ‘Northern Rock Plc’, ‘Toyota Motor Corp’, refused on speculation the U.S. market will slow. Singapore Airlines Ltd. knocks down as the value of crude oil rose to a record.
Mr. Shane Oliver, who helps manage about 83 ($) BL at ‘AMP Capital Investors’ (Sydney) states that U.K. has offered a token that the credit crunch remains in place so that the risks are still fairly high when it comes to financials.

Financial Shares

‘The Morgan Stanley Capital International Asia-Pacific’ Index slid 1.3 % to 149.65. Set for its leading drop since 10 Sept.’07. Financial shares were the major drags among the measure's ten industry liberalization groups, accounting for approximately half the benchmark's retreat.
Oil, Gold Section. 'Singapore Airlines Ltd’, the most money-making training carrier in Asia, slid 1.1 % to Singapore Dollar 18.50. Petroleum accounted for more than 37 % of its operating expense for the year ended 31st March. ‘Korean Air Lines Co’, South Korea's largest, lost 2.8 %t to 58,500 won. Crude-oil in New York climbed above ($) 81 per barrel for the 1st time on speculation rising worldwide demand may hamper efforts to store fuel for the 4th quarter. Oil for October deliverance climbed to as much as ($) 81.18 in after-hours trading after gaining 1.9 % to ($) 80.57 on previous day. 'Inpex Holdings’ advanced 0.9 % and up to 1.14 ML JPY. ‘Cnooc Ltd’, China's leading off-shore oil explorer, included 1.2 % to HKD 10.44 in Hong Kong. Australia's largest gold mining company, ‘New-Crest Mining’, jumped 4.4 <%> to AUD 26.27. Whereas China's largest gold mine ‘Zijin Mining Group Co’, gained 2.1 % to HKD 10.10. Gold reached 728.90$ an ounce on the New York Mercantile Exchange’s Comex division the highest since May 12, 2006.

U.S. Market

Uil Exceeds $81 as Rising Demand May Reduce Supplies for winter. Forex institute crude oil exceeded $81 a barrel for the first time, extending gains to 14 percent the past month, on speculation rising demand will deplete stockpiles needed during the Northern Hemisphere winter.
A U.S. Energy Department report tomorrow will probably show oil inventories fell for the 10th time in 11 weeks, according to an analyst survey. Heating oil supplies are 13.3 percent below the five-year average. Global oil demand peaks in the fourth quarter when refiners make heating fuel. "There is not a whole lot of crude to go around,'' said Tom Hartmann, commodity broker at AltaVista Worldwide forex trading Inc. in Mission Viejo, California. ``From a technical standpoint, this market probably has the legs to get up to $83-$84.''
Crude oil for October delivery rose as many 67 cents, or 0.8 percent, to $81.24 a barrel, and was trading at $81.21 in after-hours electronic trading on the New York Mercantile Exchange at 1:10 p.m. in Singapore. The contract raised $1.47, or 1.9 percent, to $80.57 yesterday, the highest closing price since trading began in 1983.
U.S. oil stockpiles probably fell 2 million barrels last week, based on the median estimate from a Bloomberg News survey of 12 analysts. Inventories held 322.6 million barrels on Sept. 7, or 2.7 percent less than a year earlier, and 8.3 percent more than the five-year average for the period, the Energy Department said Sept. 12. "If you focus on the heating oil inventories then investors should increase their long positions in the crude oil contracts,'' said Hirofumi Kawachi, a senior energy analyst at Mizuho Investors Securities Co. in Tokyo. ``Lower interest rates will clearly have a positive impact. It will support the level of consumption in the U.S.''

Inventory Valuation

To what extent should deferred payments in a particular foreign currency be secured by forward financial cover, if a trader wants to hedge against currency risk as completely as possible? Analytically, the question can be addressed in a general and a narrow sense. A more general accounting would look at all the company's outstanding debts and assets arising from many possible transactions denominated in the Forex currency-including those anticipated in the near future. Inventory Valuation

Forex Liberalization

Rather the State Bank would have to evolve less direct but nevertheless effective-techniques of monetary control. But how sophisticated need this control mechanism be to maintain full convertibility? For small open economies like Hungary and Yugoslavia, the answer depends heavily on whether a pegged or a freely floating exchange-rate system is selected. In the case of a floating exchange rate, the whole panoply of monetary control devices used in advanced industrial economies becomes necessary. Forex Liberalization

Online Training

Customer account statements in any field of finance can be confusing and even a little scary. Unfortunately, forex statements are frustrating nearly all the time. FX statements are very user-unfriendly and should be viewed as "armed and dangerous." Each firm's statement looks different from those of other firms depending on the back-office computer platform used. Online Training

Live Market

Asian stocks cut down the most in a week; lead by ‘Mitsubishi UFJ Financial Group Inc’, after ‘Bank of America Corporation’. Said fall-out from U.S. sub-prime-mortgage wounded will hurt earnings. ‘Mitsubishi UFJ’ headed for the major drop in a month and ‘National Australia Bank Ltd’. Slid to a 6 week low on worry about the forex credit crisis, which has encouraged a run on funds at United Kingdom lender ‘Northern Rock Plc’. Live Market

Forex Charting

Currencies Against to $
EUR 1.38636
AUD 1.18805
NZD 1.40409
HKD 7.78907
JPY 114.954
GBP 0.500255
INR 40.4841 Forex Charting

Exchange Concepts

If we know that the difference between the spot and forward rates reflects the difference between the interest rate yield of the U.S. dollar and the foreign currency, the question becomes, "which interest rate?" Obviously, choosing an arbitrary rate of interest for one currency to compare with an arbitrary rate of interest for another would create an unreliable and inconsistent forward market. A universal standard is required. Exchange Concepts

Control of Money

We have shown in the previous paragraph the value of the liquidity report to limit cumulative positive or negative cash flows and to control different Forex operators in their adherence to established limits. There is an additional advantage associated with this report. In many cases, the liquidity report will reflect fundamental funding techniques of a specific country. This information can be useful to review personnel in the headquarters of international banks. Control of Money