WHAT IS FOREX MARKET
The Forex market is where banks, businesses, governments, investors and traders come to exchange and speculate on currencies. The Forex market is also referred to as the ‘Fx market’, ‘Currency market’, ‘Foreign exchange currency market’ or ‘Foreign currency market’, and it is the largest and most liquid market in the world with an average daily turnover of $ 7.5 trillion.
Advantages of Forex Trading
The FX market is open 24 hours a day, 5 days a week with the most important world trading centers being located in London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney Forex is the largest market in the world, with daily volumes exceeding $ 6 trillion per day. Trade whenever you want: There is no opening bell in the Forex market. You can enter or exit a trade whenever you want from Sunday around 5 pm EST to Friday around 4 pm EST.
Ease of access: You can fund your trading account with as little as $100 at many retail brokers and begin trading the same day in some cases. Straight through order execution allows you to trade at the click of a STOCKS mouse.
Fewer currency pairs to focus on, instead of getting lost trying to analyze thousands of stocks Freedom to trade anywhere in the world with the only requirements being a laptop and internet connection.
Commission-free trading with many retail market makers and overall lower transaction costs than stocks and commodities
Volatility allows traders to profit in any market condition and provides for high probability wacky trading opportunities. Also, there is no structural market bias like the long bias of the stock market, so traders have equal opportunity to profit in rising or falling markets.
The smallest increment of price movement a currency can make. Also called point or points. For example, 1 pip for the EUR/USD = 0.0001 and 1 point for the XAUUSD = 100 pip
Leverage is the ability to gear your account into a position greater than your total account margin. For instance, if a trader has $2,000 of margin in his account and he opens a $2, 00,000 positions, he leverages his account by 200 times, or 200:1
The deposit required to open or maintain a position. Margin can be either “free” or “used”. Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $2,000 margin balance in your account and a 2% margin requirement to open a position, you can buy or sell a position worth up to a notional $2,00,000. This allows a trader to leverage his account by up to 200 times or a leverage ratio of 200:1.
The difference between the sell quote and the buy quote or the bid and offer price. For example, if EUR/USD quotes read 1.22000/03, the spread is the difference between 1.22002 and, or 2 pips in order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread.
The first currency in the pair that is located to the left of the slash mark is called the base currency, and the second currency of the pair that’s located to the right of the slash market is called the counter or quote currency.
If you buy the EUR/USD (or any other currency pair), the exchange rate tells you how much you need to pay in terms of the quote currency to buy one unit of the base currency. In other words, in the example above, you have to pay 1.22105 U.S. dollars to buy 1 euro.
If you sell the EUR/USD (or any other currency pair), the exchange rate tells you how much of the quote currency you receive for selling one unit of the base currency. In other words, in the example above, you will receive 1.22105 U.S. dollars if you sell 1 euro.
Bid Price-The bid is the price at which the market (or your broker) will buy a specific currency pair from you. Thus, at the bid price, a trader can sell the base currency to their broker.
Ask Price-The ask price is the price at which the market (or your broker) will sell a specific currency pair to you Thus, at the ask price you can buy the base currency from your broker.
Long & Short
Another great thing about the Forex market is that you have more of a potential to profit in both rising and falling markets due to the fact that there is no market bias like the bullish bias of stocks. Anyone who has traded for a while knows that the fastest money is made in falling markets, so if you learn to trade both bull and bear markets you will have plenty of opportunities to profit.
LONG -When we go long it means we are buying the market and so we want the market to rise so that we can then sell back our position at a higher price than we bought for. This means we are buying the first currency in the pair and selling the second. So, if we buy the EURUSD and the euro strengthens relative to the U.S. dollar, we will be in a profitable trade.
SHORT – When we go short it means we are selling the market and so we want the market to fall so that we can then buy back our position at a lower price than we sold it for. This means we are selling the first currency in the pair and buying the second. So, if we sell the GBPUSD and the British pound weakens relative to the U.S. dollar, we will be in a profitable trade.(potential arrow image).
A market order is an order that is placed ‘at the market’ and it’s executed instantly at the best available price.
A limit entry order is placed to either buy below the current market price or sell above the current market price. This is a bit tricky to understand at first so let me explain:
If the ERUUSD is currently trading at 1.22000 and you want to go sell the market if it reaches 1.22500, you can place a limit sell order and then when / if the market touches 1.22500 it will fill you short. Thus, the limit sell order is placed ABOVE current market price. If you want to buy the EURUSD at 1.20500 and the market is trading at 1.21000, you would place your limit buy order at 1.20500 and then if the market hits that level it will fill you long. Thus the limit buy order is placed BELOW current market price.
Buy Stop & Sell Stop Order
A stop-entry order is placed to buy above the current market price or sell below it. For example, if you want to trade long but you want to enter on a breakout of a resistance area, you would place your buy stop just above the resistance and you would get filled as price moves up into your stop entry order. The opposite holds true for a sell-stop entry if you want to sell the market.
Stop Loss Order
A stop-loss order is an order that is connected to a trade for the purpose of preventing further losses if the price moves beyond a level that you specify. The stop-loss is perhaps the most important order in Forex trading since it gives you the ability to control your risk and limit losses. This order remains in effect until the position is liquidated or you modify or cancel the stop-loss order.
Trailing Stop Loss
The trailing stop-loss order is an order that is connected to a trade like the standard stop-loss, but a trailing stop-loss moves or ‘trails’ the current market price as your trade moves in your favor. You can typically set your trailing stop-loss to trail at a certain distance from current market price, it will not start moving until or unless the price moves greater than the distance you specify. For example, if you set a 100 pip trailing stop on the EURUSD, the stop will not move up until your position is in your favor by 101 pips, and then the stop will only move again if the market moves 101 pips above where your trailing stop is, so this way you can lock in profit as the market moves in your favor while still giving the trade room to grow and breath. Trailing stops are best used in strong trending markets.
Good till Cancelled order (GTC)-A good till cancelled order is exactly what it says. good until you cancel it.
Good for the Day order (GFD) -A good for day order remains active in the market until the end of the trading day, in Forex the trading day ends at 5:00pm EST or New York time.
One Cancels the Other order (OCO) -A one cancels the other order is essentially two sets of orders; it can consist of two entry orders, two stop loss orders, or two entry and two stop loss orders. Essentially, when one order is executed the other is cancelled.
One Triggers the Other order (OTO) – This order is the opposite of an OCO order, because instead of cancelling an order upon filing one, it will trigger another order upon filling one.
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MAJOR ECONOMICAL EVENTS
Gross Domestic Products (GDP)
The GDP report is one of the most important of all economic indicators. It is the biggest measure of the overall state of the economy. The GDP number is released at 8:30 am EST on the last day of each quarter and it reflects the previous quarter’s activity. The GDP is the aggregate (total) monetary value of all the goods and services produced by the entire economy during the quarter being measured; this does not include international activity however. The growth rate of GDP is the important number to look for.
Trade balance is a measure of the difference between imports and exports of tangible goods and services. The level of a country’s trade balance and changes in exports vs. imports is widely followed and an important indicator of a country’s overall economic strength. It’s better to have more exports than imports, as exports help grow a country’s economy and reflect the overall health of its manufacturing sector.
Consumer Price Index (CPI)
The CPI report is the most widely used measure of inflation. This report is released at 8:30 am EST around the 15th of each month and it reflects the previous month’s data. CPI measures the change in the cost of a bundle of consumer goods and services from month to month.
Producer Price Index (pPI)
The PPI report is the most widely used measure of inflation. This report is released at 8:30 am EST around the 15″ of each month and it reflects the previous month’s data. PPI measures the change in the cost of a bundle of consumer goods and services from month to month.
The most important employment announcement occurs on the first Friday of every month at 8:30 am EST This announcement includes the unemployment rate; which is the percentage of the work force that is unemployed, the number of new jobs created, the average hours worked per week, and average hourly earnings. This report often results in significant market movement. You will often hear traders and analysts talking about “NEP” this means Non-Farm Employment report, and it is perhaps the one report each month that has the greatest power to move the markets.
Non Farm Payroll (NFP)
Non-farm payroll is a term used in the U.S. to refer to any job with the exception of farm work, unincorporated self-employment and employment by private households, nonprofit organizations and the military and intelligence agencies. Proprietors are also excluded. The U.S. Bureau of Labor Statistics releases closely followed monthly data on non-farm payrolls as part of its Employment Situation Report, which is commonly known as the ‘Jobs Report’. The headline figure-the change in the total number of non-farm payrolls compared to the previous month-is used as a gauge of economic health.
Federal Open Market Committee (FOMC)
The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of Monetary Policy. The FOMC meets eight times a year to discuss whether to maintain or change current policy. A vote to change policy would result in either buying or selling U.S. Government Securities on the open market to promote the growth of the national economy.
Durable Good Order
The durable goods orders report gives a measurement of how much people are spending on longer-term are expected to last more than three years. The report is released at 8:30 am EST around the 26th of each month and is believed to provide some insight into the future of the manufacturing industry.
Retail Sales Index
The Retail Sales Index measures goods sold within the retail industry, from large chains to smaller local stores, it takes a sampling of a set of retail stores across the country. The Retail Sales Index is released at 8:30 am EST around the 12th of each month; it reflects data from the previous month. This report is often revised fairly significantly after the final numbers come out.
Housing data includes the number of new homes that a country began building that month as well as existing home sales. Residential construction activity is a major cause of economic stimulus for a country and so it’s widely followed by Forex participants. Existing home sales are a good measure of economic strength of a country as well; low existing home sales and low new home starts are typically a sign of a sluggish or weak economy.
Interest rates are the main driver in Forex markets; all of the above-mentioned economic indicators are closely watched by the Federal Open Market Committee in order to gauge the overall health of the economy. The Fed can use the tools at its disposable to lower, raise, or leave interest rates unchanged, depending on the evidence it has gathered on the health of the economy. While interest rates are the main driver of Forex price action, all of the above economic indicators are also very important. Fed meetings held eight times a year.