Table of Contents
Introduction to the Forex Market ...................................................................... 3 How is Foreign Exchange Traded .................................................................... 4 The Advantages of Trading ............................................................................. 6 Currency Pairs ................................................................................................. 7 The Concept of Leverage ................................................................................ 8 Trading Costs .................................................................................................. 9 Fundamental Analysis .................................................................................... 10 Technical Analysis ......................................................................................... 14 Risk Management .......................................................................................... 19 Psychology of the Trader ............................................................................... 20 Contacting US ................................................................................................ 22

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The market was previously an Inter Bank market. The massive trade volume in the forex market – three times greater than the sum of all US financial markets combined . The foreign exchange market allows fund managers. the market still get its prices from the largest participants in the market. In the forex market the transactions that are undertaken are necessary because large institutions. based in financial centers such as London and New York. There is no single location where transactions are placed. The market is open 24 hours a day from Monday to Friday and it records trading volumes of more than $3 trillion per day. There are many different types of traders in the forex market. 3 . companies and individuals to buy and sell foreign exchange globally. It was generally conducted between large financial corporations. The market has now moved to such a state that anyone can participate. brokers and even governments. However. It is one of the few markets whose sheer size makes it almost impossible for any one person. institution or government to control. Unlike other financial security markets forex has no centralized market. governments. Forex is the largest financial market in the world.Introduction to the Forex Market Forex – the foreign exchange market – is the World's most interesting financial market. banks. Your trades will always be carried out immediately. businesses and individuals need foreign currency to buy and sell goods and service. This is because the amount of money used in trades can be anything from a few thousand dollars to billions of dollars and the leverage in the market can vary from 1:1 to as high as 400:1.makes the forex market the most liquid market in the World.

The base currency is the "basis" for the Bid price (the cost of selling the base currency) or the Ask price (the cost of buying the base currency). which represent 100. You would do this if you expected that the euro would rise in value against the US dollar.5460.5460 up to 1. In the case of the EUR/USD currency pair. The major currencies are EUR (euro). a pip is worth $10 in one lot and is $1 in a 10. If the market moves from 1. For example. Forex is traditionally traded in lots. if you Ask EUR/USD you have bought euros (and simultaneously sold dollars). CAD (Canadian dollar). The major currencies are always quoted in the following order: The first currency listed in a pair is known as the base currency. If the EUR/USD is quoted at 1.5461 that represents a move of one pip.How is Foreign Exchange Traded? In forex trading one currency is always bought and another sold at the same time. AUD (Australian dollar). GBP (sterling/British pound).000 position and $1 on a €10.000 position.000 units of the base currency although much smaller lot sizes are available today. CHF (Swiss franc) and JPY (Japanese yen) – and they are traded against the USD (US dollar). while the second currency is called the counter or quote currency.54. dollar or pound and one hundredth of a yen. 4 . A pip is the smallest increment of a currency pair and it is one ten thousandth of a euro. that means that one euro is currently worth just over $1.000 EUR/USD position so a movement of one pip would be worth $10 on a €100. NZD (New Zealand dollar). Currencies are quoted and traded in pairs such as EUR-USD.

300 profit  In forex. If you had thought that the euro was going to fall relative to the U. ending up on the wrong side of a trade can be very expensive.5330 when you sold it. dollar you would have Bid on the EUR-USD currency pair. the price rises and you close the trade.5460 when you bid it. You sold at 1. Again your position was $100.      The EUR/USD was trading at 1. 130 pips x $10 = $1. you also have the opportunity to short sell (Bid first) a currency pair if you think it will fall in price.5460 and closed your position at 1.5460 and sold at 1. You are correct.5330 for a profit of 0. You bought at 1.0130 or 130 pips.5590 for a profit of 0.300 profit Remember that these are profitable examples.000 each pip would have been worth $10.     The EUR/USD was trading at 1.000 making each pip worth $10.5460 when you asked (bought) it.A Trade Example You think that the euro will rise against the dollar and so you Ask the EUR-USD currency pair. 5 . you were correct and you closed your position for a profit. The EUR/USD was trading at 1. If your trade had been worth $100. Again. Always evaluate your positions carefully. On 130 pips x $10 you would make a $1.S.5590 when you bid (sold) it. The EUR/USD was trading at 1.0130 or 130 pips.

24 Hours Trading: The forex market operates 24 hours a day from Monday morning Sydney – Australia time to Friday evening New York (EST) time. The enormous size of the market means trades can always be carried out immediately and that the market is too large for any one player to control. This means for every $1. 6 . Trade Both Sides of the Market: You can profit from price movements in either direction.5 and $3 trillion daily. Therefore traders have immediate access to information. If you should happen to incur a loss.000 you place in your account you have access to trade with $400. whether prices are going up or down. You can profit in a bear or a bull market and the economy of any country is irrelevant to make profits. their accounts and transaction ability without after hours price fluctuation vulnerability. your broker will close your position when the loss equals the balance in your account.000 worth of contracts.The Advantages of Trading in the Forex Market High Leverage: Generally forex brokerage service providers offer a leverage of 100:1 however. Low Margin: Traders can utilize a small amount of funds in order to take a large position. XForex offers customers leverage of 400:1. Low Trading Costs: Forex brokers will only charge you for the difference of a buy and sell price quote. Liquidity: The forex market trades between $2. There are no commissions or other charges payable by the trader..

e. that Japanese investors were losing faith in the United States' economy and were pulling money out of the US into Japan. e. When to buy a pair. then the trader would Buy USD-JPY (Ask the US Dollar/Bid the Yen) expecting that the price of the USD-JPY would rise. If. then the trader would Sell USD-JPY (Bid the US Dollar/Ask the Yen) expecting that the price of the USD-JPY would fall. For example. If a trader believed. Below is an example of how currency pairs are listed on the XForex trading platform. a trader believed that the Bank of Japan was likely to intervene to cause a decrease in the yen against the US dollar. 7 . The first currency listed is always the base currency.Currency Pairs What is the significance of currency pairs? A currency pair represents the exchange rate between two currencies. The currency pairs are listed on the left side of the screen.g.g. When to sell a pair. The Bid price is the level at which a trader Bids the currency pair and the Ask price is the level at which a trader Asks the currency pair. the rate at which the EUR/USD is trading represents the number of US Dollars one Euro can purchase.

your broker will close some or all open positions. even in a highly volatile. Most market makers allow positions to be leveraged up to 100:1. This means that if a trader wanted to Ask a “lot” worth $100. Increasing your leverage increases the opportunity both to take bigger profits and sometimes to rack up bigger losses. In other markets. 8 . with 100:1 leverage the trader only has to put up $1. Due to the availability of leverage. which is also known as the margin.000. For example. What is margin? Margin is a deposit. Leverage multiplies all aspects of a trade including both profitability and risk. when leverage is 100:1. the “1” in the leverage ratio signifies the amount of capital the customer has invested of his own money. This prevents clients' accounts from falling into a negative balance. The margin requirement allows traders to hold a position much larger than the account value. fast moving market. such as the equities market. In the event that funds in the account fall below the margin requirements. XForex offers leverage up to 400:1. How are leverage and margin related? Leverage and margin are related in the way mentioned above – the amount of leverage a market maker gives to a client defines the amount of margin that the client will have to commit in order to take a position in the market. clients are able to make large investments without needing huge amounts of capital. clients would have to pay 50% of the full amount for each share of stock they were investing in.The Concept of Leverage – What is Leverage? Leverage allows traders to borrow money and use it to invest in the foreign exchange market.000. that guarantees your trading losses.

Instead. then the Bid rate of this pair will have to go up 3 pips in order for the trader to break even. it can be difficult to identify the spread cost in the equities and futures markets due to the broker-based system they use. The ask rate will always be higher than the bid rate. Because of this spread. These spreads are seen in every kind of market. the trader will have a loss on their account that is equal to the spread. 9 . • The bid rate is the price at which traders can Sell the pair. However. and then immediately closes the position at the bid rate. For example. The spread is an automatic adjustment that is made to the trader's account when making the trade. The ask (Buy) rate is always higher than the bid (Sell) rate and the spread on the EUR/USD is 3 pips. they are offered two rates for the currency pair: the bid rate and the ask rate. Above are some example currency pairs. if a trader Asks into a position at the ask rate. • The ask rate is the price at which traders can Buy the pair. The difference between the bid rate and the ask rate is the spread. meaning that if a trader Asks this pair. traders will begin every position they assume with a small loss and will need to gain some profit in order to break even.Trading Costs How much does it cost for a trader to make a trade? Traders do not take positions on a currency pair at the exact rate at which the currencies are trading.

it means its economy is not strong enough to provide people with jobs. and industrial production. Employment: The unemployment rate is a key indicator of its economic strength. such as inflation. 10 . This is determined by a country’s central bank. unemployment. If a country has a high unemployment rate. Fundamental analysis is based on the analysis of economic data. This is based on the idea that currencies with higher interest rates will generally rise in value. A carry-trade is a trade where a currency with a low interest rate is sold and a currency with a high interest rate is bought. and this leads to a decline in the currency value. and will rollover and allow trades to earn interest on a daily basis. There are three main macroeconomic factors a trader should focus on when analyzing foreign exchange rates: Interest Rates: Each currency has an overnight lending rate. This is largely due to traders who execute carry-trades. Information on events such as these is easy to find. Lower interest rates usually lead to the value of the country's currency declining. and traders try to use this information to take positions in the market in order to make profit. Geopolitical Events: Key international political events affect not only the foreign exchange market. but all other markets as well.Fundamental Analysis What influences prices in the forex market? Prices in the currencies market are affected by macroeconomic factors.

S. If you think the U. which means that you expect the British Pound to strengthen against the U. if you think that the Japanese government will continue to weaken the yen in order to help its export industry. you would click BID.S.S. dollar.S. By focusing on long term economic factors that affect countries. economy will become weaker and hurt the US dollar. expecting the pound to 11 . If you think that Japanese investors are pulling money out of U. fundamental analysis predicts long term trends. you would click on ASK. For example. If you think that there will be increased foreign demand for US financial instruments such as equities and treasuries. For example. Examples of How to Use Fundamental Analysis with the Major Currency Pairs EUR/USD When the dollar weakens the EUR/USD will rise and if the USD recovers then a strong foreign demand will send the EUR/USD lower. if you think the British economy will benefit from high yield and attractive growth in the future. Speculation about the UK adopting the euro will send the GBP/USD lower. that benefit the US dollar. dollar to increase in value against the yen.Fundamental Analysis Techniques How does fundamental analysis explain long term trends? Fundamental analysis is very useful for determining long term trends within a currency pair. you would click ASK. financial markets and repatriating funds back into the Japanese asset markets. you would click on BID. This means that you expect the yen to strengthen against the U. GBP/USD High Yield and attractive growth in the UK drives the GBP/USD higher. expecting the U. If you believe the British are about to commit themselves to adopting the Euro. dollar as Japanese investors Bid their assets and convert their dollars back into yen. USD/JPY Japanese government intervention to weaken their currency sends the USD/JPY higher and gains in the Nikkei and demand for Japanese assets drive the USD/JPY down. you can BID EUR/USD as you are expecting the euro to lose value against the dollar.S. such as the Nikkei. you can ASK the EUR/USD.

If. the dollar will continue to weaken.S. If you believe that due to instability in the Middle East and in U. expecting the Swiss franc to strengthen against the dollar.weaken against the dollar as the British devalue their currency in anticipation of merging with the euro. For example. financial markets.S. Droughts hurt the Australian economy and the AUD/USD. expecting the U. USD/CHF Global stability and global recovery send the USD/CHF higher. you would click ASK. Higher interest rates and a rebounding labor market in Canada will help to drive the USD/CAD lower. you would click ASK. expecting the Aussie to strengthen against the U.S. dollar to strengthen against the Swiss franc. you think that the U. If inflation started taking off in Germany and France. you would click BID. If inflation took off in Germany and France it could drive the EUR/CHF lower. you would click ASK. if you think that commodity prices are going to rise dramatically. Thus. you would click BID. for example.S. meaning that investors no longer need to park their money in a safe haven currency such as the Swiss franc. dollar to strengthen against the Australian dollar. AUD/USD Rising commodity prices send the AUD/USD higher. 12 . USD/CAD Canadian economic underperformance against the US sends the USD/CAD higher. you would click ASK. expecting the U.S. if you think that the market is headed towards a period of global stability and economic recovery. EUR/CHF The Swiss government uses verbal intervention to weaken the franc. the USD/CHF weakens on geopolitical instability. dollar due to Australia's status as one of the world's leading commodity exporters. If you believe that Australia will face another drought. for example. if you think the Swiss government wishes to devalue the currency to help exports in Europe. economy is going to rebound while the Canadian economy goes into recession. sending the EUR/CHF higher. For example. you would click BID expecting the Swiss franc to increase in value against a devalued euro. expecting the euro to increase in value against the Swiss franc. hurting the domestic economy. thus benefiting the Australian dollar.

dollar to strengthen against the Canadian dollar. NZD/USD Bad weather in the US. such as New Zealand. dollar.S. expecting the New Zealand Dollar to strengthen in value against the U. increasing demand for foreign wheat.S.S.expecting the U. If you felt that interest rates in New Zealand will fall in the future while interest rates in the US will continue to rise. 13 . dollar. for example. The expectation that New Zealand Interest rates will decrease would send the NZD/USD lower. dollar. would send the NZD/USD higher. expecting the Canadian dollar to strengthen against the U. you would click BID.S. you think that Hurricane damage in the US will lead to an increase in wheat imports from foreign nations. If you believe that the higher yields and rebounding labor market in Canada warrants a higher valuation for the Canadian dollar against the U. you would click ASK.S. dollar. If. you would click BID expecting the New Zealand dollar to drop in value against the U.

Traders who use fundamental analysis can sometimes run into trouble because the sheer amount of data they are attempting to organize can be overwhelming. misunderstanding and ultimately. because technical analysis helps determine where the trends are and which way they are going. regardless of its direction. where trends are going. This is an important aspect of technical analysis because if many traders are basing their decisions on technical indicators. which causes the traders to pay attention. technical analysis is much more common and popular within the foreign exchange markets. Traders are able to speculate on both up and down trends in the foreign exchange market because it is possible to Ask a currency and Bid against another currency. This can lead to misdirection. a place where technical analysis can be effective. it can be easily applied to any currency or time frame. which allows the trader to follow the trend until it ends.Technical Analysis What is so great about technical analysis? Once a trader masters technical analysis. therefore. 14 . thus giving the trader a chance of profiting from the market. The foreign exchange market is typically composed of trends and is. technical analysis can be much more straightforward. technical analysts are able to follow many currencies at the same time. For example. This aspect of currency trading works well with technical analysis. if a currency pair decrease. Many traders even consider it to be self-fulfilling. The market partly moves because of all the technical analysis performed. On the other hand. whereas fundamental analysts usually focus on one or two pairs of currencies. in a relatively short time. then the indicators must be watched since they reflect the sentiment of the market and the majority of the traders. Why is the foreign exchange market the best market to use technical analysis? The foundation behind using technical analysis is to find trends when they first develop. causing it to drop further. Because of the short time it takes to study price curves. loss of money. because there is so much information in the market for them to analyze. Technical analysis offers many different ways for traders to analyze market information. In comparison to the equities and futures markets. according to technical analysis. meaning that it works well because so many traders use it. Technical analysis allows the user to figure out. then the majority of traders will Bid the pair.

as a result. Similar to support. it will make big moves. Support and Resistance in a Range. making this a simple and attractive strategy for many market conditions. When the market breaks out of the range. There is no scientific formula for calculating support. it is something that is typically “eyeballed” by traders. it can be identified as resistance. traders can simply Ask at support levels. Support can be defined as a “floor” through which the currency pair has trouble falling below. Similarly. and Bid at resistance levels. on the other hand.trading: Trading in a range generally does not result in substantial gains on a per-trade basis. and which has a subjective element. traders trading with range strategies can suffer big losses when the market breaks out of the range. and so it takes more than normal Asking pressure to break that level. The chart below illustrates the concept of range-bound trading. Generally. resistance levels are somewhat subjective. A support level is simply a price area where Ask orders tend to be. The reason why price has trouble breaking these levels is the presence of actual orders around these levels. generally.Trading Markets One simple way to use support and resistance in trading is to simply trade the range: in other words. Resistance. a resistance level is a price area where Bid orders tend to be.Support and Resistance At the core of all technical analysis theory are two very simple concepts: support and resistance. 15 . is simply the opposite: it is the upper boundary through which a currency pair has trouble breaking. The two disadvantages of range. The forex market is range-bound a majority of the time. and so it takes more than normal Biding pressure to break that level. As a result. if the market reaches a price level a certain number of times and cannot sustain a break above that level.

This involves placing orders to Ask above resistance and to Bid below support. The rationale is that the market will gain momentum once it breaks out of the range. traders may be able to profit if the market continues to move out of the range and they are on the right side of the market. Momentum trading is a bit counter-intuitive. and thus by placing orders just below or above of support or resistance. 16 . Below is a chart that illustrates the concept of momentum trading. to anticipate a breakout. in other words.Support and Resistance in Momentum Markets Another way to use support and resistance is to trade outside of the range. as it involves Asking at a higher price and Biding at a lower price.

17 . and filters out a lot of "noise" in the Forex market.When a pair makes new highs (lows) but RSI does not.RSI may show levels of support and resistance. RSI levels are between 0 and 100. this usually indicates that a reversal in price is coming. it usually provides a better velocity reading than other oscillators. make real-time volume reporting impossible. Chart Formations .When RSI breaks out (surpasses previous highs or lows). since that is what the market as whole tends to look at. although some traders may use 20 and 80. A popular oscillator is the Relative Strength Index. Failure Swings . sometimes more clearly than the price chart itself. As the indicator is front-weighted (more importance is given to the most recent data). RSI is less affected by sharp movements. When choosing the settings for RSI. Relative Strength Index The relative strength index (RSI) measures a currency pair's strength relative to its recent past performance. traders should typically use the default time period of 14. Most traders use 30 as an oversold condition and 70 as an overbought condition.Tools in Technical Analysis Oscillators Oscillators are a type of mechanical trading tool that are used to indicate when a currency pair is overbought or oversold. Divergences . Support and Resistance . In general RSI is used in five different ways: Top and Bottoms . since the huge amount of traders in the forex market.Patterns such as double tops and head and shoulder may be more visible on RSI rather than on the price charts.Overbought and Oversold conditions are usually signaled at 30 and 70. from all over the world. this may indicate that a breakout in price is coming. Many traders also use this indicator as a substitute for volume confirmation.

.RSI was useful in detecting this USD/JPY short after a crossover of the 70 "overbought" level materialized on the daily. Following the clear Bid signals. 18 . the pair moved down 450 pips over the next 30 days.

If you are short on a currency pair the stop loss order should be placed above the current market price.Risk Management There are three basic questions that every trader should answer BEFORE entering any trade: How much do I believe the market will move and where do I want to take my profit? Limit Orders allow traders to exit the market at profit targets. Limit orders help create a disciplined trading methodology and enables traders to walk away from the computer without constantly monitoring the market. a trader needs to be right less than 50% of the time to be profitable. If you are short (sold) the system will only allow you to place a Limit Order below the current market price because this is the profit zone. a trader that uses a 30 pip Stop/Loss and 100 pip take profit needs only to be right 1/3 of the time to make a profit. Similarly. Stop Loss orders should not be so tight that normal market volatility knocks the position out. however. given the markets trading activity. if you are long (bought) the system will only allow you to place a limit order above the current market price. Similarly. If you are long on the currency pair the stop loss order should be placed below the current market price. If this rule is followed. in the long-run you will always be happy that you placed them! Where should I place my stop loss and take profit? As a general rule of thumb traders should set Stop Loss orders closer to the opening price than take profit. take profit should reflect realistic expectations of gains. Stop Loss orders help traders control risk by capping losses. Where the trader places the stop and limit will depend on how risk-adverse he/she is. How much am I willing to lose before I exit the position? A Stop Loss order allows traders to set an exit point for a losing trade. For example. 19 . Stop Loss orders are counter-intuitive because you do not want them to be hit. and the length of time one wants to hold a position.

many traders attempt to analyze the position differently from the original analysis so that the analysis will favor their original position. and then the market goes back in favor of the position the trader had held. What is often forgotten is that stops are there to keep traders from losing more money than they would like. the loss will be made up for and more. a trader can keep losses to a minimum while allowing profits to run. A trader must keep their original analysis in mind when seeing the result of a trade. and be objective about what is happening to their position. However. Another psychological error traders make is to believe that. every trade can turn out to be profitable. either by closing positions to take a profit before they reach their original profit target or by failing to close a losing position in the hopes that the market will swing back in their favor. this belief can cause the trader to remove stops from their trades. A third important psychological error traders sometimes make is to become too committed to an individual trade and unwilling to let it go. as a result. They intentionally distort their analysis for one of two reasons: they do not want to close 20 . If there is an instance where a stop is hit. How can this be avoided? Through careful planning and analyses. with patience. many do not thoroughly plan out their actions. when this is advisable. Stick with your original plan and always follow the precautions you put in place before the trade. traders must sufficiently analyze the positions they are about to take. One huge psychological error that many traders make is going against their original plan. Professional traders never try to improvise and nor should anyone new to the market. This can result in traders losing a lot of money very fast. including knowing where to place Stop Loss and limit orders. not to act as roadblocks against profit. However. and instead make trades based on guesses and hunches.Psychology of the Trader What should the psychology of the trader be? Before placing trades. Make sure to have a plan that utilizes stop and limit levels before making the trade in order to minimize losses and lock in profits. and what they should do about it. It is okay to hit stops and lose a pre-determined amount of money because when a trader lets profitable trades run.

The psychological mistake they are making is that they are thinking of their trade as a $1. A mistake made by many traders is over trading. or to lose more than they originally would have lost. keeping enough margin available to cover your positions is critical to succesful trading. meaning that they trade much larger amounts of their account than is reasonable or trade too frequently. when in actuality it is a $100. Although most traders perform adequate analysis of currencies before placing trades. A general rule that traders can try to follow in order to keep from getting over-leveraged is to never use too much of their account at any given time. Although leverage allows traders to trade one lot of currency with only $1.000 as a margin deposit.000 investment. This psychological viewpoint causes many traders to lose the profit that they had made.000 investment. they sometimes use too much of their margin and are later forced to exit the position at the wrong time.the position with a loss or they are hoping that the position will become more profitable than it already is. 21 . it does not mean that traders should trade their entire available margin in one or two trades.

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