Two Simple Forex Trades

Interested in currency investing? Not sure how it all works? Then read on for a simple Forex trading example!

Pretend you have opened an account with an online broker, and made a margin deposit of $1,000. Your broker offers ‘matching’, so you’re able to trade the standard lot size of 100,000 units on the 1,000 deposit.

You’ve done your research and feel pretty confident that the Euro is going to rise over the short-term, so you decide to put up 100,000 on the trade.

The market opens and your broker gives you a quote of EUR/USD = 1.4425 EUR. You sell $144,250 U.S. at this rate to purchase 100,000 EUR.

A few days later, the EUR rises to 1.4535 you decide to sell 100,000 EUR at this price, and will be paid U.S. $145,350. Without factoring in any margin spread, your profit will be $145,350-$144,250 = $1,100.

Now, let’s look at a long-range strategy.

Let’s say you believe that the Swiss Franc (CHF) is going to strengthen relative to the Japanese Yen (JPY) over the next two months.

In order to minimize risk, though, you decide to take a smaller position and put up 10,000 Yen against the Franc. Your broker gives you a quote of CHF/JPY = 98.35

Now, in order to pull of this long-range trade, you have to use a strategy called ‘margin trading’ and employ a tactic called “swapping”.

This is because Forex is, on a day-to-day basis, a ’spot trading’ market, and the only way to carry a margin position forward long-term is to perform a ’swap’. A swap is a method of buying and selling a currency pair at the same time on two different dates.

In this case, you will swap CHF/JPY at the time of your first trade, and set your position forward for two months (the amount of time you expect it to take for the Franc to rise against the Yen).

So, you agree to sell 10,000 JPY for CHF at 98.351, then swap your position for two months at a forward rate of CHF 98.45 – i.e. – buy CHF for 984,500.

Within a month, the exchange rate has moved upwards, and you must move your position forward another month by buying back Yen at a new rate of 97.40 for 970,400.

When the position closes at the two month mark, both trades are settled. Your JPY account is debited and credited 10,000 Yen simultaneously. Your CHF account is debited 970, 400 CHF and credited 984, 500 CHF — for a profit of 14,100 CHF.

Convert this back into JPY for a profit of 1,373,340 Yen.

Forex Hedging Tutorial: Why Forex Hedging Is a Bad ‘Bet’ For Most

Forex hedging is not for beginners, nor for those without a significant pool of risk capital to invest. In fact, hedge funds – generally speaking – are not wise investments for the average person.

If you are just getting your feet wet in the investment game, you might be tempted towards Forex hedge funds. After all, a properly managed fund can yield returns higher than 500 percent – and even higher if you’re the fund manager. It is easy to see why a beginner could get sucked into this fairy-tale scenario.

My recommendation, however, is that you steer clear of hedging until you have several years of successful trading experience under your belt – not to mention disposable income – and I’m going to explain why right here and now.

First, let’s discuss hedge funds. What are they, exactly?

Hedge funds are private investment partnerships, usually managed by wealthy individuals – e.g. – other investors, business people, commodity pool operators and all-around financial tycoons.

However, the Securities and Exchange Commission does not impose any strict rules on who may start a hedge fund. In fact, if you won the lottery tomorrow, you could start your own hedge fund. This free-market, ‘anyone can play’ philosophy is the first high risk factor that should steer you clear of Forex hedging.

The second factor is the high risk associated with the strategies involved in hedge fund trading. You’ve probably heard about futures contracts, derivatives, ‘put’ options and the like, yes?

If you’ve been doing your homework, then you already know that these ‘investments’ revolve around the highly speculative trading strategy of ’selling short’. Really, this is why we call it ‘hedging’: you’re hedging your bets either for or against the given financial instrument based on short-term market fluctuations.

It is difficult enough for the average investor to predict short-term movements on every day stocks; but, try doing so on the even more volatile foreign exchange market and you’ll understand why Forex hedging is so risky.

It takes years of experience, coupled with a very sophisticated understanding of the world economy, to profit from a Forex-based hedge account, and even more to manage one.

So, if you are investing for your future, your family’s future, your children’s education or any other closely held dream, then I suggest you stick to the time-honored mid and long-range investment strategies like stocks, bonds and IRAs. There are plenty of high-yield options in the latter category, especially.

And if it is wealth you’re looking for, then consider starting your own business. A second income can help you get out of debt, and sock even more money into savings and investments.

Remember: real wealth is built on a foundation of security..and that’s the smartest ‘hedge’ you can make for your financial future!

A Introduction to Forex Signals

Forex Signals, also known as ‘technical indicators’, are data points used in the prediction of currency movements. This article will examine three of the most popular forex signals in use today.

Signal #1: Relative Strength Index (RSI)

The RSI indicator measures the ratio of upwards to downwards movements on the market, and the result is normalized to a range between 0-100.

.When an instrument, such as a currency pair, moves to 70 or greater on the RSI, the instrument is said to be ‘over bought’. Likewise, when a currency pair moves to 30 or below on the RSI, it is said to be ‘over sold’.

So, the Relative Strength Index is essentially a broad measurement of market demand for a given currency. Keep in mind, however, that spikes and drops may occur for any number of reasons, and do not necessarily indicate the development of a trend.

Relative Strength is useful in spot trading and some mid-range strategies, but it is not the only indicator to watch, particularly if you intend to employ long-range holding strategies.

Signal #2: Stochastic Oscillators (SO)

Charts derived from Stochastic oscillations are also used to indicate ‘over bought’ and ‘over sold’ conditions for currencies on the exchange market. These conditions are typically expressed on a percentage scale from 0-100%.

The S.O. scale method was derived from historical observation of market phenomena centered around closing trades. It was observed that – during the period towards closing – both the upwards and downwards trends in conditions tend to congregate towards the extreme ends of the scale.

These Buying and Selling conditions are charted using two lines: %K and %D. A divergence between these lines against the price action of a currency is a strong trading signal.

Signal #3: Moving Average Convergence Divergence (MACD)

This signal plots two lines of movement: the MACD line, and the signal/trigger line.

The MACD line represents the difference between two, exponential moving averages and the signal line — which is the exponential moving average of that difference. This is a tricky concept to grasp, so let’s look at MACD as an equation.

We’ll let each exponential moving average be represented by EMA-0, EMA-1, EMA-2, etc..

The Signal Line, then, is equal to: EMA (EMA0 – EMA-1… + …EMA-2 – EMA-3…+..) and so on.

Basically, the signal line is reflecting the exponential moving average of moving averages over time, such that:

Signal Line = EMA (EMA-0 minus EMA-1), and..

The MACD line = (EMA0-EMA1) – signal line.

The MACD and Signal Lines are charted around a ‘Zero’ line, the extreme limits of which represent ’slow MACD movement’ and ‘fast MACD movement’, respectively. Whenever the MACD and Signal Lines cross, it is an indicator that a change in trend is likely.

This wraps up our look at three of the most popular Forex signals. They are by no means the only ones. Some of the other, more technically complex signals includes indicators derived from Gann numbers and Elliot Wave theory.

The good news is that you don’t have to be a math whiz to make use of these indicators, as there are plenty of commercial software solutions on the market.

Learn Forex Currency Trading Online – The Easy Way!

Are you interested in learning how to trade currency on the foreign exchange market? If so, there is no better way to learn than by taking advantage of the wealth of resources available to you online.

Forex is a hot subject, and there are so many web sites about it, it can be hard to know which sites are relevant and trustworthy versus which ones to avoid. My goal here is to help you cut through the clutter, and find the resources you need to learn Forex trading online – the easy way!

Step One: Know Your Terms

The hardest part of learning any system is usually in the memorization of vocabulary, and the concepts represented by the ‘jargon’.

Forex is certainly no exception to this rule.

More often than not, you’ll come across a word you are unfamiliar with – and you’ll look it up – only to find the definition contains 2 or 3 other concepts you’ve never heard of before.

So, before you dive in too deeply, make sure you have a good reference handy. One very helpful site is ‘InvestoPedia’ (http://www.investopedia.com/).

Step Two: Open An Online ‘Demo’ Trading Account

You can test your basic knowledge – without losing your shirt – by opening a demo Forex account with an online broker.

Demos trades allow you to spot the weaknesses in your skills and knowledge, while also getting you comfortable with the fast-paced speed of the market and quick-thinking required to move on opportunities.

Step Three: Consider Investing In Your Education

There are more than a few top-notch Forex training courses available online. Some of these courses are run by online brokerages and are interactive in nature. Other courses may include ebooks or how-to videos put together by experienced investors-turned-teachers.

Make sure you choose a course that suits your needs, learning style and budget. Avoid any courses that sound too good to be true in terms of the financial gains they promise you. Forex takes time and you won’t get rich overnight on currency trading. It takes dedication, patience and practice.

Above all, remember to have fun!

Online Forex Trading: What You Need to Know

The Internet has made it easier than ever for the average person to get involved in speculative forms of day trading, like Forex trading.

In the past, Forex trades had to be carried out by calling up your broker’s ‘dealing desk’. Today, though, carrying out a trade is as simply as pointing and clicking from within your online trading account.

This is indeed a luxury but, as you may have guessed, there is both an upside and a downside to the technological ease of online trading.

One of the biggest problems is a phenomenon known as ’scalping’. Scalpers are traders who rely on the speed of electronic trading (and the ability to bypass the ‘dealing desk’) to ’scalp’ Pips.

In other words, they trade currencies on the smallest fluctuations in exchange rate. A scalper might trade a pair when it moves from 1.3435 to 1.3436, for example.

There’s technically nothing wrong with doing so, except that scalpers executes these types of trades hundreds of times daily. They may exit a trade before the broker even has time to deal with it, and this results in a loss…for the broker, that is.

Scalping is a risky strategy that is all to easy to perform online. So, the first thing you need to be sure of before you start trading is that you know what you’re doing. Scalping isn’t something you want to do as a beginner, regardless of whether you’re doing it intentionally or through sheer inexperience.

The second thing you’ll want to do is develop a long-term investment strategy. Forex is fun to ‘play’ with, and online accounts make it easy to jump in the game just to try it out. It has almost become a fad.

However, what the sad statistics bear out is that over half of all new Forex traders lose their money within a year. The foreign exchange market is seeing a lot of hype right now, and too many people are signing on in the hopes of making a quick buck. Forex is simply not that easy, though, and it is certainly not a get rich quick scheme for the average person.

So, before you start trading, make sure you take the time to educate yourself. There’s plenty of free information online, as well as top-notch training courses provided by brokers and expert investors.

Putting the necessary time up front into developing a long-range strategy, and educating yourself on the marketplace, will go a long way to assuring your success.

Forex Basics: An Exchange Rates Tutorial

Profits are gained and lost on the foreign exchange, or ‘Forex’, market due to fluctuations in the exchange rate. This fact may seem like common knowledge, but one should not take for granted how exchange rates are determined.

There is actually a very rich history behind the concept of the exchange rate, and it is important that you understand why things came to be as they are — as well as how to capitalize on that knowledge.

This quick tutorial on exchange rates will help you do just that.

First, let us look at the simplest definition of an exchange rate. An exchange rate is the value of one currency in relation to another. If one U.S. dollar is worth $1.20 Canadian, then the exchange rate is 1:1.2, or 1.2 for the CAD/USD currency pair.

What does this really mean, though? Why is it that one currency can be worth more than another, and who decides?

If you look back to the earlier part of the 20th Century, you’ll recall that most currencies of the world were back by precious metals, like silver and gold.

It used to be that the United States followed the ‘gold standard’, which ‘pegged’ the Dollar to the price of 1 ounce of gold. All other currencies were then ‘pegged’ to the Dollar and allowed to fluctuate in either direction by a margin of no more than 1 percent.

This type of exchange rate, although it allowed for minor fluctuation, was considered a “fixed exchange rate”.

Now, fast-forward to the latter half of the century, and you find that the ‘gold standard’ has been dropped, along with the fixed rate model of exchange. Instead, the foreign exchange market now operates primarily on a ‘fluctuating exchange rate’.

Fluctuating exchange rates are governed by the market forces of supply and demand. If the demand for a currency exceeds the supply, then the exchange rate (and value) of that currency will rise.

Likewise, if the supply of a currency exceeds market demand, then the value of that currency (and its exchange rate) will drop.

We see this happening today with the U.S. Dollar. In order to keep up with government spending, the federal reserve prints more and more dollars, then sells them to other countries as ‘debt’.

The market forces which previously gave the dollar its strength — such as oil exports and oil transaction denominated in U.S. dollars – have eroded. Thus, we not only find the exchange rate of the dollar weakened, but also the exchange rates of many of our closest trading partners.

The Japanse Yen, for example, has fallen even more than the dollar. Part of this is due an overall crash in the Asian market, but it is also linked to the fact that much of Japan’s economic growth at the end of the last century depended upon exports to the United States.

This is just one example of how market forces affect exchange rates, but it is a useful one for examining some of the factors involved in rate fluctuations.

If you would like a real world exchange rate tutorial, I recommend opening a demo trading account with an online broker. Do some test trades to get a feel for things, and make note of current exchange rates.

Then, make sure you stay abreast of world and financial news, and see if you can spot the relationships between major announcements and rate fluctuations!

Understanding Forex Pips

Pips and ‘pips values’ represent one of the most misunderstood concepts in Forex trading. Newbies, especially, often have trouble grasping the idea behind pips — but, a solid understanding of pips is crucial to successful Forex investing.

If you’ve had trouble with pips, then today may be your lucky day. I’m going to attempt to clarify things once and for all with a brief pips tutorial.

Hopefully you’re already familiar with the concept of ‘basis points’. One basis point is equal to one one-hundredth of one percent, and represents the smallest increment of change measured for any financial instrument.

Take interest rates as an example. If the interest rate on your credit card rises from 10.12 percent to 10.13 percent, then it has risen by 1 basis point.

Pips are the Forex market’s version of basis points. Let’s say that the exchange rate for the EUR/USD pair move from 1.4465 to 1.4468. This movement represents a shift of 3 Pips, and may be good or bad depending on which currency you are holding.

Here’s the catch, though. Notice that the shift took place on the 4th decimal, which is the ten-thousandths place, or 1/10,000 of a percentage point? You have a shift of one ten-thousandth instead of one one-hundredth.

The reason for this is that most currencies (with the exception of the Yen) are quoted out to four decimal places. This means you get to take advantage of even the most minute shifts as you trade on high volume.

In order to calculate Pips for the common, four decimal currency pairs, you must divide the value of 1 Pip by the exchange rate:

1 Pip = 1/10000th / exchange rate

Now, what happens when you are dealing with the Japanese Yen? In this currency pair, we find an exception to the rule because the Yen is quote out only to the hundreds place, or 1/100.

For the USD/JPY pair (or vice versus), your formula would be:

1 Pip = 1/100th / exchange rate

Now that you know how to calculate Pips for any currency pair, you must look at what an actual Pip is worth to you in real dollar terms. This value is known as “pips value’. In order to do this, we must bring ‘lot size’ into the equation.

If you purchase a standard lot of 100,000 pairs of EUR/USD at 1.4465. , your formula will be as follows:

Pip Value = (0.0001 / 1.4465) x 100,000 = 6.91

So, a pip at this exchange rate is worth 6.91 Euro. Don’t look for exact numbers here. What you need to pay attention to is the fact that ‘6.91′ represents the average gain or loss per change in pips.

In other words, a fluctuation of 2 pip from 1.4465 to 1.4467 isn’t going to raise your profit or loss by a full Euro or more. Try doing the calculation for a 2 pip rise, and you’ll see that your pips value goes up only to 6.192.

I recommend getting comfortable with these basic calculations first, and then moving on to the calculations of actual profit and loss, which will require you to factor in bid price and ask price.

Also, remember that your online broker usually calculates pip and pips values for you, and you don’t have to know how to do the math. It’s just good business to be able to do it yourself.

Forex for Newbies: A Quick Currency Trading Tutorial

So, you want to learn how to trade currency on the foreign exchange market? The process of trading currencies appears very straight-forward on the surface; but, there is more to it than meets the eye.

The currency trading tutorial you’re about to receive here will give you a basic idea of how things works. However, you must keep in mind that this tutorial is only scratching the surface. The Forex market is complex, fast-paced and requires serious further study if you wish to trade successfully.

Now that we have that disclaimer out of the way, let’s begin by looking at the fundamental unit involved in every trade: the ‘currency pair’.

What are currency pairs?

Currency pairs are units of 2 currencies involved in a foreign exchange trade. For example, if you want to sell U.S. dollars to buy Euros, you would look at the exchange rate quoted for the EUR/USD currency pair. Or, if you wanted to sell Euros to buy U.S. dollars, you would look at the exchange rate quoted for the USD/EUR currency pair.

You might thinking: “Aren’t they the same thing?” Well, they almost are, but you must look at the correct pair, in the correct order, based on the currency being purchased.

There are two reasons for doing this:

First, it is easier to calculate the results of your exchange in terms of how much of the base currency you can purchase with your ‘quote’ currency. Your base currency is the currency you intend to buy, and the quote currency is the currency you intend to sell in exchange for the base.

When quoting an exchange rate, your broker will list the base currency first in the pair, and the quote currency second.

This means that when you see a pair like EUR/USD, you are seeing the cost of 1 Euro in U.S. Dollars. An exchange rate quote of EUR/USD = 1.4436 means that 1 Euro costs $1.4436 in U.S. Dollars.

Likewise, the USD/EUR pair indicates the cost of 1 U.S. Dollar in terms of Euros. An exchange rate of USD/EUR = 0.6834 would mean that 1 U.S Dollar costs 0.6834 Euro.

The second reason for looking at the correct buy/sell ordered pair is that you’ll want to know the difference between the ‘bid price’ (exchange rate) and the ‘ask price’ (what the market makers want for the currency).

The difference between bid price and ask price make up what is known as ‘the spread’. Forex traders are subject to spreads when opening or closing trades in the buying position.
In other words, you are always subject to a spread when you buy, regardless of whether you are opening or closing the trade.

Open buy -> spread
Close sell -> no spread

Open sell -> no spread
Close buy -> spread

Let’s say that you want to buy the EUR/USD pair. The bid price is 1.4436. The ask price may be something like 1.4440. You must pay the spread of 0.0004 in order to do the trade.

Those are the basics of a currency trade, but there are other factors to take into consideration. In order to make a profit on currency exchanges, you must also know how
to calculate the cash value of exchange rate fluctuations in terms of ‘basis points’ – or, in Forex jargon – ‘pips value’.

This currency trading tutorial will not cover pips values, but it is a concept you should investigate further if you want to master the basics of trade on the foreign exchange.

Getting a Solid Forex Trading Education

There are a lot of Forex trading courses online that promise to teach you everything you need to know to jump into the market with confidence. If you are new to Forex, though, how can you tell which ones will truly provide you with the solid Forex trading education you need?

A reputable course should training material on all the fundamental concepts for beginners, including:

*Exchange rates
*Fixed rates versus floating rates
*Currency pairs
*Bid Prices versus Ask Prices
*Spreads
*Lot Sizes
*Margins, Margin Calls and Leverage
*Pips Values and their role in calculating profit and loss
*How to evaluate leading economic indicators
*How to read Forex signals and charts

This is just the bare minimum. A really good course should also walk you through a variety of trading examples, and show you how to perform ‘test trades’ yourself using a demo account with a reputable broker.

Another thing you can do to help speed your learning process is to immerse yourself in the literature of the market. There are scores of books and magazines available on the subject both online and off. You might want to have a look at the free, online magazine called Currency Trader (http://www.currencytradermag.com/).

Finally, consider enhancing your knowledge of other financial marketplaces. You’ll find some concepts and terms repeated when reading about how to trade on the Stock Market, or how things like interest rates fluctuate for bonds, bills and other instruments.

This is especially useful if you feel more comfortable in one area of financial knowledge than other because you’ll be able to see some related concepts from Forex in a context with which you are already familiar.

A Beginner’s Guide to Forex Trading Systems

Ah, the foreign exchange market! So exciting and fast-paced. So much risk, yet so much potential. Every new prospector is drawn to the adrenaline rush of speculative currency trading. It is that element of risk that makes success that much sweeter.

It also that same element of risk that drives so many new investors to seek out the ‘ultimate trading system’. You get into Forex and you realize it is not as simple as it looked from the outside. The speed and complexity of market movements is mind-boggling.

Perhaps you’ve already opened a demo account, and practiced making trades. Maybe you went ahead and opened a live account, lost an embarrassing chunk of money, and are back at square one — looking for that ‘magic bullet’.

The question to ask yourself is: “Do I really need a better trading system, or do I just need a better grip on Forex?”

It may surprise you to know that the answer is: “Both.”

Why?

Quite simply, the better you understand Forex, the more likely you are to choose a trading system that fits your needs. Put another way: the less you understand Forex, the more likely you are to choose the wrong trading system!

In order to see why, let’s discuss the nature of Forex trading systems and what they’re really intended to do for you.

First, there are roughly two kinds of trading systems: ’signal service’ systems and ‘complete’, strategic systems — and I almost hesitate to refer to ’signal services’ as ‘trading systems’ at all. Keep reading, and you’ll see why.

Signal services are convenient tools for experienced spot traders. The primary role of a signal service is to send you ’signals’ or ‘alerts’ about market movements as they arise, according to popular Forex indicators like the Relative Strength Index and MACD lines.

Typically, these services send ‘buy/sell’ alerts (and/or general ‘movement’ alerts) to their subscribers via the subscriber’s preferred method of communication: e-mail SMS or text-message alert, etc.

What many of these services do not do, however, is provide with you with a trading strategy or ‘auto-trading’ option. In order to get that kind of service, you must go with a broker who provides a ‘complete’ trading system, and not merely a glorified signal service.

How can you tell which brokers offer truly complete trading platforms?

There are a couple of things to look for when evaluating potential brokers. The first thing to look for is full disclosure of trading strategies.

If a given brokerage company really is in business to help you succeed, then you should easily be able to find some wording on their web site about proprietary trading strategies. Many brokers offer ‘auto trading’ services, where trades are made on your behalf, based on these strategies.

This type of service can be invaluable. However, it may also hinder you if the broker is unwilling to disclose the nature of the strategies involved. Your best bet is to find a brokerage that lets you choose when and whether to use the auto-trade feature.

If the broker provides new clients with in-depth training on their strategies, that’s

even better.

The other thing to look for is ’specialization’, but this can be tricky. Some brokerages will claim to be Forex specialists, when they are really just ‘fly-by-night’ scams based on risky trading strategies.

It is often far better to go with a ‘name brand’ brokerage that treats Forex as a specialized component within a broader package. What your account may lack in ‘cutting-edge’ options will be more than made up for by common sense policies and safety measures. A really good broker will be as risk-averse with your money as you are.

Finally, it is important that you take the time to develop your own trading strategies. Take the time to sit down and flesh out your entry and exit tactics.

How much do you want to risk per trade? How much margin are you comfortable with trading on? Do you have recovery strategy in the event your trades take you below margin?

How do you intend to manage the overall growth of your portfolio? Will you take profits out or reinvest them to a target goal?

Answering these questions ahead of time will help you choose the right trading system for your needs.

Newbies Guide To Forex Trading