Forex Trading

An Introduction and Basic Seminar on

How the Currency Market Works

What is Forex?
The foreign exchange, forex, or FX market is one of
the most dynamic markets in the world. In fact, there
is a daily turnover of more than $5 trillion each
trading day. Within the Forex market itself, one
currency is traded in exchange for another currency.
For example, the EUR is traded against the USD,
making up the EUR/USD currency pair.

Characteristics of Forex
Decentralized
Traded in pairs (EUR/USD 1.2500)
Can be traded 24 hours a day, 5 days a week
Can be traded on bull and bear markets
Can be traded with small capital
Very Volatile

History of Forex Trading

Bretton Woods Accord
- world leaders came together after WWII (July 1-22,
1944) in New Hamsphire
- Official Name: United Nations Monetary and Financial
Conference
- Decided the fate of the worlds monetary system
- All currencies are pegged with the US Dollar making it
the worlds currency reserve
- 1 ounce of gold = $35/ounce (caused the undoing of
the entire system)

History of Forex Trading

The End of Bretton Woods Accord
- President Lyndon B. Johnsons policy agenda for the
Vietnam war and his Great Social welfare programs in the
US
- Printed more money to instead of raising taxes and cutting
expenses which resulted to increase in money supply
- More money supply = raise in inflation to 9% in 1968
- US consumers started buying more goods abroad which
affected the trade balance
- Central banks and foreign governments had to sell their
currencies to buy more US dollars

History of Forex Trading

The End of Bretton Woods Accord
- Bundesbanks (Germanys central bank) put up a good fight but
gave up after it was forced to buy $1B in one day on May 4,
1971 and other $1B on May 5, 1971 which caused the market
to float
- England, France, Switzerland and etc. started converting USD
into gold at $35/ounce and sell it later at $40/ounce to
$58/ounce which caused too much pressure on the US govt.
- August 15, 1971 Nixon administration announced it would
suspend convertibility from USD to gold

History of Forex Trading

Smithsonian Agreement
- On December 18, 1971 at the Smithsonian Institution, the US,
UK, Germany, France, Italy, Canada, Japan, Netherlands,
Belgium, Sweden and Switzerland (also known as G10) had a
meeting
European Joint Float
- The European Economic Community (West Germany, France,
Italy, Netherlands, Belgium and Luxemburg established the
European Joint Float system in 1972.

History of Forex Trading

End of the Smithsonian Agreement and the Joint Float
- Expansion of US money supply, value of gold reached
more than $100/ounce and lack of ability of foreign
governments to continue buying the US dollars =
forced the market to devaluate the US dollar. This lead
to the free-floating currency system.

History of Forex Trading

The Jamaica Agreement
- Members of the International Monetary Fund (IMF) finally
formalized the free-floating currency system on January 7
and 8, 1976 at an IMF meeting in Jamaica and agreed on
the following:
Floating currency rates were now acceptable
IMF members could enter the Forex market as they saw fit
to temper unwarranted price fluctuations
Gold would no longer be used as a reserve asset and the
IMF would return all of its gold to its member nations.

Forex Market Structure

Forex Market Hierarchy

Major Currency Pairs

ISO Currency Codes

Currency Pair Terminology

USD = US Dollar
EUR = Euro
JPY = Japanese Yen
GBP = British Pound
CHF = Swiss Franc
CAD = Canadian Dollar
AUD = Australian Dollar
NZD = New Zealand Dollar

EUR/USD = "Euro"
USD/JPY = "Dollar Yen"
GBP/USD = "Cable" or "Sterling"
USD/CHF = "Swissy"
USD/CAD = "Dollar Canada" (CAD
referred to as the "Loonie")
AUD/USD = "Aussie Dollar"
NZD/USD = "Kiwi"

Minor or Cross-Currency Pairs

Exotic Currency Pairs

Basic Forex Terminologies

What the is a Pip?
The unit of measurement to express the change in value
between two currencies is called a pip. If EUR/USD moves
from 1.2250 to 1.2251, that .0001 USD rise in value is ONE PIP.
What is a Pipette?
A pipette is a fraction of a pip.
Example: if GBP/USD moves from 1.5154(2) to 1.5154(3), that
.00001 USD move higher is ONE PIPETTE.

Basic Forex Terminologies

Basic Forex Terminologies

Leverage means the % amount of money you are allowed to
borrow from the broker when you open a position.
Margin can be thought of as a good faith deposit required to
maintain open positions. This is not a fee or a transaction
cost, it is simply a portion of your account equity set aside and
allocated as a margin deposit.

Margin call A request from a broker or dealer for additional

funds or other collateral to guarantee performance on a
position that has moved against the client. If the equity
balance in your account falls below the margin requirement, a
margin call will be generated.

Basic Forex Terminologies

Leverage means the % amount of money you are allowed to
borrow from the broker when you open a position.
Margin can be thought of as a good faith deposit required to
maintain open positions. This is not a fee or a transaction
cost, it is simply a portion of your account equity set aside and
allocated as a margin deposit.

Margin call A request from a broker or dealer for additional

funds or other collateral to guarantee performance on a
position that has moved against the client. If the equity
balance in your account falls below the margin requirement, a
margin call will be generated.

Basic Forex Terminologies

Bid Price The bid is the price at which the market is
prepared to buy a specific currency pair in the Forex
market.

Ask Price The ask is the price at which the market is

prepared to sell a specific currency pair in the Forex
market.
Bid/Ask Spread or Spread - The difference between the
bid and the ask price is popularly known as the spread.

Basic Forex Terminologies

Lot Size The amount of money you put in a trade in
accordance to your margin.
Market Order is an order to buy or sell at the current
market price.
Limit Order (TP/Take Profit) A limit order is an order
placed to buy or sell at a certain price. Stop Loss Order

Stop Loss (SL) A stoploss order is a limit order linked to

an open trade for the purpose of preventing additional
losses if price goes against you.

Basic Forex Terminologies

Bullish Market -the market is bullish when prices go
up

Basic Forex Terminologies

Bearish Market - The market is bearish when prices
go down

Basic Forex Terminologies

Consolidation - The market is consolidating when it is
moving sideways within a price range

Forex Trading Sessions

Time Zone

EDT

GMT

Sydney Open
Sydney Close

6:00 PM
3:00 AM

10:00 PM
7:00 AM

Tokyo Open
Tokyo Close

7:00 PM
4:00 AM

11:00 PM
8:00 AM

London Open
London Close

3:00 AM
12:00 PM

7:00 AM
4:00 PM

New York Open

New York Close

8:00 AM
5:00 PM

12:00 PM
9:00 PM

Average PIP Movement

Pair

Tokyo

London

New York

EUR/USD

76

114

92

GBP/USD

92

127

99

USD/JPY

51

66

59

AUD/USD

77

83

81

NZD/USD

62

72

70

USD/CAD

57

96

96

USD/CHF

67

102

83

EUR/JPY

102

129

107

GBP/JPY

118

151

132

AUD/JPY

98

107

103

EUR/GBP

78

61

47

EUR/CHF

79

109

84

Types of Forex Brokers

Types of Forex Brokers

How to Choose a Forex Broker

1. Regulatory Compliance
National Futures Association (NFA)
U. S. Commodity Futures Trading Commission (CFTC)

2. Account Details:
Margins, Leverage, Commission & Spread

3. Ease of Deposit and Withdrawal

4. Currency Pairs Offered
5. Customer Service
6. Trading Platform

3 Types of Analyses

Sentiment Analysis
Chicago Board Options Exchange (CBOE) Volatility Index (VIX)
is arguably the best gauge of risk and sentiment available to
the investing public; it can be used effectively by any trader in
the Forex market. The VIX is often nicknamed the fear index,
which is actually somewhat misleading, since it doesnt
directly measure fear of any kind.
The VIX is actually a measure of traders expectations about
volatility in the S&P 500. It is charted like an index, and the
higher it goes, the higher traders expectations for short-term
market volatility are.

Sentiment Analysis
General Rule:

If traders are expecting a lot of volatility, this is generally a bearish sign. If

investors are concerned that volatility is increasing, the VIX will rise.
Conversely, if investors are expecting low volatility, the VIX will drop, which
is considered to be a bullish sign

So what should you be watching for when you analyze the VIX? You should
be looking for the following:
When the VIX starts to rise, look for safe-haven currencies to appreciate
in value.
When the VIX starts to fall, look for riskier, higher-yielding currencies to
appreciate in value.
VIX: http://www.cboe.com/micro/vix-options-and-futures.aspx

Sentiment Analysis

Fundamental Analysis
Fundamental analysis is the interpretation of
statistical reports and economic indicators. Things
like changes in interest rates, employment reports,
and the latest inflation indicators all fall into the
realm of fundamental analysis.
Forex traders must pay close attention to economic
indicators which can have a direct and to some
degree, predictable effect on the value of a nation's
currency in the forex market.

12 Key Questions to Ask

1.
2.
3.
4.
5.
6.
7.
8.

Does your economy run a trade surplus or a trade deficit?

What does your economy export?
To whom does your economy export?
What does your economy import?
From whom does your economy import?
Do you have an attractive government debt market?
Do you have an attractive equities market?
Tell me about your central bank. What are its mandates? How much gold and
foreign currency reserves does it hold?
9. Do you have an over involved government that likes to intervene in the Forex
market?
10. What economic announcements are important to you?
11. Are you a safe-haven currency? (USD, CHF, JPY, Gold or XAU)
12. How can I trade you?

Key Economic Data to Watch Out

Gross Domestic Product (GDP)
Interest Rates
Employment Rate / New Jobs Numbers
Unemployment Rates / Unemployed Numbers
Inflation
Monetary Policy Statements
Housing Data
Retail Sales

Determinants of Supply & Demand

Demand > Supply = Currency value goes up
Demand < Supply = Currency value goes down
Demand = Supply = Consolidation
Supply and demand in the currency market are driven primarily by
the following five factors.

Trade flows (Surplus or Deficit)

Investment flows
Money supply
Government interventions and currency manipulation
Investor fear (VIX)

How Interest Rates Affect Currencies

How Interest Rates Affect Currencies

How Economic Data Drive Volatility

Economic Calendar

Economic Calendar
http://www.forexfactory.com/calendar.php
http://www.fxstreet.com/economic-calendar/
http://www.dailyfx.com/calendar

Forex and Commodities

Correlations

Gold and AUDUSD

When gold goes up, AUD/USD goes up. When gold goes
down, AUD/USD goes down.
Australia is the worlds 3rd largest gold producer.
Gold has a positive correlation with AUDUSD.

Gold and USDCHF

When gold goes up, USD/CHF goes down. When gold goes down, USD/CHF goes up.
Switzerlands central bank is backed by at least 25% of gold.

Gold has a negative correlation with USDCHF.

Oil and USDCAD / CADJPY

If demand for oil goes up, USDCAD goes down and CADJPY
goes up.
Canada is the #1 oil exporter to the US and is one of the
worlds top oil producers.
Japan is a major oil importer.

Other commodities
AUD
- Iron
- Copper
- Mining industry
NZD
- Milk
- Dairy products

Forex and Equities

Correlations

Forex and Stock Market

Currency

Stock Index

Description

USD

Dow Jones

The Dow Jones Industrial Average, is considered to be one of the premier stock
indexes in the U.S. It measures how well the top 30 publicly owned companies are
trading.

USD

S&P 500

The Standard & Poor 500, is a weighted index of the stock prices of the 500 largest
American companies.

USD

NASDAQ

National Association of Securities Dealers Automated Quotations 3,700

companies, largest trading volume

JPY

Nikkei

The Dow Jones equivalent of Japan. Top 225 companies

EUR

Dax

Deutscher Aktien Index measures the top 30 blue chip companies in Germany that
are trades in Frankfurt Stocks Exchange.

EUR

DJ EURO STOXX 50

The Dow Jones Euro Stoxx 50 index is the euro zones leading blue-chip index. It
comprises over 50 top-sector stocks from 12 euro zone countries.

GBP

FTSE

The FTSE (pronounced footsie) index tracks the performance of the most highly
capitalized UK companies listed on the London Stock Exchange. There are several
versions of this index, such as the FTSE 100 or FTSE 250, depending on the
number of companies included in the index.

HKD

Hang Seng

The Hang Seng index is a stock market index in Hong Kong. By recording and
monitoring the daily price changes of the stocks included in the index, it tracks the
overall performance of the Hong Kong stock market.
This index is currently compiled by the HSI Services Limited, which is a subsidiary
of Hang Seng Bank.

Nikkei and USDJPY

Dow Jones and USDJPY

S&P 500 and EURJPY

DAX & EURJPY

Technical Analysis
Technical analysis is the framework in which forex traders
study price movement.
The theory is that a person can look at historical price
movements and determine the current trading conditions and
potential price movement.
The main evidence for using technical analysis is that,
theoretically, all current market information is reflected in
price. If price reflects all the information that is out there,
then price action is all one would really need to make a trade.
History repeats itself.

Understanding Candlesticks

Candlestick Chart

Support and Resistance

Support and resistance is a concept in technical
analysis that the movement of the price of a security
will tend to stop and reverse at certain
predetermined price levels. These levels are denoted
by multiple touches of price without a breakthrough
of the level.

Support and Resistance

Support and Resistance

Trend Lines
Trend lines - A line that is drawn over pivot highs or
under pivot lows to show the prevailing direction of
price.

Fibonacci
Named after Leonardo Fibonacci, an Italian mathematician, after discovering a
simple series of numbers that created ratios describing the natural proportions
of things in the universe.
The ratios arise from the following number series: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34,
55, 89, 144
Fibonacci Retracement Levels
0.236, 0.382, 0.500, 0.618, 0.764
Fibonacci Extension Levels
0, 0.382, 0.618, 1.000, 1.382, 1.618
Fibonacci levels can serve as support and resistance as well as profit taking levels.

Fibonacci + Support & Resistance

Fibonacci + Trend Lines

Timeframes
Forex can be trading in the following time frames:
m1, m5, m15, m30, h1, h4, h8, D1, WK, MN

It is advisable to analyze the charts in the higher time

frames and go to the lower times frames after to
determine the major trend.

Technical Indicators
MACD (Moving Average Convergence Divergence)
RSI (Relative Strength Index)
Stochastics
SMA (Simple Moving Averages)
Exponential Moving Averages (EMA)
Volume
ADX (Average Directional Index)

How to Trade Forex?

70% Psychology Discipline, patience, fight greed and
other human emotions. It is more on when not to trade
than when to trade.
20% Money/Risk Management Position sizing, how
much are you willing to lose per trade?
10% Techniques Your methodology in trading.
Money Management + Techniques = Your trading system
which comprises 30%.

Psychology
The 4 demons in trading:
1. Greed
2. Fear
3. Euphoria
4. Panic

These are the top 4 enemies of a trader.

Money / Risk Management

Risk only 1% - 5% of your trading account maximum
Set proper risk to reward ratios, 1:3 is ideal
Set realistic targets
Never over leverage and over trade
Never open multiple positions you cannot manage

Position Sizing
Capital (USD)
$1000
$1000
$1000
$1000
$1000
$1000
$1000
$1000
$1000
$1000
$1000
$1000
$1000
$1000
$1000
$1000
$1000
$1000
$1000

Lot Size
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0

Volume
1
2
3
4
5
6
7
8
9
10
20
30
40
50
60
70
80
90
100

PIP Value in $
$0.1
$0.2
$0.3
$0.4
$0.5
$0.6
$0.7
$0.8
$0.9
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10

PIP Buffer
10000
5000
3333
2500
2000
1666
1428
1250
1111
1000
500
333
250
200
166
142
125
111
100

10 Rules in Trading Forex

1.
2.
3.
4.
5.
6.
7.
8.
9.

Get proper training and education before you trade

Never trade money you cant afford to lose
Be patient and disciplined. Fight off greed and fear
Know when to enter and always have an exit
Plan your trade and trade your plan
Never over trade and catch up breakouts
Never over leverage. Use proper risk management
Always pair strong and weak currencies
Your trades must be fundamentally driven.
Technically executed.
10. Know when to break your rules.

Techniques
Price Action Trading (P.A.T.) is the discipline of making all
of your trading decisions from a stripped down or
naked price chart. This means no lagging indicators
outside of maybe a couple moving averages to help
identify dynamic support and resistance areas and trend.
All financial markets generate data about the movement
of the price of a market over varying periods of time; this
data is displayed on price charts. Price charts reflect the
beliefs and actions of all participants (human or
computer) trading a market during a specified period of
time and these beliefs are portrayed on a markets price
chart in the form of price action (P.A.).

Analysis Composition
70% Price Action based on Conventional and
Unconventional Technical Analysis

20% Fundamental Analysis (news from Central

Banks and major market movers, ignore other
noise)
10% Sentiment Analysis (VIX) take advantage of
investor fear.

Time for Price Action

AUD/USD Monthly chart analysis

AUD/USD Daily chart analysis

AUD/USD (h4) before

AUD/USD (h4) After