Forex and Hedge Trading
March 26, 2009 by admin
Filed under Forex Systems
Forex and Hedge Trading
Many Forex trading systems allow users to open a special trading position called a "hedge". Normally when investors make trades in Forex, they buy or sell a currency pair. You can go long, hoping that the base currency will increase, or go short, hoping that the base currency will fall. For example, if you are trading EUR/USD, the base currency is the one on the left, or the European Euro. If you are going long on EUR/USD, then you are hoping and anticipating that the Euro will rise relative to the US Dollar. If you are going short, then you are hoping that the Euro will fall relative to the US Dollar.
In hedge trading, you open two positions instead of one. The two positions cancel each other out. For example, if you hedge EUR/USD then it means that you are opening one position long and an equally sized position short. So if the EUR/USD then raises 5 pips, your first position would have raised 5 pips and your second position would have lost 5 pips. So what’s the purpose of that, aren’t you just canceling out any gains and losses? Actually, yes you are canceling them out and if you factor in the spread or commission then you are actually going to lose money.
So why would anybody use a hedge trade? Well, if you are losing money on a trade and want to immediately protect yourself from losing more money, you can open a hedge so that even if you trade continues to lose money, you will have an equal and opposite trade that will cancel out any more money lost.
Additionally, some traders use advanced systems with hedging. For example, one investor opened a hedge position with GBP/CHF (British Pounds to Swiss Francs). He put stop orders for both hedges so that if it rose or fell to certain levels he would then sell one of the positions. He then back-tested his formula over several years and found that the system would bring in 13% profits on average per month. So hedges aren’t only used by novice traders to protect themselves from further losses, but also by more experienced traders who have devised trading strategies that can use them as part of a strategy that works fairly consistently.
For the beginning trader, hedges probably won’t be a big part of trading, but beginning traders should know what hedging is because they will read about it and see options for hedging in their trading platform. Big banks and experienced and skillful traders can find ways for hedging in an overall strategy for trading with profitable results.
© GetForexHelp.com
Reading Forex Charts
March 20, 2009 by admin
Filed under Forex Fundamentals
Reading Forex Charts
As a Forex trader, the Forex chart isn’t only your friend, it’s your trading lifeline. Reading charts isn’t all that difficult, but it is a crucial skill that you will need to master. Whether you are a fundamentals trader or a technical trader, you will need to master chart reading. There are a number of vendors offering Forex charts, and your Forex broker should offer free charts with your account. Each chart is going to look a bit different, but they all have a few things in common.
Look at the chart above. Starting at the top, we can see the currency pair. In this case the currency pair is EUR/USD. So we are seeing the value of one Euro expressed in Dollars. There are various numbers: open, close, high and low. These numbers represent the value of the EUR/USD on the given date which is August 18th. Keep in mind that the dates and times are going to be based on a certain time zone that will not likely correspond with your own timezone. For each chart, you will need to know which time zone is represented. In some cases, the time zone will be the same as your broker’s location. So if your broker is based in New York City, then East Standard Time may be the charting time. Also, each chart can cover a different rate of time. In this case, each line represents a full day, but you can adjust charts to show five minute intervals or one hour intervals.
If you are doing short-term trading, you might want to look at a minute by minute chart. So check the bottom of the chart which will show you how long the time interval is. Below, we see a lot of red and blue lines with different notches on them. The currency prices are represented in this way because this is an OHLC chart. OHLC stand for Open, High, Low, Close. Each one of those lines will give us this information. Look at the last line on the chart which represents a single day. In this case, August 18th. Look at the small notch on the left. You will notice that this notch is located at 1.469455. That is the same price as the Open. So you can see here that the left notch represents the opening price for that day. There is also a corresponding notch on the right. It is higher up, near the top of the line. That notch corresponds with 1.479355 which you will notice corresponds with the closing price. So you can see that the opening price was around 1.4694 and the closign price 1.4793, which means the Euro rose relative to the US Dollar during that day. Because the Euro rose, the line is blue.
If it had fallen, the line would be red. In fact, if you look carefully, you will see that every time the opening price (the notch on the left) is higher than the closing price (the notch on the right), you have a red line because the opening price was higher than the closing price. Likewise, every line that has an opening price notch on the left that is lower than the closing notch on the right is colored blue because the price rose during the day. We know the price rose because the closing price was higher than the opening price. So what about the rest of the line? Why are some longer than other? The rest of the line shows you the trading range during the day. The lowest point on the line is the lowest that the currency pair traded at during the day. If we look again at August 18th, we can see that the bottom of the line corresponds with the value of 1.463025. The top of the line represents the value of 1.479355. Looking up at the top we can see that these two values are the same as the high and low of the EUR/USD currency pair. That means that at one point in the day the Euro was worth as many as 1.4793 US Dollars, and at another point during the day, the Euro was worth as little as 1.4630 Dollars.
So the top point and the bottom point of the lines represent the top and bottom prices. The longer lines generally mean that the price was more volatile moving a great deal during the day and the shorter lines mean that the price was more stable, moving on a slight amount during the day. Looking closer, you can see that there is a green line and a red line running across each of the days. These two lines are moving averages. They represent sort of an average of prices across days. Basically each point of these lines averages out a certain number of previous days’ prices. That way we can get a general idea of where a currency is moving without just staring at the prices and getting bogged down in data. Another type of chart is the Candlestick chart:
A Candlestick chart is the same as the OHLC chart, except the skinny line represents the day’s range (the low and high prices). The fat part shows the range of the open and closing prices. If the fat part is clear in this chart, the price went up during the day, if it is solid then the price decreased. Once again, we have two moving average lines, which are the red and green lines. So if you can read the OHLC chart above then you should have no problem reading the Candlestick chart. Now that you can read basic charts, you are well on your way to becoming a Forex trader. Sure, advanced charts have a lot more data, but the most important data is all covered in the basic charts above.
GetForexHelp.com
The Stock Market vs Forex Trading
March 13, 2009 by admin
Filed under Forex General
The Stock Market vs Forex Trading
The stock market lists thousands of companies, five days of week and investors try to sift through the data and then anxiously await the market opening and then nervously watch their trades until lunch time, when things slow down a bit. As the afternoon wears on, people get tired and the rush of the morning is forgotten as the afternoon reaches its end.
Right there we can see several reasons why stock trading is different from currency trading. In the Forex market, there are only a limited number of currencies to work with. Traders aren’t overloaded with thousands of choices and can concentrate on just a few currencies. In the Forex market, the trading never stops. That’s great if you live in a time zone that doesn’t have a stock exchange in it. You don’t have to be up at odd hours of the night trying to fight off sleep to watch your positions. You can trade when and where you want because the Forex market is always on.
The way that brokers make money is different as well. In stocks, brokers charge a fee for every trade that is placed, but in Forex trading many brokers forego commissions altogether and make their profits on the spread between the buying price and the selling price.
Forex trading is also a lot more disparate than stock trading. In stock trading, everyone is going through the same market. If you trade Apple stock, then you will always be going through the NASDAQ exchange. If you trade currency, there are different players. If you’ve ever gone on vacation and changed money into the local currency at your hotel or on the street corner, then you were making a Forex trade, albeit on a small scale. Try taking some stock certificates with you the next time you’re on a foreign vacation and exchanging those for a hotel room! Because there are so many actors in currency trading, the market is much more fragmented. Sometimes these different fragments of the market are connected by Electronic Communication Networks (ECNs). In a stock market, nothing needs to be connected, because all trades are in the same market.
Stock brokers will let you trade on margin, but only at 2:1. In other wise you can only borrow double what you already have invested. With Forex trading the margin rate is much higher, meaning that you can often trade 100:1 or higher and can borrow a lot more money to make a trade.
Finally, the Forex market is huge. Every day about 15 times more Forex currencies are exchanged than stocks. So if you have ever traded in a stock and seen a company plummet on what seems like some sort of market manipulation, you will have a lot less to worry about. Currencies are harder to manipulate than stocks are because the amounts are so huge and because it requires several governments to cooperate to truly manipulate a price. Economic data is harder to manipulate than the opinion toward a stock. With a stock, all you have to do is create a rumor and watch the stock move. With Forex, you have to fudge economic and political developments. This also means that as a small player, if you load up on one currency, only to sell it later, you won’t see the currency move signicantly down when you sell it. Try doing that with a small cap stock when as you try to unload it the price plummets. Because the Forex market is so large trades are made instantly, instead of waiting for another stock trader to agree on a price.
All of these differences make Forex trading a totally different animal from stock trading, and I daresay more interesting!
© GetForexHelp.com
Understanding Pips
March 6, 2009 by admin
Filed under Forex Fundamentals
Understanding Pips
In Forex, you will hear the term "Pips" a lot. But what is a Pip? "Pip" is derived from "percentage in point". A Pip is the smallest unit of value that a currency pair can be valued at. To get an idea of what I am talking about, let’s look at Euros and US Dollars. Let’s say a Euro is worth 1.4694 US Dollars. So the EUR/USD is 1.4694. The "4" on the end is the smallest unit. In other words it is four ten-thousandths of a dollar. If you have 10,000 Euros you would have 14,694 US Dollars. In the case of Euro/USD, that "4" then is the smallest unit and that is where the Pip comes from. Let’s say the value of the US Dollar decreases relative to the Euro and it is now 1.4793 Dollars per Euro. In this case the Euro just gained almost 1 penny on the Dollar, meaning for every Euro you sell, you would receive about 1 more US cents. But the actual movement is under 1 cent, it is .0099. That means that the change was 99 pips. Since the last number is the smallest unit, we see a change of 99 from that. If the EUR/USD had gone to only 14,695, then the change would have been 1 pip.
In the case of many currencies, the pip is at the fourth decimal point. In the case of USD/JPY, only two decimal points are used because the Yen is so cheap relative to the Dollar. So a Pip in one currency doesn’t necessarily mean the same amount of decimal points. It depends on the currencies we are talking about.
A Pip doesn’t sound like much. If you have one Euro and you just made a few ten-thousandths of a US Dollar, you wouldn’t really care. However in Forex, most traders are trading large amounts of money. If you are leveraged and you are trading a lot of money, then even a few Pips can turn out to be a few hundred Dollars. Let’s say you have USD/JPY. The price for USD/JPY is 110.00. In other words, you can buy 110.00 Yen for 1 Dollar. How much is a Pip worth? Let’s say you have bought on margin 100,000 dollars worth.
Then how much is that Pip worth? To find this out, divide the volume of 100,000 by the number of Yen that you can receive. 100,000 divided by 110.00 = 909. Transform that into dollars and it’s $9.09. So if the USD/JPY goes from 110.00 to 110.01, and you have 100,000 on the line, then you just made $9.09. If it goes up by 10 or 20 pips, then you can multiply that by 10 or 20.
© GetForexHelp.com
Reading Forex Quotes
March 1, 2009 by admin
Filed under Forex Fundamentals
Reading Forex Quotes
Reading Forex Quotes is not as difficult as it may initially appear. With stock quotes, you just have a number of the amount a share of stock is worth. With Forex quotes, you don’t have a number as much as you have a ratio.
If you remember back to basic mathematics, a ratio is just comparing two numbers by division. For example, if you are using a standard sized computer monitor, then you might have 4 units in width of the screen to 3 units in height, or a 4:3 ratio. If you divide that ratio, you get 1.3333. So basically the width is 1.3333 times the size of the height.
Now we look at some currencies:
USD/CHF 1.0928
USD/JPY 109.87
USD/EUR 0.6775
USD/GBP 0.5363
USD/CAD 1.061
USD/NOK 5.386
Here we have a number of currency ratios (also called currency pairs). On the left we see "USD". The three letters are an abbreviation for "United States Dollar". As you can see, almost all of the currencies are quoted in dollars. This is for historical reasons as the USD was used as the default currency after World War II. On the right we have a number of other currencies: CHF = Swiss Franc, JPY = Japanese Yen, EUR = European Euro, GBP = Great British Pound, CAD = Canadian Dollar, and NOK = Norwegian Kroner. It’s not listed here but AUD, or Australian Dollar is also commonly used. Almost always you will see the currency pair contain the USD or US Dollar as the currency on the left, which is referred to as the "base currency". Sometimes there are exceptions to this rule, with the GBP, EUR and AUS quoted first. That’s usually because those currencies may be worth more than the dollar and it is easier to read.
So what do the numbers mean then? Well, if you go back to the division example given above, let’s apply it to the currency pair. Look at the USD/JPY. If you take the value of the US Dollar and divide it by the worth of the Japanese Yen, you get 109.87. That basically means that the value of the US Dollar is about 110 times that of the Japanese Yen. If you go to Japan and exchange money you will get close to 110 Yen for every dollar that you sell.
Yes, reading currency pairs is that easy. It’s just a ratio that compares the values of two currencies. The higher the number is, the more the base currency is worth. The lower it is, the lower the base currency is worth. Just like the basic division and ratios you learned in school.
© GetForexHelp.com