FX 101Marshall Chang

What is Forex?

The foreign exchange market (forex, FX, or currency market)

Assists international trade and investments

History: 1970s Bretton Woods system => floating exchange rates

Characteristics

huge trading volume world leading high liquidity

no physical location (OTC)

continuous operation 24 hours a day except weekends

low margins of relative profit

leverage

Variety of factors perfect competition?

Financial Instruments (game rules)

Spot traded immediately using the current market price

Forward contract on an exchange rate for any date in the future

Swap an agreement between two parties to exchange sequences of cash flows for a

set period of time

Futures contract specifying a standard volume of a particular currency to be

exchanged on a specific settlement date

Options the right but not the obligation to exchange

Who are the players?

Banks, commercial companies, central banks, investment management firms,

hedge funds, and retail forex brokers and investors

The largest financial market in the world

The Super Banks Large

Commercial

Companies

Governm

ents and

Central

Bank

The Speculators

Just how big the market is

Averaged $5.3 trillion per day

(NYSE is about $22.4 billion per day)

200 times BIGGER!

Retail traders (that’s us)

trade the spot market and

that’s about $1.49 trillion

Market Stucture

• stock market

tends to be very

monopolistic

• “Specialist”

• no single price

• quotes from

dealers vary

• competition

• efficiency

What is traded in FX market?

Money

“buying a share in a particular country”

CHF

(Confoederatio Helvetica franc)

Symbol Country Currency Nickname

USDUnited St

atesDollar Buck

EUREuro zone

membersEuro Fiber

JPY Japan Yen Yen

GBPGreat

BritainPound Cable

CHFSwitzerla

ndFranc Swissy

CAD Canada Dollar Loonie

AUD Australia Dollar Aussie

NZDNew

ZealandDollar Kiwi

The Dollar is King in the Forex Market

How does it work?

Buying and Selling (Long and Short)

E.g Buy EUR/USD equals Sell USD/EUR

EUR/USD “euro dollar”

USD/JPY “dollar yen”

GBP/USD “pound dollar”

USD/CHF “dollar swissy”

USD/CAD “dollar loonie”

AUD/USD “aussie dollar”

NZD/USD “kiwi dollar”

Major Currency Pairs

FX vs. Stocks

Advantages Forex Stocks

24-Hour Trading YES No

Minimal or no Commission YES No

Instant Execution of

Market OrdersYES No

Short-selling without an

UptickYES No

No Middlemen YES No

No Market Manipulation YES No

Forex cs. Futures

Advantages Forex Futures

24-Hour Trading YES No

Minimal or no Commission YES No

Up to 500:1 Leverage YES No

Price Certainty YES No

Guaranteed Limited Risk YES No

Mr. Forex looks UNBEATABLE!

The truth is…

About 95% of traders join FX market today will leave FX market in a year..

Only 5% of traders make money

Next Lesson!

How to trade

Golden rules (if you want to survive)

Open an account

Next Step: Trade FX!

What do you need first?

A Broker to open an account!

Advance of internet in the 90s

The big brother: Commodities Futures Trade Commission (CFTC)

protect market users and the public from fraud

Brokers

Dealing Desk=> Market Makers

No Dealing Desk=> ECN + STP

(Electronic Communication Network +

Straight Through Processing)

Dealing desk/Market Makers: Make money from spread

Also are liquidity provider to you

They are on the other side of your trade, fraud? Conflict of interest?

Not really, they execute large amount of buy and sell orders

What they do: Match your order to other clients/Provide liquidity to you

directly

They spread that you hate is their bread and butter

No dealing desk(NDD): ECN+STP or ECN

A structure to connect you and others

The NDD STP system: Dealer routes clients order directly to liquidity provider

Variable Spread, Interbank Market

The NDD ECN system: Participants trade with each other, ideal

“Depth of market”

Commision

Who to chose?

Dealer desk or NDD?

Tighter spread but commission => Day traders

Wider spread but no commission => Longterm traders

Dealing Desk (Market

Maker)No Dealing Desk (STP) No Dealing Desk (STP+ECN)

Fixed Spreads Most have variable spreads Variable spreads or

commission fees

Take the opposite side of

your trade

Simply a bridge between

client and liquidity

provider

A bridge between client

and liquidity provider and

other participants

Artificial quotes Prices come from liquidity

providers

Prices come from liquidity

providers and other ECN

particpants

Orders are filled by broker

on a discretionary basis

Automatic execution, no

re-quotes

Automatic, no re-quotes

Displays the Depth of

Market (DOM) or liquidity

information

Bucket Shop

Worst thing for you

Jesse Lauriston Livermore, Great Bear of Wall Street

Open an Account

Account type

Registration

Activation

http://www.fastbrokers.com/

DEMO!!!

“Trading live is a different beast altogether. It’s like the difference between sparring against your kid brother (or sister) and fighting Manny Pacquiao.”

FX Market Analysis

Green Pill or Red Pill?

Technical

Fundamental

Sentimental

three-legged stool

Technical Analysis

Def: framework in which forex traders study price movement.

Theory: look at historical price movements and determine the current trading

conditions and potential price movement.

Evidence: 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 tends to repeat itself“?

Show me the Chart!

with all the traders who rely on technical analysis out there, these price

patterns and indicator signals tend to become self-fulfilling.

Don’t Panic!

Fundamental Analysis

analyzing economic, social, and political forces that may affect the supply

and demand of an asset

all of the factors that affect supply and demand

Economy goodStrengthen

High Interst rateStrengthen

In a nutshell…

potential moves of a currency through the strength or weakness of that

country’s economic outlook

Sentiment Analysis

“The market is just like Facebook – it’s a complex network made up of

individuals who want to spam our news feeds.”

The market represents the opinion of all participants

You as retail trader, can’t move the market your way, unless you are George

Soros or Goldman Sachs.

SentimentWhether market is bullish or bearish based on your analysis

Recap

TechnicalStudy of currency price movement on charts

Fundamental Study of how the economy is doing

Sentimental Determine whether bull or bear

Fundamental factors shape sentiment

Technical analysis visualize that sentiment and apply a framework to create

our trade plans.

Technical: Read Chart

Trend

Fibonacci

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