Trading Forex 101 - storage.googleapis.com · You will need to do the opposite of what most (losing...
Transcript of Trading Forex 101 - storage.googleapis.com · You will need to do the opposite of what most (losing...
Trading Forex 101
An introductory course focussing on the foundations and macrofundamentalcomponents of Forex Markets.
The least you need to know to succeed
In this introductory course, we will provide you with the basics to get
started. There is a lot of free and valuable information freely
available on the net. Our goal is to introduce you to these sources
and show you what you need to know to become consistently
profitable. Successful students do this before committing capital in
an account.
Much of what we show you may surprise you.
To get in touch with our trading community, contact us
Warnings!
Virtually all forex trading firms regard new clients as ‘punters’ who will
eventually lose all, or most of their money. They will tempt you by
offering incredibly high leverage, cash back for opening an account,
and trading alerts for short term trades.
None of these offers are for your benefit (which should be obvious)
You will need to ask yourself what makes you different from the
typical forex trader. Seriously…
You will need to do the opposite of what most (losing) traders are
doing. We will help you with that.
Why take a forex course?
Most people do it for 1 of 2 reasons...
1) They don’t have time to learn on their own so they hope someone will teach
them all they have to know, ideally, quickly. This is not a good reason.
2) They need the perspective of an experienced pro, a mentor, a community to
learn from, unique knowledge not available online or anywhere else.
If you are in this 2nd group, you have the right mind frame to succeed.
We will be able to help you in our advanced course which follows this introduction.
Golden Rules…
These are the key criteria that hedge funds and professional trading firms pay much
attention to…and which FX trading firms never talk about
The Spread and news event volatility:(what amounts to ‘commission’ for buying or selling.)
Not all firms charge the same and most new traders get rude surprises in volatile markets.
Optimal Leverage: (the amount of risk capital you should bet considering your account
size, market conditions, risk tolerance, and the specific FX pair.
Interest rate on debit balances: (you get charged for debit balances in the currency you are short, as well as for leverage.) This can add up.
Most people may consider this ‘boring’. They don’t really care what the professionals are doing. But you need to remember, this business functions like a casino. You need to be
smart and think about probabilities if you hope to be successful in the long run.
What you need to learn
The Macro-fundamentals: the health of the economy is what determines the value of any
currency. You absolutely need to understand this. We will show you how currencies are
correlated, when these correlations break down, how to understand Central Bank policy,
how to trade news events and profit from macro trends.
Technical Trade set-ups: You need to get good pricing in your trades as this improves your risk management - which also helps with the psychological side of trading. We will show you
what indicators work and which ones are complete garbage (this may surprise you.) You will
also learn some proprietary indicators which work really well.
Risk Management and Psychology: This is a bit of a science, but we have made it easy to
understand. Once you learn the mathematics of success, you will look at trading in a whole
new way. To get an idea of the approach we take, follow this link: https://www.penguinrandomhouse.com/books/178551/a-man-for-all-markets-by-edward-o-thorp/9781400067961/
Why do you want to trade?
Ultimately, it’s about the money.
Money buys freedom, personal liberty, the ability to do what one wants in life. The vast majority of human beings aspire to having security and excess capital so they may achieve personal fulfillment. It’s only natural.
However, this goal to have security or expensive toys (sports cars, yachts etc.) may actually be working against you!
Those who are motivated by greed or fear of loss, usually lose. We need to look at trading as a business of managing probabilities where our knowledge of the markets gives us a statistical advantage over others.
Thinking too much about the money may reduce your
chance of success.
The Psychological element is everything; people often act irrationally when real
money is at stake, and even more irrationally when they are losing. You should
not talk about the money you made on the demo, not to yourself, not to anyone. This is counter-productive and only feeds your ego junk food.
Detachment: To succeed in trading, you need to be a bit detached from the
money. Losing traders typically have too tight a stop-loss, or they marry a position and add to losers out of over-confidence (pride).
Managing probabilities: We have developed models of trading that have been profitable over the long term which rely exclusively on effective money
management, such as: 1) scaling in and out of positions, 2) following a trend,
and 3) using optimal amounts of leverage and capital.
How do you achieve your goals?
Motivation
to succeed in this competitive marketplace, you need lots of it; enough to
stick with it when things don’t go according to plan
Knowledge
The markets are always changing, market relationships are never black and
white; You need to study the markets almost everyday.
Independence
Many people attracted to money tend to follow market ‘gurus’; they usually
get burned. Don’t be attracted by hot tips and such nonsense. If you are
attracted to gurus or need to constantly seek someone’s advice, go see a
psychiatrist. They will prove to be far cheaper and you will learn more.
Warning about the “Forex Dream Job”
The marketplace is full of scams that make trading look easy.
It is easy to fake results or select only winning trades to show potential clients.
Some FX platforms, and especially Binary option platforms, are engineered like
slot machines. You have little or no chance over the long run. Most blindly trade with no true knowledge of the markets and simply take uncalculated
bets.
Most importantly: Day traders are at a disadvantage.
Day trading forex is a not a smart idea due to the spreads. You will have a
greater chance if you swing trade and incorporate macro-fundamental ideas.
We teach this swing trading technique
Forex Basics and
Currency Pairs
What is the
Forex market?
FX, is a global decentralized and
deregulated market for currency exchange
Most liquid market: Approximately $2-4
trillion flows through the market each day.
A system of banks, brokerage firms, and dealers which brings
buyers and sellers together (Intra bank)
Modern technology has made the retail forex market much more
accessible to everyone in the world
Comparing Spot Forex and Currency Futures
Forex Futures – A contract that is traded through a regulated exchange
(ex: CME) The futures currency price will vary from the spot fx price due to
the expiry date of the futures contract. This difference (also known as the
cost of carry) is created by the value of the interest that will accrue
between now and expiration of the contract. Similarly, the charges for
being on the non-interest paying side of a transaction is less in the futures
market than with a spot forex dealer.
Spot Forex – An immediate transaction between you and your broker at
the currency spot price plus the spread. This market is also referred to as
the cash market or the spot market.
For further details…
Spot vs. FuturesCash Forex Future Forex
When 24/h 23/h
How Traded through a forex broker Exchanged traded
Costs Spreads Commission
Overnight Swap fees Roll over (expiration date)
Size Micro lots, Mini lots, full lots Mini lots, Full lots
Activity Unable to see true intraday
activity (currently trying)
Bid/Ask, order flow, volume,
open interest, outstanding
orders, etc
Regulation Loosely regulated Regulated by CFTC
Asset Replicates the price trading
now
Speculates the price of an
asset at the future date
* Cash forex occurs at the present and does not expire, whereas future forex contracts are
obligatory agreements to take hold of an asset when it expires.
Euro Futures (Dec. 2017) vs. EURUSD spot The futures price will be higher than the spot price, reflecting the cost
of carry.
Forex History : Gold Standard
In the past, trade was difficult amongst countries because there was
no standard value for money. The creation of a gold standard gave
the markets trust and confidence in the value of the exchange rates.
In 1944 at Bretton Woods, New Hampshire, a system of monetary order
was installed to govern monetary relations among independent
states. Each country had an obligation to adopt a monetary policy
that maintained the exchange rate at (± 1 %) by tying its currency to
gold. Also, there was a need to address the lack of cooperation
among other countries and to prevent competitive devaluation of
currencies.
The United States, which controlled two thirds of the world's gold,
insisted that the Bretton Woods system rest on both gold and the US
dollar. Countries would peg their exchange rate to USD (and the USD
would be pegged to gold)
Bretton Woods unravels In the 1960s, the US was losing global economic dominance. The EEC and Japan
had become international powers with higher levels of growth and trade, and per capita income approaching that of the U.S.,
The gold standard was no longer serving its original purpose as countries were
becoming more interdependent, doing more trade with each other rather than the
U.S. and . global monetary management was breaking down. Countries were
becoming more interdependent.
In 1971, the USA removed the gold peg which brought the gold standard system to
an end. This action created a situation in which the US dollar became, by default,
the global reserve currency used by many states. Without a gold standard, the US dollar, like many other currencies, became free floating fiat currencies.
For more about why Bretton Woods broke down, go here…
https://www.globalpolicy.org/component/content/article/209/42675.html.
Fixed and Floating Exchange Rates
Free Floating currency – A type of currency that has its value determined by the free market. (Virtually all major currencies are floating).
Fixed or ‘pegged’ Currency – A type of currency that has its value pegged to another currency or asset. An example of this would be the Hong Kong Dollar. These are not currencies we would want to trade
Some currencies are less ‘free floating’ than others. A country may at times speak in the press about how they will intervene if their currency appreciates too much and have a figurative ‘peg’. Traders will look at this peg as a definite support level and place a large position confident it will hold. The problem is when a Central Bank suddenly changes its mind. A classic case of this is Switzerland in January 2015. https://www.forbes.com/sites/steveschaefer/2015/01/16/swiss-bank-stunner-claims-victims-currency-broker-fxcm-bludgeoned/#6fee65c06de0
Gold’s influence on FX Markets Gold – is globally recognized as a store of value. It cannot be created out of ‘thin
air’, and thus is the antithesis of a ‘fiat’ currency. When benchmark currencies, such as the USD are weak, or offer no interest, gold will appreciate in the market. (*much more about this in our full Forex course). https://www.onlinefinanceacademy.com/classroom/trading-foreign-exchange/
Investors are attracted to Gold in a ‘risk-off’ environment. For example, in times of geopolitical crisis or economic crisis people like to buy gold because there is a perception that it will maintain its value when countries attempt to devalue their currency by raising debt and printing more money.
Gold has traditionally been an inflation hedge but with global stagnation, gold has become more sensitive to interest rate changes. Because it doesn’t collect interest, investors will exchange their gold for fixed income investments when rates increase. Gold is highly negatively correlated with the USD(about -.90). Therefore, one should pay attention to the value of gold when trading currencies against the USD.
Fiat Currency Fiat Currency – All sovereign currencies today are fiat. This simply means it is
intrinsically worthless and that its value is derived by the goodwill and faith of acountry. All political states have incentive to maintain a fiat currency systembecause it allows them to issue debt. A country that maintains a standard, such asgold, would theoretically see the value of its currency increase, which in turn willraise the cost of exports from that country and have an immediate adverse effecton employment (though it will increase investment over the long run.)
Since the primary objectives of Central Banks are to: 1) to facilitate employmentgrowth / stability, and 2) preventing inflation, we have a situation where virtuallyevery nation is incentivized to maintain a devalued currency, but at the same timekeeping inflation in check to secure confidence in the economy and foreigninvestment. Most countries look at 2% inflation as their inflation objective.
For more about fiat currencies, go to…
Currency Market Participants It should be noted that the forex market is so big that no single participant can
really affect the value of a currency. Historically, even when nations attempted
to stem rapidly declining currency values by buying their currency in the open
market, they have failed. This dynamic means that forex markets can’t be
traded the same way one might trade stocks or futures intraday. For example:The advantages of understanding how to use the DOM are absent when trading
forex.
Retail traders should understand that their trading platform does not reflect thefull forex market, only a miniscule fraction of it. Most trading is transacted by large
financial institutions and governments over the counter (meaning these
transactions do not take place on an exchange, but generally over the phone
between dealers and clients.)
Market liquidity in times of crisis
As big and liquid as the forex market is, its price can experience great
volatility in times of crisis or during economic news events.
It is normal during an important economic event for spreads on a forex
platform to widen substantially. Many new retail traders are unaware of
this and often complain about bad fills when they hit market to get out of
a trade, or when their stop gets hit. It is best for new traders to stay out of
the forex market during such events. Scalping the market by hitting the
market price is generally a loser’s game.
During major news or geopolitical events - the Brexit vote for example –
even financial institutions may have difficulty exchanging large sums of
currency in the interbank forex market. When such events hit, dealers may
be reluctant to trade. The result is that traders may resort to futures
markets if they need to hedge.
Market Participants
UBS CITIBANK
HSBC BARCLAYS
Intra Bank
Corporations Institutional Hedge Funds
Central Banks FX Market Makers
Retail Brokers Individuals
Small/Mid Size Banks Airport Kiosk
Except weekends
Forex market closes
at 5pm on Friday
and reopens at
5pm on Sunday.
Futures market
closes 1h per day at
5pm and reopens at
6pm
Forex enables anyone to trade when it is
convenient for them.
Focussing on a few pairs. Successful forex traders typically focus on a few favourite pairs. They learn the
macro-fundamentals that affect that market and only trade things they know.
For example, the Aussie dollar has a unique relationship with the yen; theireconomies are quite divergent and yet do a lot of trade with each other. The Yen,
has in recent history, had zero interest rates, while the Aussie dollar has had thehighest rates among the major currency pairs. Australia is also a major commodities
exporter while Japan is a finished goods exporter.
For example, in the so-called ‘carry trade’, Japanese investors will buy the Aussie
dollar in order to collect the relatively higher interest. Of course, nothing is this easy.
This pair can exhibit some rapid price moves when a macro event influences the
pair, leading to Japanese investors bailing out of Aussie en masse.
Notice the following chart the extreme daily range that can occur in this pair.
11/19/2017Sample Footer Text 26
How to quote currencies?
PIP = Percentage in Points
Represents the 4th digit after the decimal (5th in the cash market)
The base pair is always the one that is quote
Futures market: 1 lot = $10/pips
Cash market: .01 micro = $0.01/pips
EUR/USD 1.1245
Base Pair Counter Pair Pip
5
Spreads
EUR/USD = 1.124
Spreads 1.125
Spreads 1.123
5
5
5
• Spreads are the rate at which a broker will charge you to take the trade • Example = fixed 10 point spread with bid price and ask price
• The farther out you go from the intermarket, the higher the spreads will be.
• Spreads will change during times of volatility
• (High volatility = higher spreads
Margin
The initial amount required to open a position.
Sufficient balance in relation to the size of your position is needed to take a trade.
Margin Call - If you have an open position and fall below margin requirements.
Margin varies depending on your broker.
Leverage
• Borrowed money that allows you to trade bigger size.
• Can drastically increase gains or losses
• 1 lot represents a control of a position worth $100,000.
• Leverage varies depending on your broker.
• Example of cash market leverage on forex pairings (50:1, 500:1 or 2000:1)
Major Pairings
Major forex pairings are paired against the US dollar
As it’s the global reserve currency and central banks hold a
portion of their reserves in USD. Also, major transactions are done
in USD (oil and gold are priced in USD)
These pairings offer the most volume and liquidity and can be
traded 24 hours per day with exception of the weekend.
Due to large volume and liquidity, they have better spreads, are
more predictable to trade, and have less chance of erratic price
action.
Major Pairings (futures contracts)
Currency Symbol Nickname Significances Average daily
volume
European Dollar EUR Fiber Most liquid
currency
216K
Japanese Yen JPY Yen Safe Haven
currency
192K
Great Britain
Pound
GBP Cable First Central Bank 78K
Australian Dollar AUD Aussie Commodity
currency / metals
75K
Canadian Dollar CAD Loonie Commodity
currency / crude
oil
50K
Swiss Franc CHF Swissy Safe Haven
currency
17K
New Zealand
Dollar
NZD Kiwi Commodity
currency / dairy
17K
Cross Pairings
Any pairing that does not involve the USD is considered a cross pair.
Can be used as an indicator to trading the major pairings.
Can be traded on the cash market and with some futures broker.
The spread on these parings are higher than commonly traded pairs.
Good volume and liquidity in some pairings makes them less difficult to trade.
EURO CROSSES POUND CROSSES YEN CROSSES
EUR/JPY GBP/AUD AUD/JPY
EUR/GBP GBP/CAD CAD/JPY
EUR/CHF GBP/NZD NZD/JPY
Cross pairings offer opportunities that are not associated with USD
data.
Try pairing one major economy (not US) versus another major
economy i.e. GBP/AUD
Look at how one economy is performing versus a broad range of
major economies i.e. EUR vs GBP, CHF, JPY, etc.
Some popular cross pairings are: EUR/GBP, EUR/CHF, AUD/JPY,
AUD/NZD
Cross Pairing Tips
Minor Pairings
Minor pairings typically involve one major economy and one
emerging market economy.
They are more volatile, less liquid, less volume, have choppy trading
ranges, whipsaws, slippage.
The spreads on minor pairings tend to be higher.
Riskier and more difficult to trade (little information on macro data
and central banks).
Primarily traded on the spot market. (No corresponding futures
contracts on the CME - the main currency futures exchange).
Minor Pairing Tips
Emerging markets currencies tend to have
higher interest rates. So if you are short the
minor currency, you will pay carrying costs
- margin may become a factor.
Understand the macro picture: major trading partners, commodities, and geo
politics that affect these economies.
Do not try to trade these in the shorter time
frame as the spreads may make it impractical.
SYMBOL NAME
USD/TRY Turkish Lira
EUR/RUB Russian Ruble
GBP/ZAR South African Rand
USD/MEX Mexican Peso
USD/BRL Brazilian Real
USD/SGD Singapore Dollar
What’s Next?
Many trading students become overwhelmed by all there is to learn. And we have just touched the surface here. Ultimately, your success will come down to following some basic risk management rules and not trading too much.
In our complete course, which includes several hours of training in a semi-private online classroom, and admittance to our exclusive trader chat room, you will learn a method that works for you.
Your goal as a new trader should be to follow your trading plan (which we will help develop with you) and focus on markets that suit you (we will assist you here as well.)
Additionally, you will be taught by the very best in the business, traders who have been successfully trading and analyzing the markets for over a quarter century. To register for the full course, follow us here….
Free Resources: Brokers
There are many forex brokers, many of whom advertise aggressively to win your
business. We suggest you avoid those who make special offers and advertise
relentlessly. That advertising cost needs to be borne by the client in the end. A
broker needs to be : Reliable, Reputable, Regulated and Experienced
Recommended Forex Brokers :
Oanda
FxPro
Interactive Brokers
Recommended Futures Brokers :
Wedbush
Interactive Brokers
Free Resources
Website:
ForexLive.com
Used for opinions on the market
TradingView
Web based Charting software
Investing.com
Used for Economic Calendar
Bloomberg.com
Very reliable, not timely
Forex Peace Army
Consumer reports on brokers
Mobile Apps
• MetaTrader 4
• Trading, charting, demo accounts
• NewsImpact
• Realtime economic data
• Investing.com
• Economic data
• Bloomberg-Business
• News
Lots more to learn… We expect this short course will give you a solid base to begin
your forex trading education
To access the syllabus for our complete forex trading course, to find out about other courses, or to be put on our mail list to receive other learning materials, reach us at the link below. Be sure to register with us in order to receive future research reports and promotional items: