Forex stands for the Foreign Exchange market, also abbreviated by "FX", and it is one of the most exciting, fast-paced markets around the world. It was established in 1971 when fixed currency exchange was introduced. Forex is when one currency is traded by another. The Forex market is the largest financial market in the world, with a daily turnover of $3.20 trillion. The major traders in this market are large banks, central banks, multinational corporations, governments and currency speculators. It is a true 24-hour market, operating from Sunday 5:00 PM ET to Friday 5:00PM ET.
Unlike other financial markets, investors can respond to currency fluctuations caused by economic, political events and psychological effects at the time they occur - day and night. Currencies are traded in pairs, usually against the US Dollar, such as Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).
The extreme liquidity and the availability of high leverage and margin trading have helped to spur the market's rapid growth and made it the ideal place for many traders. Any position can be opened and closed within minutes, or can be held for months and years. The price fluctuations of the currencies are based on objective considerations of supply and demand and cannot be manipulated easily because the size of the market does not allow even the largest players, such as central banks or governments, to move prices at will.
Until recently, trading in the Forex market had been the domain of governments, large financial institutions and corporations, central banks, hedge funds and extremely wealthy individuals. The emergence of new technologies such as the internet has changed all of this, and now it is possible for small time and home investors to buy and sell currencies easily with the click of a mouse through their home computer.
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2) What is Forex?
The foreign exchange market is the "place" where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want to buy cheese from France, either you or the company that you buy the cheese from has to pay the French for the cheese in Euros (EUR). This means that the U.S. importer would have to exchange the equivalent value of U.S. Dollars (USD) into Euros. The same goes for traveling. An English tourist in Paris can't pay in Sterling to see the Louvre because it's not the locally accepted currency. As such, the tourist has to exchange the Sterling for the local currency, in this case the Euros, at the current exchange rate.
The need to exchange currencies is the primary reason why the Forex market is the largest, most liquid financial market in the world. It dwarfs other markets in size, even the stock market, with an average traded value of around U.S. $3.2 billion per day.
One unique aspect of this international market is that there is no central marketplace for currency exchange. Rather, trade is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - across almost every time zone. This means that when the trading day in the U.S. ends, the Forex market begins anew in Tokyo and Hong Kong. As such, the Forex market can be extremely active any time of the day, with price quotes changing constantly.
Spot Market and the Forwards and Futures Markets
There are actually three ways that institutions, corporations and individuals trade Forex: the spot market, the forwards market and the futures market. The spot market always has been the largest market because it is the "underlying" real asset that the forwards and futures markets are based on. In the past, the futures market was the most popular venue for traders because it was available to individual investors for a longer period of time. However, with the advent of electronic trading, the spot market has witnessed a huge surge in activity and now surpasses the futures market as the preferred trading market for individual investors and speculators. When people refer to the Forex market, they usually are referring to the spot market. The forwards and futures markets tend to be more popular with companies that need to hedge their foreign exchange risks out to a specific date in the future.
Spot Market
More specifically, the spot market is where currencies are bought and sold according to the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, sentiment towards ongoing political situations (both locally and internationally), as well as the perception of the future performance of one currency against another. When a deal is finalized, this is known as a "spot deal". It is a bilateral transaction by which one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. Although the spot market is commonly known as one that deals with transactions in the present (rather than the future), these trades actually take two days for settlement.
Forwards and Futures Markets
Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead they deal in contracts that represent claims to a certain currency type, a specific price per unit and a future date for settlement.
In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves.
In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange. In the U.S., the National Futures Association regulates the futures market. Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterpart to the trader, providing clearance and settlement.
Both types of contracts are binding and are typically settled for cash for the exchange in question upon expiry, although contracts can also be bought and sold before they expire. The forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets in order to hedge against future exchange rate fluctuations, but speculators take part in these markets as well.
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3) Reading Quotes
One of the biggest sources of confusion for those new to the currency market is the standard for quoting currencies. In this section, we'll go over currency quotations and how they work in currency pair trades.
When a currency is quoted, it is done in relation to another currency, so that the value of one is reflected through the value of another. Therefore, if you are trying to determine the exchange rate between the U.S. dollar (USD) and the Japanese yen (JPY), the quote would look like this:
USD/JPY = 105.25
This is referred to as a currency pair. The currency to the left of the slash is the base currency, while the currency on the right is called the quote or counter currency. The base currency (in this case, the U.S. dollar) is always equal to one unit (in this case, 1 USD), and the quoted currency (in this case, the Japanese yen) is what that one base unit is equivalent to in the other currency. The quote means that US$1 = 105.25 Japanese yen. In other words, US$1 can buy 105.25 Japanese yen.
Direct Quote vs. Indirect Quote
There are two ways to quote a currency pair, either directly or indirectly. A direct quote is simply a currency pair in which the domestic currency is the base currency; while an indirect quote, is a currency pair where the domestic currency is the quoted currency. So if you were looking at the Canadian dollar as the domestic currency and U.S. dollar as the foreign currency, a direct quote would be CAD/USD, while an indirect quote would be USD/CAD. The direct quote varies the foreign currency, and the quoted, or domestic currency, remains fixed at one unit. In the indirect quote, on the other hand, the domestic currency is variable and the foreign currency is fixed at one unit.
For example, if Canada is the domestic currency, a direct quote would be 0.85 CAD/USD, which means with C$1, you can purchase US$0.85. The indirect quote for this would be the inverse (1/0.85), which is 1.18 USD/CAD and means that USD$1 will purchase C$1.18.
In the Forex spot market, most currencies are traded against the U.S. dollar, and the U.S. dollar is frequently the base currency in the currency pair. In these cases, it is called a direct quote. This would apply to the above USD/JPY currency pair, which indicates that US$1 is equal to 119.50 Japanese yen.
However, not all currencies have the U.S. dollar as the base. The Queen's currencies - those currencies that historically have had a tie with Britain, such as the British pound, Australian Dollar and New Zealand dollar - are all quoted as the base currency against the U.S. dollar. The Euro, which is relatively new, is quoted the same way as well. In these cases, the U.S. dollar is the counter currency, and the exchange rate is referred to as an indirect quote. This is why the EUR/USD quote is given as 1.55, for example, because it means that one euro is the equivalent of 1.55 U.S. dollars.
Most currency exchange rates are quoted out to four digits after the decimal place, with the exception of the Japanese yen (JPY), which is quoted out to two decimal places.
Cross Currency
When a currency quote is given without the U.S. dollar as one of its components, this is called a cross currency. The most common cross currency pairs are the EUR/GBP, EUR/CHF and EUR/JPY. These currency pairs expand the trading possibilities in the Forex market, but it is important to note that they do not have as much of a following (for example, not as actively traded) as pairs that include the U.S. dollar, which also are called the majors.
Bid and Ask
As with most trading in the financial markets, when you are trading a currency pair there is a bid price (buy) and an ask price (sell). Again, these are in relation to the base currency. When buying a currency pair (going long), the ask price refers to the amount of quoted currency that has to be paid in order to buy one unit of the base currency, or how much the market will sell one unit of the base currency for in relation to the quoted currency.
The bid price is used when selling a currency pair (going short) and reflects how much of the quoted currency will be obtained when selling one unit of the base currency, or how much the market will pay for the quoted currency in relation to the base currency.
The quote before the slash is the bid price, and the two digits after the slash represent the ask price (only the last two digits of the full price are typically quoted). Note that the bid price is always smaller than the ask price. Let's look at an example:
USD/JPY = 1.1915/1.1920
BID = 1.1915
ASK = 1.1920
If you want to buy this currency pair, this means that you intend to buy the base currency and are therefore looking at the ask price to see how much (in Canadian dollars) the market will charge for U.S. dollars. According to the ask price, you can buy one U.S. dollar with 1.1920 Canadian dollars.
However, in order to sell this currency pair, or sell the base currency in exchange for the quoted currency, you would look at the bid price. It tells you that the market will buy US$1 base currency (you will be selling the market the base currency) for a price equivalent to 1.1915 Canadian dollars, which is the quoted currency.
Whichever currency is quoted first (the base currency) is always the one in which the transaction is being conducted. You either buy or sell the base currency. Depending on what currency you want to use to buy or sell the base with, you refer to the corresponding currency pair spot exchange rate to determine the price.
Spreads and Pips
The difference between the bid price and the ask price is called a spread. If we were to look at the following quote: EUR/USD = 1.5500/04, the spread would be 0.0004 or 4 pips, also known as points. Although these movements may seem insignificant, even the smallest point change can result in thousands of dollars being made or lost due to leverage. Again, this is one of the reasons that speculators are so attracted to the Forex market; even the tiniest price movement can result in huge profit.
The pip is the smallest amount a price can move in any currency quote. In the case of the U.S. dollar, euro, British pound or Swiss franc, one pip would be 0.0001. With the Japanese yen, one pip would be 0.01, because this currency is quoted to two decimal places. So, in a Forex quote of USD/CHF, the pip would be 0.0001 Swiss francs. Most currencies trade within a range of 100 to 150 pips a day.
Currency Pairs in the Forwards and Futures Markets
One of the key technical differences between the Forex markets is the way currencies are quoted. In the forwards or futures markets, foreign exchange always is quoted against the U.S. dollar. This means that pricing is done in terms of how many U.S. dollars are needed to buy one unit of the other currency. Remember that in the spot market some currencies are quoted against the U.S. dollar, while for others, the U.S. dollar is being quoted against them. As such, the forwards/futures market and the spot market quotes will not always be parallel one another.
For example, in the spot market, the British pound is quoted against the U.S. dollar as GBP/USD. This is the same way it would be quoted in the forwards and futures markets. Thus, when the British pound strengthens against the U.S. dollar in the spot market, it will also rise in the forwards and futures markets.
On the other hand, when looking at the exchange rate for the U.S. dollar and the Japanese Yen, the former is quoted against the latter. In the spot market, the quote would be 115 for example, which means that one U.S. dollar would buy 115 Japanese Yen. In the futures market, it would be quoted as (1/115) or .0087, which means that 1 Japanese Yen would buy .0087 U.S. dollars. As such, a rise in the USD/JPY spot rate would equate to a decline in the JPY futures rate because the U.S. dollar would have strengthened against the Japanese yen and therefore one Japanese yen would buy less U.S. dollars.
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4) Benefits vs. Risks
In this section, we'll take a look at some of the benefits and risks associated with the Forex market. We'll also discuss how it differs from the equity market in order to get a greater understanding of how the Forex market works.
The Good and the Bad
We already have mentioned that factors such as the size, volatility and global structure of the Forex market have all contributed to its rapid success. Given the highly liquid nature of this market, investors are able to place extremely large trades without affecting any given exchange rate. These large positions are made available to traders because of the low margin requirements used by the majority of the industry's brokers. For example, it is possible for an investor to control a position of US$100,000 by putting down as little as US$1,000 up front and borrowing the remainder from his or her broker. This amount of leverage acts as a double-edged sword because investors can realize large gains when rates make a small favorable change, but they also run the risk of a massive loss when the rates move against them. Despite the risks, the amount of leverage available in the Forex market is what makes it attractive for many speculators.
The currency market is also the only market that is truly open 24 hours a day with decent liquidity throughout the day. For traders who may have a day job or just a busy schedule, it is an optimal market to trade in. The major trading hubs are spread throughout many different time zones, eliminating the need to wait for an opening or closing bell. As the U.S. trading closes, other markets in the East are opening, making it possible to trade at any time during the day.
While the Forex market may offer more excitement to the investor, the risks are also higher in comparison to trading equities. The ultra-high leverage of the Forex market means that huge gains can quickly turn to damaging losses and can wipe out the majority of your account in a matter of minutes. This is important for all new traders to understand, because in the Forex market - due to the large amount of money involved and the number of players - traders will react quickly to information released into the market, leading to sharp moves in the price of the currency pair.
Though currencies don't tend to move as sharply as equities on a percentage basis (where a company's stock can lose a large portion of its value in a matter of minutes after a bad announcement), it is the leverage in the spot market that creates the volatility. For example, if you are using 1:100 leverage on $1,000 invested, you control $100,000 in capital. If you put $100,000 into a currency and the currency's price moves 1% against you, the value of the capital will have decreased to $99,000 - a loss of $1,000, or all of your invested capital, representing a 100% loss. In the equities market, most traders do not use leverage, therefore a 1% loss in the stock's value on a $1,000 investment, would only mean a loss of $10. Therefore, it is important to take into account the risks involved in the Forex market before trading.
Differences between Forex and Equities
A major difference between the Forex and equities markets is the number of traded instruments: the Forex market has very few compared to the thousands found in the equities market. The majority of Forex traders focus their efforts on seven different currency pairs: the four majors, which include (EUR/USD, USD/JPY, GBP/USD, USD/CHF); and the three commodity pairs (USD/CAD, AUD/USD, NZD/USD). All other pairs are just different combinations of the same currencies, otherwise known as cross currencies. This makes currency trading easier to follow because rather than having to cherry-pick between 10,000 stocks to find the best value, all that FX traders need to do is “keep up” on the economic and political news of eight countries.
The equity markets often can hit a lull, resulting in shrinking volumes and activity. As a result, it may be hard to open and close positions when desired. Furthermore, in a declining market, it is only with extreme ingenuity that an equities investor can make a profit. It is difficult to short-sell in the U.S. equities market because of strict rules and regulations regarding the process. On the other hand, Forex offers the opportunity to profit in both rising and declining markets because with each trade, you are buying and selling simultaneously, and short-selling is, therefore, inherent in every transaction. In addition, since the Forex market is so liquid, traders are not required to wait for an uptick before they are allowed to enter into a short position - as they are in the equities market.
Due to the extreme liquidity of the Forex market, margins are low and leverage is high. It just is not possible to find such low margin rates in the equities markets; most margin traders in the equities markets need at least 50% of the value of the investment available as margin, whereas Forex traders need as little as 1%. Furthermore, commissions in the equities market are much higher than in the Forex market. Traditional brokers ask for commission fees on top of the spread, plus the fees that have to be paid to the exchange.
Wednesday, June 24, 2009
Forex Trading Education
Forex trading education helps you to get fundamental information about market peculiarities.
CURRENCY PAIR
Reading a foreign exchange quote may seem confusing at first. However, it's really quite simple if you remember two things when starting your Forex trading education:
1) The first currency listed is the base currency
2) The value of the base currency is always 1.
The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of 1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 120.01 means that one U.S. dollar is equal to 120.01 Japanese yen.
When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 123.01, the dollar is stronger because it will now buy more yen than before.
The 3 exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.4366, meaning that one British pound equals 1.4366 U.S. dollars.
In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.
Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.
When continuing your Forex trading education, you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).
PIP
Once you start your Forex trading education, you will learn to love this word because it is what you will be seeking for the rest of your Forex career. A pip is the smallest denominator of a particular currency pair, so for the above example, if the EUR/USD moves from 1.2150 to 1.2155 then it has moved up 5 pips.
LEVERAGE
Leverage is a simple concept of Forex trading education. If you have $10,000 to trade with, your Forex broker will let you borrow money from him so that you can trade in larger quantities. They will let you borrow as much as 400 times (400:1) what you put up in a trade. Most brokers allow between 50:1 and 100:1 margin. So, if you put up $1,000, and your broker allows 100:1 margin, then you'll be trading $100,000 worth of currency (instead of $1,000).
That's important, because every pip equals a certain dollar amount. When you trade $10,000, each pip movement equals $1. The chart below shows how it goes from there. If you trade 10,000 worth of currency, each movement would be equal to $1. So if you bought at 1.1445 and sold at 1.1545, you would make 100 x $1, or $100. If you trade $100,000, each pip movement would equal $10 and so on.
LONG AND SHORT
There are 2 different ways to trade on the Forex market and many beginners (or those who continue their Forex trading education) are surprised to learn that they can actually make as much money when currency price moves down as when it goes up. Let's start with the most logical movement, when the price moves up.
Most people are very familiar with the concept of buying something at a low price and selling it when the price increases. So the concept of buying the EUR/USD at 1.2150 and selling it at 1.2160 for a 10 pip gain should seem logical. This process is called going long.
You can also do this in reverse! If you know that the currency price is more likely to go down rather than up, you can go short. This is just the opposite of the above transaction, selling it first and buying it back later in the hope that the price will go down for you to make profit.
This may seem strange at first, but the concept remains the same either way. You always want to buy something at a low price, and sell it expensive. The consecution of actions doesn't matter. You must both buy and sell; as long as you sell at a higher price than you buy you make profit. Let us continue our Forex trading education.
SPREAD
The difference between stock markets and the Forex market brokers, is that in the Forex market, broker commissions are either very low or zero. So how do the ?? make money? They make it from the "spread" - difference between the actual price and the offered price through a broker.
On the right you can see a typical board of currency pairs and their spreads. This one is taken from our feed this morning, and you can see the difference between the Offer (the price you can place on a sell order) and the Bid (the price you can place on a buy order) is 3 pips (the spread).
What does this mean to you though? Well, let's look at the board. If you bought the EUR/USD at 1.2158 as it is offered under the Offer column, and immediately sold it again before the price moved, you would only get 1.2155 as is shown in the Bid column. So the net result is -3 pips, or a loss to you, and a profit to the broker. Remember to always take the spread into account when placing a trade, setting targets and stop losses.
BEARS AND THE BULLS
Once (you have) started your Forex trading education, you will constantly see the terms "Bears" and "Bulls" in Forex books and chat rooms. These are terms that describe the general mood of the market. A "bear" market, is when the general mood of the market is down, i.e. when there are more sellers than buyers in the marketplace. A "bull market" is the opposite, when there are more buyers than sellers and the general mood of the market is up. Forex is a place where bulls and bears struggle, and if you can identify who is gaining the upper hand, then you can identify the direction of the price. Easier said than done, of course. There are many more areas to cover, this should help those only starting Forex trading education.
CALCULATING PROFIT AND LOSS
Forex market, is an around-the-clock cash market where the currencies of nations are bought and sold. Forex trading is always done in currency pairs. For example, you buy Euros, paying with U.S. Dollars, or you sell Canadian Dollars for Japanese Yen. The value of your Forex investment increases or decreases because of changes in the currency exchange rate or Forex rate. These changes can occur at any time, and often result from economic and political events. Using a hypothetical Forex investment, this article shows you how to calculate profit and loss in Forex trading. Let's push your Forex trading education to a new level together.
To understand how the exchange rate can affect the value of your Forex investment, you need to learn how to read a Forex quote. Forex quotes are always expressed in pairs. In the following example, your pair of currencies is the U.S. Dollar (USD) and the Canadian Dollar (CAD). The Forex quote, USD/CAD = 170.50, means that one U.S. Dollar is equal to 170.50 Canadian Dollars. The currency to the left of the "/" (USD in this example) is referred to as base currency and its value is always 1. The currency to the right of the "/" (CAD in this example) is referred to as the counter currency. In this example, one USD can buy 170.50 CAD, because it is the stronger of the two currencies. The U.S. Dollar is regarded as the central currency of the Forex market, and it is always treated as the base currency in any Forex quote where it is one of the pairs.
CURRENCY PAIR
Reading a foreign exchange quote may seem confusing at first. However, it's really quite simple if you remember two things when starting your Forex trading education:
1) The first currency listed is the base currency
2) The value of the base currency is always 1.
The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of 1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 120.01 means that one U.S. dollar is equal to 120.01 Japanese yen.
When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 123.01, the dollar is stronger because it will now buy more yen than before.
The 3 exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.4366, meaning that one British pound equals 1.4366 U.S. dollars.
In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.
Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.
When continuing your Forex trading education, you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).
PIP
Once you start your Forex trading education, you will learn to love this word because it is what you will be seeking for the rest of your Forex career. A pip is the smallest denominator of a particular currency pair, so for the above example, if the EUR/USD moves from 1.2150 to 1.2155 then it has moved up 5 pips.
LEVERAGE
Leverage is a simple concept of Forex trading education. If you have $10,000 to trade with, your Forex broker will let you borrow money from him so that you can trade in larger quantities. They will let you borrow as much as 400 times (400:1) what you put up in a trade. Most brokers allow between 50:1 and 100:1 margin. So, if you put up $1,000, and your broker allows 100:1 margin, then you'll be trading $100,000 worth of currency (instead of $1,000).
That's important, because every pip equals a certain dollar amount. When you trade $10,000, each pip movement equals $1. The chart below shows how it goes from there. If you trade 10,000 worth of currency, each movement would be equal to $1. So if you bought at 1.1445 and sold at 1.1545, you would make 100 x $1, or $100. If you trade $100,000, each pip movement would equal $10 and so on.
LONG AND SHORT
There are 2 different ways to trade on the Forex market and many beginners (or those who continue their Forex trading education) are surprised to learn that they can actually make as much money when currency price moves down as when it goes up. Let's start with the most logical movement, when the price moves up.
Most people are very familiar with the concept of buying something at a low price and selling it when the price increases. So the concept of buying the EUR/USD at 1.2150 and selling it at 1.2160 for a 10 pip gain should seem logical. This process is called going long.
You can also do this in reverse! If you know that the currency price is more likely to go down rather than up, you can go short. This is just the opposite of the above transaction, selling it first and buying it back later in the hope that the price will go down for you to make profit.
This may seem strange at first, but the concept remains the same either way. You always want to buy something at a low price, and sell it expensive. The consecution of actions doesn't matter. You must both buy and sell; as long as you sell at a higher price than you buy you make profit. Let us continue our Forex trading education.
SPREAD
The difference between stock markets and the Forex market brokers, is that in the Forex market, broker commissions are either very low or zero. So how do the ?? make money? They make it from the "spread" - difference between the actual price and the offered price through a broker.
On the right you can see a typical board of currency pairs and their spreads. This one is taken from our feed this morning, and you can see the difference between the Offer (the price you can place on a sell order) and the Bid (the price you can place on a buy order) is 3 pips (the spread).
What does this mean to you though? Well, let's look at the board. If you bought the EUR/USD at 1.2158 as it is offered under the Offer column, and immediately sold it again before the price moved, you would only get 1.2155 as is shown in the Bid column. So the net result is -3 pips, or a loss to you, and a profit to the broker. Remember to always take the spread into account when placing a trade, setting targets and stop losses.
BEARS AND THE BULLS
Once (you have) started your Forex trading education, you will constantly see the terms "Bears" and "Bulls" in Forex books and chat rooms. These are terms that describe the general mood of the market. A "bear" market, is when the general mood of the market is down, i.e. when there are more sellers than buyers in the marketplace. A "bull market" is the opposite, when there are more buyers than sellers and the general mood of the market is up. Forex is a place where bulls and bears struggle, and if you can identify who is gaining the upper hand, then you can identify the direction of the price. Easier said than done, of course. There are many more areas to cover, this should help those only starting Forex trading education.
CALCULATING PROFIT AND LOSS
Forex market, is an around-the-clock cash market where the currencies of nations are bought and sold. Forex trading is always done in currency pairs. For example, you buy Euros, paying with U.S. Dollars, or you sell Canadian Dollars for Japanese Yen. The value of your Forex investment increases or decreases because of changes in the currency exchange rate or Forex rate. These changes can occur at any time, and often result from economic and political events. Using a hypothetical Forex investment, this article shows you how to calculate profit and loss in Forex trading. Let's push your Forex trading education to a new level together.
To understand how the exchange rate can affect the value of your Forex investment, you need to learn how to read a Forex quote. Forex quotes are always expressed in pairs. In the following example, your pair of currencies is the U.S. Dollar (USD) and the Canadian Dollar (CAD). The Forex quote, USD/CAD = 170.50, means that one U.S. Dollar is equal to 170.50 Canadian Dollars. The currency to the left of the "/" (USD in this example) is referred to as base currency and its value is always 1. The currency to the right of the "/" (CAD in this example) is referred to as the counter currency. In this example, one USD can buy 170.50 CAD, because it is the stronger of the two currencies. The U.S. Dollar is regarded as the central currency of the Forex market, and it is always treated as the base currency in any Forex quote where it is one of the pairs.
Sunday, June 14, 2009
HOW TO READ A CURRENCY QUOTE
Before trading currencies an investor has to understand the basic terminology of the forex market, including how to interpret forex quotes. In every foreign exchange transaction an investor is simultaneously buying one currency and selling another. These two currencies make up a currency pair. This is an example of a foreign currency exchange rate of the dollar versus the yen:
USD/JPY = 119.72
The currency to the left of the slash ("/") is called the base currency (in this example, the US dollar) and the one on the right is called the quote currency or counter currency (in this example, the Japanese Yen). This notation means that 1 unit of the base currency (that is, 1 dollar) is equal to 119.72 Japanese Yen. If buying, the exchange rate specifies how much you have to pay in units of the quote currency to buy one unit of the base currency; in the above example, you have to pay 119.72 yen to buy 1 US dollar. If selling, the foreign currency exchange rate specifies how much units of the quote currency you get for selling one unit of the base currency; in the above example, you will receive 119.72 Japanese Yen when you sell 1 US dollar.
As with stocks, a forex quote includes a bid price (or bid) and an ask price (or ask). This can be easily illustrated with an example of a currency quote taken from the forex trading software:
In the above example, the bid price is 119.68 yen and the ask price is 119.75 yen [notice that when the ask price is displayed, only the last two decimal places are displayed to the right of the slash (75 instead of 119.75)]. The bid price is the price at which dealers are willing to buy the base currency (in units of the quote currency) and users of our software can sell. Thus, if a trader presses the button "Sell USD," he/she would sell dollars at 119.68 yen. The ask price, on the other hand, is the price at which dealers are willing to sell the base currency and users of our system could buy it. By clicking "Buy USD," an investor would be buying dollars at 119.75 yen.
Even though there are many currencies all over the world, 85% of all daily transactions involve trading a group of currencies known as the "Majors." These currencies include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. The four most actively traded currency pairs are the US Dollar / Japanese Yen (USD/JPY), Euro / US Dollar (EUR/USD), British Pound / US Dollar (GBP/USD), and the US Dollar / Swiss Franc (USD/CHF). The US Dollar / Canadian Dollar (USD/CAD) and the Australian Dollar / US Dollar (AUD/USD) are also actively traded pairs. For traders, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies; i.e., the "Majors."
The examples below were taken from the currency dealing system which provides forex real time quotes. From left to right are the euro-dollar exchange rate, the british pound-dollar exchange rate, and the dollar-swiss franc exchange rate. All of these currency quotes are of major currency pairs.
Taking the example of the euro forex quote (first pair above), buying one euro would cost 1.0099 US dollars and selling would provide 1.0093 US dollars.
USD/JPY = 119.72
The currency to the left of the slash ("/") is called the base currency (in this example, the US dollar) and the one on the right is called the quote currency or counter currency (in this example, the Japanese Yen). This notation means that 1 unit of the base currency (that is, 1 dollar) is equal to 119.72 Japanese Yen. If buying, the exchange rate specifies how much you have to pay in units of the quote currency to buy one unit of the base currency; in the above example, you have to pay 119.72 yen to buy 1 US dollar. If selling, the foreign currency exchange rate specifies how much units of the quote currency you get for selling one unit of the base currency; in the above example, you will receive 119.72 Japanese Yen when you sell 1 US dollar.
As with stocks, a forex quote includes a bid price (or bid) and an ask price (or ask). This can be easily illustrated with an example of a currency quote taken from the forex trading software:
In the above example, the bid price is 119.68 yen and the ask price is 119.75 yen [notice that when the ask price is displayed, only the last two decimal places are displayed to the right of the slash (75 instead of 119.75)]. The bid price is the price at which dealers are willing to buy the base currency (in units of the quote currency) and users of our software can sell. Thus, if a trader presses the button "Sell USD," he/she would sell dollars at 119.68 yen. The ask price, on the other hand, is the price at which dealers are willing to sell the base currency and users of our system could buy it. By clicking "Buy USD," an investor would be buying dollars at 119.75 yen.
Even though there are many currencies all over the world, 85% of all daily transactions involve trading a group of currencies known as the "Majors." These currencies include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. The four most actively traded currency pairs are the US Dollar / Japanese Yen (USD/JPY), Euro / US Dollar (EUR/USD), British Pound / US Dollar (GBP/USD), and the US Dollar / Swiss Franc (USD/CHF). The US Dollar / Canadian Dollar (USD/CAD) and the Australian Dollar / US Dollar (AUD/USD) are also actively traded pairs. For traders, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies; i.e., the "Majors."
The examples below were taken from the currency dealing system which provides forex real time quotes. From left to right are the euro-dollar exchange rate, the british pound-dollar exchange rate, and the dollar-swiss franc exchange rate. All of these currency quotes are of major currency pairs.
Taking the example of the euro forex quote (first pair above), buying one euro would cost 1.0099 US dollars and selling would provide 1.0093 US dollars.
CURRENCY TRADING BASICS
All currency trades involve the buying of one currency and the selling of another, simultaneously. Currency quotes are given as exchange rates; that is, the value of one currency relative to another. The relative supply and demand of both currencies will determine the value of the exchange rate.
When a currency trader places a trade he wants the currency purchased to appreciate in value versus the currency sold. His ability to determine the direction that the exchange rate will move, will dictate his gain or loss in a trade. Let's do an example with a currency quote obtained from the forex trading system.
Example of a forex trade
The current bid-ask price for EUR/USD is 1.0120/1.0126, meaning you can buy 1 euro (EUR) for 1.0126 US dollars (USD). Suppose you feel that the EUR is undervalued against the dollar. To execute this strategy, you would buy Euros (simultaneously selling Dollars) and then wait for the exchange rate to rise.
So you make the trade: purchasing 100,000 EUR (1 lot) and selling 101,260 Dollars. (Remember, at 1% margin, your initial margin deposit would be 1,000 Euros.)
As you expected, EUR/USD rises to 1.0236/42. Since you bought Euros and sold Dollars in your previous trade, you must now sell Euros for Dollars to realize any profit. You can now sell 1 EUR for 1.0236 Dollars. When you sell the 100,000 Euros at the current EUR/USD rate of 1.0236, you will receive 102,360 USD.
Since you originally sold (paid) 101,260 USD, your profit is US $1100.
Total profit = US $1100.00
When a currency trader places a trade he wants the currency purchased to appreciate in value versus the currency sold. His ability to determine the direction that the exchange rate will move, will dictate his gain or loss in a trade. Let's do an example with a currency quote obtained from the forex trading system.
Example of a forex trade
The current bid-ask price for EUR/USD is 1.0120/1.0126, meaning you can buy 1 euro (EUR) for 1.0126 US dollars (USD). Suppose you feel that the EUR is undervalued against the dollar. To execute this strategy, you would buy Euros (simultaneously selling Dollars) and then wait for the exchange rate to rise.
So you make the trade: purchasing 100,000 EUR (1 lot) and selling 101,260 Dollars. (Remember, at 1% margin, your initial margin deposit would be 1,000 Euros.)
As you expected, EUR/USD rises to 1.0236/42. Since you bought Euros and sold Dollars in your previous trade, you must now sell Euros for Dollars to realize any profit. You can now sell 1 EUR for 1.0236 Dollars. When you sell the 100,000 Euros at the current EUR/USD rate of 1.0236, you will receive 102,360 USD.
Since you originally sold (paid) 101,260 USD, your profit is US $1100.
Total profit = US $1100.00
Reading Charts
CHART 1
AS I SAID THERE IS MORE THAN ONE WAY TO TRADE PP’S
AT THE START OF THE DAY THE MARKET WAS ABOVE THE PP LEVEL AND RALLYING UP. SO WE COULD HAVE TRADED THE MARKET LONG ON THE BREAK OF THE R1 TARGETING THE R2 WHICH WAS NOT A HUGE TRADE TO BEGIN WITH. THE MARKET DULY BROKE THE R1 BUT FAILED TO ACHIEVE THE R2 LEVEL.
THIS TRADE COULD HAVE RESULTED IN NO MORE THAN A 10 PIP PROFIT.
THE MARKET STARTED TO DROP AND FELL BELOW THE R1 THEN RETRACED BACK TO THE TREND LINE WHICH IT TESTED TWICE AND FAILED. THIS WAS THE CLUE THAT WE COULD START LOOKING AT A SHORT TRADE ON THE BREAK OF THE R1 TARGETING FIRST THE PP AND THEN THE S1. WE ENTER AT THE R1 WITH OUR STOP 15 POINTS ABOVE. WHEN THE MARKET REACHES THE PP WE CAN TIGHTEN OUR STOP LOSS TO BREAK EVEN AND SELL OF HALF THE LOTS AND LET THE REST RIDE TILL THE S1. FOR A 61 POINT TRADE. WE COULD ALSO HAVE LET THE TRADE RUN ON IN THE ANTICIPATION A LARGER PROFITS AS ONCE THE MARKET BREAKS A SUPPORT OR RESISTANCE LEVEL ITS TENDENCY IS TO CHALLENGE THE NEXT LEVEL.
USED WITH OUR OTHER INDICATORS PP’S CAN BE A POWERFUL TRADING TOOL. JUST REMEMBER THOUGH THAT BECAUSE THESE LEVELS ARE PREDICTIVE AND MOST OF YOUR NORMAL INDICATORS LAG THE MARKET THERE MIGHT NOT ALWAYS BE CONVERGENCE OF THE TWO. THE SIGNAL IS A BREAK OR A STALL AT A LEVEL AND YOUR INDICATORS SHOULD ONLY BE FOR CONFIRMATION.
CHART 2
IF THE MARKET OPENS ABOVE THE PIVOT POINT THEN THE BIAS FOR THE DAY IS LONG TRADES. IF THE MARKET OPENS BELOW THE PIVOT POINT THEN THE BIAS FOR THE DAY IS FOR SHORT TRADES.
THE THREE MOST IMPORTANT PIVOT POINTS ARE R1, S1 AND THE ACTUAL PIVOT POINT.
THE GENERAL IDEA BEHIND TRADING PIVOT POINTS ARE TO LOOK FOR A REVERSAL OR BREAK OF R1 OR S1. BY THE TIME THE MARKET REACHES R2,R3 OR S2,S3 THE MARKET WILL ALREADY BE OVERBOUGHT OR OVERSOLD AND THESE LEVELS SHOULD BE USED FOR EXITS RATHER THAN ENTRIES.
A PERFECT SET WOULD BE FOR THE MARKET TO OPEN ABOVE THE PIVOT LEVEL AND THEN STALL SLIGHTLY AT R1 THEN GO ON TO R2. YOU WOULD ENTER ON A BREAK OF R1 WITH A TARGET OF R2 AND IF THE MARKET WAS REALLY STRONG CLOSE HALF AT R2 AND TARGET R3 WITH THE REMAINDER OF YOUR POSITION.
FIRST SET YOUR CHART TO A DAILY TIME FRAME. ENTER YOUR H, L, C INTO YOUR PIVOT CALCULATOR.
THIS IS TODAY’S CHART WE ARE LOOKING AT. H 1.1773 L 1.1659 C 1.1691 REPRESENTS YESTERDAY’S MOVES. THE MARKET WAS IN A BIT OF CONSOLIDATION IN THE CHANNEL BETWEEN THE PP AND THE S1 LEVEL. WE COULD HAVE TRADED THIS AS A BREAK OUT BY PLACING A BUY 15 POINTS ABOVE THE PP LEVEL AND TARGETED THE R1 AND OUR STOP 10 POINTS BELOW THE PP.
OR WE COULD HAVE TRADED THIS AS A CONTINUATION OF THE CURRENT DOWN TREND BY PLACING OUR SELL ORDER AT THE PP WITH OUR STOP 15 PIPS ABOVE THE PP AND TARGETED THE S1 FOR PROFIT. MANY TRADERS WOULD PUT THEIR STOPS ABOVE THE S2. THIS WOULD DEPEND ON YOUR EQUITY MANAGEMENT.
THE MARKET DROPPED ALL THE WAY TO THE S1 OUR INITIAL TARGET. IF YOU WERE TRADING MORE THAN ONE LOT YOU COULD HAVE EXITED HALF YOUR LOTS AND LET THE BALANCE RUN IN CASE THE MARKET CONTINUED SHORT AND TIGHTENED YOUR STOP TO JUST ABOVE THE DOWN TREND LINE. THIS TRADE YIELDED 65 POINTS. BEARING IN MIND ALSO THAT BOTH THE MVA AND MACD CONFIRMED THE SHORT TRADE.
AS I SAID THERE IS MORE THAN ONE WAY TO TRADE PP’S
AT THE START OF THE DAY THE MARKET WAS ABOVE THE PP LEVEL AND RALLYING UP. SO WE COULD HAVE TRADED THE MARKET LONG ON THE BREAK OF THE R1 TARGETING THE R2 WHICH WAS NOT A HUGE TRADE TO BEGIN WITH. THE MARKET DULY BROKE THE R1 BUT FAILED TO ACHIEVE THE R2 LEVEL.
THIS TRADE COULD HAVE RESULTED IN NO MORE THAN A 10 PIP PROFIT.
THE MARKET STARTED TO DROP AND FELL BELOW THE R1 THEN RETRACED BACK TO THE TREND LINE WHICH IT TESTED TWICE AND FAILED. THIS WAS THE CLUE THAT WE COULD START LOOKING AT A SHORT TRADE ON THE BREAK OF THE R1 TARGETING FIRST THE PP AND THEN THE S1. WE ENTER AT THE R1 WITH OUR STOP 15 POINTS ABOVE. WHEN THE MARKET REACHES THE PP WE CAN TIGHTEN OUR STOP LOSS TO BREAK EVEN AND SELL OF HALF THE LOTS AND LET THE REST RIDE TILL THE S1. FOR A 61 POINT TRADE. WE COULD ALSO HAVE LET THE TRADE RUN ON IN THE ANTICIPATION A LARGER PROFITS AS ONCE THE MARKET BREAKS A SUPPORT OR RESISTANCE LEVEL ITS TENDENCY IS TO CHALLENGE THE NEXT LEVEL.
USED WITH OUR OTHER INDICATORS PP’S CAN BE A POWERFUL TRADING TOOL. JUST REMEMBER THOUGH THAT BECAUSE THESE LEVELS ARE PREDICTIVE AND MOST OF YOUR NORMAL INDICATORS LAG THE MARKET THERE MIGHT NOT ALWAYS BE CONVERGENCE OF THE TWO. THE SIGNAL IS A BREAK OR A STALL AT A LEVEL AND YOUR INDICATORS SHOULD ONLY BE FOR CONFIRMATION.
CHART 2
IF THE MARKET OPENS ABOVE THE PIVOT POINT THEN THE BIAS FOR THE DAY IS LONG TRADES. IF THE MARKET OPENS BELOW THE PIVOT POINT THEN THE BIAS FOR THE DAY IS FOR SHORT TRADES.
THE THREE MOST IMPORTANT PIVOT POINTS ARE R1, S1 AND THE ACTUAL PIVOT POINT.
THE GENERAL IDEA BEHIND TRADING PIVOT POINTS ARE TO LOOK FOR A REVERSAL OR BREAK OF R1 OR S1. BY THE TIME THE MARKET REACHES R2,R3 OR S2,S3 THE MARKET WILL ALREADY BE OVERBOUGHT OR OVERSOLD AND THESE LEVELS SHOULD BE USED FOR EXITS RATHER THAN ENTRIES.
A PERFECT SET WOULD BE FOR THE MARKET TO OPEN ABOVE THE PIVOT LEVEL AND THEN STALL SLIGHTLY AT R1 THEN GO ON TO R2. YOU WOULD ENTER ON A BREAK OF R1 WITH A TARGET OF R2 AND IF THE MARKET WAS REALLY STRONG CLOSE HALF AT R2 AND TARGET R3 WITH THE REMAINDER OF YOUR POSITION.
FIRST SET YOUR CHART TO A DAILY TIME FRAME. ENTER YOUR H, L, C INTO YOUR PIVOT CALCULATOR.
THIS IS TODAY’S CHART WE ARE LOOKING AT. H 1.1773 L 1.1659 C 1.1691 REPRESENTS YESTERDAY’S MOVES. THE MARKET WAS IN A BIT OF CONSOLIDATION IN THE CHANNEL BETWEEN THE PP AND THE S1 LEVEL. WE COULD HAVE TRADED THIS AS A BREAK OUT BY PLACING A BUY 15 POINTS ABOVE THE PP LEVEL AND TARGETED THE R1 AND OUR STOP 10 POINTS BELOW THE PP.
OR WE COULD HAVE TRADED THIS AS A CONTINUATION OF THE CURRENT DOWN TREND BY PLACING OUR SELL ORDER AT THE PP WITH OUR STOP 15 PIPS ABOVE THE PP AND TARGETED THE S1 FOR PROFIT. MANY TRADERS WOULD PUT THEIR STOPS ABOVE THE S2. THIS WOULD DEPEND ON YOUR EQUITY MANAGEMENT.
THE MARKET DROPPED ALL THE WAY TO THE S1 OUR INITIAL TARGET. IF YOU WERE TRADING MORE THAN ONE LOT YOU COULD HAVE EXITED HALF YOUR LOTS AND LET THE BALANCE RUN IN CASE THE MARKET CONTINUED SHORT AND TIGHTENED YOUR STOP TO JUST ABOVE THE DOWN TREND LINE. THIS TRADE YIELDED 65 POINTS. BEARING IN MIND ALSO THAT BOTH THE MVA AND MACD CONFIRMED THE SHORT TRADE.
FOREX PIVOT POINTS
USING FOREX PIVOT POINTS IN FOREX TRADING AS PART OF A TRADING STRATEGY OR AS A FOREX PIVOT POINT SIGNAL HAS BEEN AROUND FOR A LONG TIME AND WAS ORIGINALLY USED BY FLOOR TRADERS. THIS WAS A NICE SIMPLE WAY FOR FLOOR TRADERS TO HAVE SOME IDEA OF WHERE THE MARKET WAS HEADING DURING THE COURSE OF THE DAY WITH ONLY A FEW SIMPLE CALCULATIONS.
THE PIVOT POINT IS THE LEVEL AT WHICH THE MARKET DIRECTION CHANGES FOR THE DAY. USING SOME SIMPLE ARITHMETIC AND THE PREVIOUS DAYS HIGH, LOW AND CLOSE, A SERIES OF POINTS ARE CALCULATED. THESE POINTS CAN BE CRITICAL SUPPORT AND RESISTANCE LEVELS. THE PIVOT LEVEL, SUPPORT AND RESISTANCE LEVELS CALCULATED FROM THAT ARE COLLECTIVELY KNOWN AS PIVOT LEVELS.
EVERY DAY THE MARKET YOU ARE FOLLOWING HAS AN OPEN, HIGH, LOW AND A CLOSE FOR THE DAY (SOME MARKETS LIKE FOREX ARE 24 HOURS BUT GENERALLY USE 5PM EST AS THE OPEN AND CLOSE). THIS INFORMATION BASICALLY CONTAINS ALL THE DATA YOU NEED TO USE PIVOT POINTS.
THE REASON TRADING WITH PIVOT POINTS ARE SO POPULAR IS THAT THEY ARE PREDICTIVE AS OPPOSED TO LAGGING. YOU USE THE INFORMATION OF THE PREVIOUS DAY TO CALCULATE POTENTIAL TURNING POINTS FOR THE TODAY.
BECAUSE SO MANY FOREX TRADERS FOLLOW PIVOT POINTS YOU WILL OFTEN FIND THAT THE MARKET REACTS AT THESE LEVELS CREATING A TRADING OPPORTUNITY.
IT IS NOT NECESSARY TO REINVENT THE WHEEL EVERYDAY AND DO MANUAL CALCULATIONS. HERE IS A LINK TO A DESKTOP CALCULATOR YOU CAN USE ON YOUR PC. BY JUST ADDING YOUR PREVIOUS DAYS HIGH LOW AND CLOSE THIS CALCULATOR WILL DO THE CALCULATION FOR YOU. THE FOLLOWING IS THE CALCULATION FOR THOSE WHO ARE INTERESTED
RESISTANCE 3 = HIGH + 2*(PIVOT - LOW) RESISTANCE 2 = PIVOT + (R1 - S1) RESISTANCE 1 = 2 * PIVOT - LOW PIVOT POINT = ( HIGH + CLOSE + LOW )/3 SUPPORT 1 = 2 * PIVOT - HIGH SUPPORT 2 = PIVOT - (R1 - S1) SUPPORT 3 = LOW - 2*(HIGH - PIVOT)
AS YOU CAN SEE FROM THE ABOVE FORMULA, JUST BY HAVING THE PREVIOUS DAYS HIGH, LOW AND CLOSE YOU EVENTUALLY FINISH UP WITH 7 POINTS, 3 RESISTANCE LEVELS, 3 SUPPORT LEVELS AND THE ACTUAL PIVOT POINT.
USE ACTIONFOREX.COM TO GET YOUR PIVOT POINT
R3
R2
BUY ONLY IF RESISTANCE IS BROKEN
R1
SELL ONLY IN RESISTANCE AREA
CPP
BUY ONLY INSUPPORT AREA
S1
IF SUPPORT IS BROKEN,SELL
S2
S3
THE PIVOT POINT IS THE LEVEL AT WHICH THE MARKET DIRECTION CHANGES FOR THE DAY. USING SOME SIMPLE ARITHMETIC AND THE PREVIOUS DAYS HIGH, LOW AND CLOSE, A SERIES OF POINTS ARE CALCULATED. THESE POINTS CAN BE CRITICAL SUPPORT AND RESISTANCE LEVELS. THE PIVOT LEVEL, SUPPORT AND RESISTANCE LEVELS CALCULATED FROM THAT ARE COLLECTIVELY KNOWN AS PIVOT LEVELS.
EVERY DAY THE MARKET YOU ARE FOLLOWING HAS AN OPEN, HIGH, LOW AND A CLOSE FOR THE DAY (SOME MARKETS LIKE FOREX ARE 24 HOURS BUT GENERALLY USE 5PM EST AS THE OPEN AND CLOSE). THIS INFORMATION BASICALLY CONTAINS ALL THE DATA YOU NEED TO USE PIVOT POINTS.
THE REASON TRADING WITH PIVOT POINTS ARE SO POPULAR IS THAT THEY ARE PREDICTIVE AS OPPOSED TO LAGGING. YOU USE THE INFORMATION OF THE PREVIOUS DAY TO CALCULATE POTENTIAL TURNING POINTS FOR THE TODAY.
BECAUSE SO MANY FOREX TRADERS FOLLOW PIVOT POINTS YOU WILL OFTEN FIND THAT THE MARKET REACTS AT THESE LEVELS CREATING A TRADING OPPORTUNITY.
IT IS NOT NECESSARY TO REINVENT THE WHEEL EVERYDAY AND DO MANUAL CALCULATIONS. HERE IS A LINK TO A DESKTOP CALCULATOR YOU CAN USE ON YOUR PC. BY JUST ADDING YOUR PREVIOUS DAYS HIGH LOW AND CLOSE THIS CALCULATOR WILL DO THE CALCULATION FOR YOU. THE FOLLOWING IS THE CALCULATION FOR THOSE WHO ARE INTERESTED
RESISTANCE 3 = HIGH + 2*(PIVOT - LOW) RESISTANCE 2 = PIVOT + (R1 - S1) RESISTANCE 1 = 2 * PIVOT - LOW PIVOT POINT = ( HIGH + CLOSE + LOW )/3 SUPPORT 1 = 2 * PIVOT - HIGH SUPPORT 2 = PIVOT - (R1 - S1) SUPPORT 3 = LOW - 2*(HIGH - PIVOT)
AS YOU CAN SEE FROM THE ABOVE FORMULA, JUST BY HAVING THE PREVIOUS DAYS HIGH, LOW AND CLOSE YOU EVENTUALLY FINISH UP WITH 7 POINTS, 3 RESISTANCE LEVELS, 3 SUPPORT LEVELS AND THE ACTUAL PIVOT POINT.
USE ACTIONFOREX.COM TO GET YOUR PIVOT POINT
R3
R2
BUY ONLY IF RESISTANCE IS BROKEN
R1
SELL ONLY IN RESISTANCE AREA
CPP
BUY ONLY INSUPPORT AREA
S1
IF SUPPORT IS BROKEN,SELL
S2
S3
POWER TIPS FOR TRADING FOREX
TRADING BEGINS:9PM SUNDAY-9PMFRIDAY
(NO TRADING ON SATURDAY)
#TRADING SESSIONS
1.NEW YORK
2.LONDON
3.ASAIAN
4.AUSTRALIAN
5.GREAT BRITAIN
3 MAJOR SESSIONS
**NEW YORK
**LONDON
**ASIAN
BEST TRADING TIMES FOR DAY TRADERS
ASIAN SESSION
7AM—9AM
London session
LONDON
1PM—5PM
NEW YORK
(NO TRADING ON SATURDAY)
#TRADING SESSIONS
1.NEW YORK
2.LONDON
3.ASAIAN
4.AUSTRALIAN
5.GREAT BRITAIN
3 MAJOR SESSIONS
**NEW YORK
**LONDON
**ASIAN
BEST TRADING TIMES FOR DAY TRADERS
ASIAN SESSION
7AM—9AM
London session
LONDON
1PM—5PM
NEW YORK
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