The Basics of Currency Trading

Quoting Conventions :
In the Foreign Exchange market, currencies are traded in pairs. For instance, a speculator may trade the Euro versus the US Dollar, EUR/USD, or the US Dollar versus the Japanese Yen, USD/JPY. The base currency is the term for the first currency in the pair. The counter currency is the term for the second currency in the pair. The exchange rate represents the number of units of the counter currency that one unit of the base currency can purchase.
Traders in the market are speculating on the exchange rate between two currencies. Exchange rates measure the relative strength of one currency to another. Speculators make buy and sell decisions on currency pairs based on fundamental and technical analysis, with the intention of the exchange rate moving in their favor.

EUR/USD :

In this example euro is the base currency and thus the “basis” for the buy/sell.If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute USD order. By doing so you have bought euros in the expectation that they will appreciate versus the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a USD order. By doing so you have sold euros in the expectation that they will depreciate versus the US dollar.

USD/JPY :

In this example the US dollar is the base currency and thus the “basis” for the buy/sell.If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.

GBP/USD :

In this example the GBP is the base currency and thus the “basis” for the buy/sell.
If you think the British economy will continue to be the leading economy among the G7 nations in terms of growth, thus buying the pound, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. If you believe the British are going to adopt the euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.

USD/CHF :

In this example the USD is the base currency and thus the “basis” for the buy/sell.
If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.

Sample Trade :
A trader wishes to speculate on EUR/USD. Believing that the EUR will rise against the USD, or that the exchange rate will move upwards, the trader places an order to buy EUR/USD at a market rate of 1.3050. Let us also assume that the trader is speculating on 100,000 units of the base currency, which is the standard lot size, or trading increment, used in the Foreign Exchange market. Since the base currency is the first currency in the pair, the trader is speculating on the value of 100,000 Euros with respect to the US Dollar.
In this example, the trader is buying Euros, since he believes the Euro will rise in value with respect to the US Dollar. Accordingly, he finances the transaction of buying 100,000 Euros by borrowing an equivalent amount of US Dollars.
For the trader, the value of the amount borrowed is a function of the exchange rate. Since the exchange rate at the time of the transaction was 1.3050, the market cost for 1 Euro was 1.3050 US Dollars. Hence, 100,000 Euros cost $130,500 (1.3050 * 100,000). This borrowed amount of 130,500 USD must be paid back when the transaction is closed.
Let’s assume that the trader is correct in assuming that the Euro would rise in value with respect to the USD, and that the exchange rate moved to 1.3150, 100 pips above the rate at which the trader entered. If the trader were to close his position now, the 100,000 Euros he purchased at the onset of the transaction would be sold, and his debt of 130,500 US Dollars would be paid off.
At an exchange rate of 1.3150, the trader’s 100,000 Euros are now worth 131,500 US Dollars (100,000 * 1.3150). After repaying the borrowed amount of 130,500, this leaves him with a profit of $1,000.
Traders have equal opportunities to profit regardless of whether the exchange rate is rising or falling.

Spreads & Bid/Ask :
When viewing quotes, you will notice that there are two prices for each currency pair. Similar to all financial products, FX quotes include a "bid' and "ask". The bid is the price at which a dealer is willing to buy and clients can sell the base currency in exchange for the counter currency. The ask is the price at which a dealer is willing to sell and a client can buy.
Bid = The Price at which the Trader (You) Can Sell Ask = The Price at which the Trader (You) Can Buy
For example, say the EUR/USD is trading at 1.3050 x 1.3053. In this case, the bid is 1.3050 and the ask is 1.3053. The difference between the bid and ask constitutes the spread. In the above example, the spread is 3 pips, or points. This differential reflects the cost of the trade. Essentially, the market would have to move 3 pips in your favor for you to break even, and 4 pips for you to be in your profit zone.

Structure of the Market :
The FX market is an over-the-counter market with no centralized exchange. Traders have a choice between firms that offer trade-clearing services.
Unlike many major equities and futures markets, the structure of the

is highly decentralized. In other words, there is no central location where trades occur. The New York Stock Exchange, for example, is a totally centralized exchange. All orders pertaining to the purchase or sale of a stock listed on the NYSE are routed to the same dealer and pass through the hands of a single clearing firm. This structure requires buyers and sellers to meet at the NYSE in order to trade a stock that is listed on this exchange. It is for this reason that there is one universally quoted price for a stock at any given time.
In the FX market there are multiple dealers whose business is to unite buyers and sellers. Each dealer has the ability and the authority to execute trades independently of each other. This structure is inherently competitive as traders are faced with a choice between a variety of firms with an equal ability to execute their trades. The firm that offers the best services and execution will capitalize on this market efficiency by attracting the most traders. In the equities markets, the execution of trades is monopolized and there is no incentive for a clearing firm to offer competitive prices, to innovate, or to improve the quality of their service.

Margin :
In standard cash stock accounts, money should be deposited for the full amount of the position you are trading, or if you have a margin account, for at least half of the position. This is in contrast to the FX market, where only a small percentage of the actual position value needs to be deposited prior to taking on the trade. This small deposit, known as the margin, is not a down payment, but rather a performance bond or good faith deposit to ensure against trading losses. The margin requirement allows traders to hold positions much larger than their account value (up to 200x the size).
Margin requirements are as low as .5% meaning for every standard lot size of 100,000 units, you must commit $500. However, if you wanted to control a $100,000 in the stock market, you would have to deposit at the very least, $50,000. Even in the futures market you would have to deposit at least $5,000 to control a $100,000 position.

Bank of England Collapse :
The above illustration shows a classic example of a 5000-pip collapse of the GBP/DEM in 1992 from 2.9000 to 2.4000 in a matter of weeks. George Soros, in fact made $1 billion overnight buying GBP to convert them into DEM.

Currency Abbreviations :
Below is a list of the abbreviations for various currencies that are commonly traded in the FX market:
EUR = Euro

GBP = British Pound (Sterling, Cable)

JPY = Japanese Yen

CHF = Swiss Franc (Swissie)

USD = United States Dollar

NZD = New Zealand Dollar (Kiwi)

AUD = Australian Dollar (Aussie)

CAD = Canadian Dollar

25 Trading stategies for forex :

Currency Trading Strategy Number One:
When you are just starting out, strive to carve out 20 pips per
session, and that’s it. Then, turn it off, and study some more. When
you get really good at it, you can then “graduate” to higher returns.
So, set your goal at 20 pips and stick to it, until you are a grand
master at this wonderful “business” called forex trading. I stress the
word business. This is not a game, especially where your “hardearned
money” is involved.

Currency Trading Strategy Number Two:
Spend most of your time on the 15-min chart.

Currency Trading Strategy Number Three:
When you first start out in any particular session, look at the 1 hr
chart to get an overall perspective on trend from one session to the
next, and what it’s likely shaping up to be at the beginning of the
upcoming new session.

Currency Trading Strategy Number Four:
Only look at the 5 min chart if you absolutely have to see what’s
behind the current 15 min bar – especially where the bar is
elongated, and may have just penetrated a pivot point; in other
words, is price reversing course on the 5 min chart, which would
obviously not yet be reflected on the 15 min chart?

Currency Trading Strategy Number Five:
Don’t dwell on the 5 min chart, as it contains a lot of “noise” that will
whipsaw you to death.

Currency Trading Strategy Number Six:
MACD rules on the 15 min chart. Even if MACD is, say, trending up
on the 1 hr chart, if it is trending down on the 15 min chart, that’s
what you take your cue from. That’s not to say a shift in price
direction is not in the works. It just means it’s coming, but not yet.
In the meantime, you don’t want to miss what’s happening “in the
now,” which is what is reflected in the 15 min chart.

Currency Trading Strategy Number Seven:
If MACD is trending down on the 15 min chart, and price is wanting
to go north, price will sooner than later head south as it perhaps
bounces off a pivot point, or gets turned around at a juncture caught
by one of the other three “tools” you should be using (“reading
bars,” MACD divergence, or trendline analysis). Same thing if MACD
is trending up, and price is trying to head south.

Currency Trading Strategy Number Eight:
Only use MACD for divergence, not for buy or sell signals. It is a
lagging indicator, and as such is useless as a trigger. It is too slow
for that in the forex world.

Currency Trading Strategy Number Nine:
Again, MACD divergence on the 15 min chart is more significant than
what you see on the 1 hr chart in the near-term. For those of you
who don’t understand what divergence means, keep looking at my
own personal forex trading examples on this page on a daily basis for
examples of divergence. Basically, what it means is where you see
MACD waves “waving” in the opposite direction to price action. That’s
why I connect the top of the waves (in a downtrend) and the bottom
of the waves (in an uptrend) to illustrate that the waves are “waving”
higher in an uptrend and lower in a downtrend – in the opposite
direction to where price is going.

Currency Trading Strategy Number 10:
Always “protect” your money by using 20-30 pip stops. Mental stops
are okay, but not if you are dead serious about using a “disciplined”
approach to managing your money. You will lose three out of ten
trades. The three losses should be kept to 20-30 pips. Your wins will
by far surpass your small losses, and that’s what stop-losses are all
about. Don’t be afraid to lose. Even professional batters strike out six
out of 10 times. Lions are only successful 20% of the time in their
chase for the kill. Professional golfers lose 95% of the time.
Professional poker players lose 50% of the time. So, your chances
are better at trading the forex, using my system of course, than in
any other venue. Even businesses have “bad inventory.” And, life in
general is not always “100%” for sure.

Currency Trading Strategy Number 11:
That all said and done, if you entered a trade close to a pivot point,
or a particular significant bar pattern (like a double top, for instance,
or a trendline breakout), place your stop on the other side (but not
too close to) the event that caused you to take action. This is
because price has a tendency to snap back to that situation that
caused it to bolt away from it in the first place. If you follow the 20-
30 pip stop rule, but a 33 pip stop on the other side of that event
would safeguard you against such a reaction, then so much the
better. So, yes the stop rule is 20-30 pips, but within reason of
course.

Currency Trading Strategy Number 12:
Stops (read “stop-loss”) are for insurance purposes only – not
necessarily for taking profits. However, you can most certainly
employ “trailing stops,” whereby you keep moving your stop up (or
down, whichever the case may be) to protect your profits, as price
advances, or declines.

Currency Trading Strategy Number 13:
Only use “reading bars,” MACD divergence, pivot points, and
trendline analysis in your forex trading toolkit. That’s all you need for
this market. Be a technical bigot. Focus on pure technical analysis,
and avoid funnymentals. Even news is factored into price action, so
you don’t need to be up on it each and every nanosecond. If you
don't have my .pdf file on reading bars, please send me an e-mail,
and I'll forward it to you: prbain@tradingsmarts.com As was pointed
out to me by a client, "reading bars" includes spotting double, or
even triple, tops and bottoms.

Currency Trading Strategy Number 14:
And now for the tough part. I know my documentation says that the
forecast low and high for the next trading session can be M1/M3 or
M2/M4. However, trading is shades of gray. It is not a black and
white business. If it were, the world would be paved in gold, and
everybody would be rich. Now, we wouldn’t want that would we? The
forex would be nothing more than a Church at the end of a road
connected to a river bank at the other end with nothing in between.
The point I am trying to make is that the “actual” low and high for
the next session could very well be any combination of M1, M2, M3,
and M4. It could be M1/M4, M2/M3, or combinations of the other five
pivot points. The M1/M3 and M2/M4 calculations are just guideposts,
but are not poured in concrete. Price is the number one indicator. It
will determine what the low and high are going to be. And one other
thing, you should use these forecasts in conjunction with the other
three “tools” in your forex trading toolkit – “reading bars,” MACD
divergence, and trendline analysis. In other words, if price has been
trending down from the past session into the current one, price is
trading at, say, M3, and price is still going down, then M3 may very
well be the high for the new session, regardless of the fact that my
system may have called for M4 to be the high. So, use the pivot
points in conjunction with other three possible signals – “reading
bars,” MACD divergence, and trendline analysis. I have seen it
happen, as in the example just given, where price was trending down
from one session to the next right through M3 at the open of the
next session – simultaneous with the formation of a “double top” bar
pattern. Well, there you have three indications that price was headed
south for sure. And, I believe MACD was also trending down in that
particular case. So, that was another clue that the high for the
session had probably already been put in.

Currency Trading Strategy Number 15:
When you are first starting out, pick one currency of the four major
pairs (EUR/USD, USD/JPY, GBP/USD, and USD/CHF) to trade, and
become a specialist in it. I would personally recommend the Euro,
especially if you are going to be asking me questions, as that's what
I focus on with my clients around the world. Get to know its rhythm.
When you are doing well with it, then move on, and trade the other
three major pairs, as you see fit. When you are in learning mode,
you will have your hands full trying to figure out what to look for,
and how to manage your trades – enough so that you don't want to
be skipping back and forth between currencies.

Currency Trading Strategy Number 16:
Keep a log of all your trades – both good and bad. Analyze where
you went right and wrong, and vow not to repeat those situations
that could have been done better. This is all part of being organized
as a "professional" trader - with good habits. This is not about gunslinging
and winging it with "Hail Mary" passes.

Currency Trading Strategy Number 17:
Important point here: If price action opens in the upper end of the
projected range for the session (all the way up to R2, and beyond) –
in other words, in the sell area (that area above the central pivot
point) – and there are other suggestions that price is too high (such
as a particular bar reading, MACD divergence, or trendline breakout),
then price has probably achieved the upper end of its price range for
the session. The same holds true where price action opens in the
lower end of the projected range for the session (all the way down to
S2, and beyond) – in other words, in the buy area (that area below
the central pivot point) – and there are other suggestions that price
is too low (such as a particular bar reading, MACD divergence, or
trendline breakout), then price has probably achieved the lower end
of its price range for the session.

Currency Trading Strategy Number 18:
If there is nothing to do, then don't do it. Don't just do something
because your "gut" tells you to. That can get you in a lot of trouble in
this business. Only react to bona fide signals provided by the four
indicators talked about above – "reading bars," MACD divergence,
pivot points, and trendline analysis.

Currency Trading Strategy Number 19:
Only use an "industrial strength" market maker with the lowest pip
spread in the industry.

Currency Trading Strategy Number 20:
Occasionally, you will see a huge spike up in price, as we did 11 May
03. This just happened to be on a Sunday, shortly after recommencement
of trading, after the weekend respite. Ordinarily, I
would take the OHLC numbers from Friday, but given the nature of
the wild swing up that evening on one of the 15 min bars, I would
then use the OHLC numbers from Sunday night's session close to get
a better reading on support and resistance levels for the next
session. This is, of course, if you are using a market maker that
delineates its break between trading sessions in the late evening -
anywhere between 20:59:50 and 24:00 (midnight).

Currency Trading Strategy Number 21:
I often get asked by fellow traders why my pivot points aren't the
same as theirs. Good question. The answer is, of course, that you
may be using a different market maker, where a daily 24-hour
session is "cut off" at a different time. Some end at 20:59:50. Others
at five pm. Where you take your OHLC from will have a direct
bearing on the pivot points that you calculate using my program. The
results will obviously not be the same. But, that is okay – because
you want to use the pivot point calculations that are reflective of the
last 24 hours at the market maker you are trading with. That way,
the resulting numbers will be truly indicative of the support and
resistance levels you should be working with during the next session.
If you are trading with a firm that cuts off at 5 pm, and using OHLC
figures from another source that cuts off at a different time, your
figures will be "out-of-sync." I hope this all makes sense. If not,
please send me an e-mail: prbain@tradingsmarts.com Also, in your
message, you can ask me how to get a copy of my program, if you
don't already have one. You can also ask me where you should be
trading – i.e., which market maker you should be using. I only
recommend "select" providers, after considerable research, and
feedback from my clients.

Currency Trading Strategy Number 22:
Former stock traders take note: I say former because I don't
honestly know why you would ever want to go back to stocks after
having tasted the forex. Don't over-trade the forex. This is not a
scalping market! If you have to scalp, do it in slow motion.
Currencies trend well. Don't buy too soon in a downtrend, and don't
sell too soon in an uptrend. Watch for trendline breakouts to know
when to make your move.

Currency Trading Strategy Number 23:
You cannot succeed at trading the forex unless you are TOTALLY
committed to trading, and trading it. This is not something to be
played with. If you are not going to take it seriously, then try
something else.

Currency Trading Strategy Number 24:
Put your emotions in your hip pocket. This is a business, and should
be treated as such. If you have any bad habits, the forex will fix
them real quick.

Currency Trading Strategy Number 25:
Important point here: If you deem the major trend for the current
session, based on everything you have learned to this point, to be
down, then think DOWN. Sell rallies. Don't look to buy, or you might
get whipsawed to death. Likewise, if you deem the major trend for
the current session to be up, based on everything you have learned
to this point, then think UP. Buy the dips. Don't look to sell. Former
stock traders fall prey to wanting to have it both ways. Maybe, when
you get real good at this, you can try. But for now, think one way,
and save yourself the grief.