LESSON 1

LESSON 1

INTRODUCTION

Forex, or FX, stands for the foreign exchange market. This is a 24-hour market in which currencies are traded in cash, which is known as a spot market. There is no central, standard trading center, such as, a stock exchange. Instead, trade is conducted “over-the-counter” via an international network of dealers. Until recently, the forex market was confined to larger traders: major, international commercial and investment banks; international corporations; international money brokers; currency traders. When the United States went off the gold standard in 1971, investors immediately recognized new opportunities for making profits. Every year, more companies start up that cater to smaller institutions and investors so they may participate in spot forex trading. A prime factor to take into account before participating in the spot market is your temperament. A risk-aversive customer is not suitable for this marketplace. You should consider not only your experience in the investment world, but your objectives, and your capacity to absorb financial losses. Certainly, you should never invest any amount of money you cannot afford to lose.

It is the largest and least regulated financial market in the world.  The main trading centers are:

• New York
• Sydney
• Tokyo
• Frankfurt
• London

• The daily turnover has increased from approximately 5bn dollars in 1977 to 4 trillion dollars in today’s market. The NYSE only trades about 74 bn only per day.
• It is a 24 hr market, 5 days in a week – It runs from Sunday 5pm EST through Friday 4 pm EST.
• Trading begins in the Asia Pacific region followed by Middle East, Europe and America.

FOREX BASICS

Foreign exchange is the global buying and selling of foreign currencies.  Forex is an acronym for Foreign Exchange.  Other names of forex are:

• Spot
• FXSpot
• Retail forex

Currencies are traded through a broker or dealer.  Each currency is recognized by 3 letter code.  The major currencies i.e. the most widely traded ones are:

• USD (United States Dollar)
• EUR (Euro)
• CHF (Swiss franc)
• JPY (Japanese Yen)
• GBP (Great Britain Pound)
• AUD (Australia dollar)
• CAD (Canadian dollar)

Major Currencies

Major Currency Pairs

The currency pairs listed below are considered the “majors” and are the most frequently traded. The majors are the most liquid and widely traded currency pairs in the world.

EUR/CHF                     Euro zone / Switzerland                       “euro swissy”

EUR/GBP                    Euro zone / United Kingdom                 “euro pound”

Currency pairs that don’t contain the U.S. dollar (USD) are known as cross-currency pairs or simply as the “crosses.”

When you are buying one currency you are simultaneously selling the other.  You buy in a strong economy and sell in the weaker one.

FOREX REQUIREMENTS

• Laptop/desk computer
• Knowledge or skills
• High speed internet connection e.g. ADSL, EDGE, BROADBAND, etc
• Working space or premises
• Starting capital
• Trading plan
• Online broker that meets regulatory requirements, i.e.

• USA: brokers you check with NFA (National Futures Association), CFTC         (Commodity Futures Trading Commission) (cftc.org or com)
• UK : Financial Services Association (FSA)
• Hong Kong: Securities and Futures Commission (SFC)
• Canada, British Colombia : (British Colombia Securities Commission                         (BCSC)
• France: Banque de France (BDF)
• Australia: Australian Securities Investments Commission (ASIC) and

Swiss Federal Department of Finance (SFDF)

• Japan: The Financial Futures Association of Japan (FFAJ)
• Germany: German Federal Labour Market Authority (Bafin)

BENEFITS OF TRADING FOREX

1. No commissions, no government fees, no clearing fees, no brokerage fees
2. No middle-men
3. No fixed lot prices
4. 24 hr market trading and support
5. Leverage (money the brokers lends you e.g. $200 : 1)
6. High liquidity (by the click of the mouse you can buy or sell at will)
7. Free demo accounts, free news; chart and analysis

FOREX TERMINOLOGIES

1. Base/quote

Base is the first listed currency and it is the determining factor of any buy or sell transaction while quote (counter) is the second listed currency e.g. EUR/USD (leading and secondary)

1. Long/short

Long is to buy while short is to sell (when buying you are going on a long position and vice versa)

1. Bid(sell quote) /Ask(buy quote)

Bid – is the price at which you sell

Ask – is the price at which you buy

The sell quote is displayed on the left and is the price at which you can sell the base currency.

The buy quote is displayed on the right and is the price at which you can buy the

base currency.

Bid is lower than Ask price e.g. EUR/USD 1.2660   1.2663

1^st number – Bid or sell price

2^nd number – Ask, offer or buy price

1. Spread

This is the difference between Bid and Ask.  This is how the brokers are compensated.

1. Margin

The deposit required to open or maintain a position. Margin can be either “free” or “used”. Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions.

The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade.

1. Margin call

If a trader’s account falls below the minimum amount required to maintain an open position, he will receive a “margin call” requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open.

7. Bull/ Bear Market

Bull Market is a market in which prices are rising whereas a Bear Market is a market in which prices are declining.