The forex market is enormous in size and is the largest market with millions of participants. This tutorial covers the fundamentals of forex trading.
75 pages
609 KB – 75 Pages
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Forex Trading i Forex Market is an exciting place. The one good thing about entering into the forex market is that you can trade anytime as per your convenience. The forex market is enormous in size and is the largest mar ket with millions of participants. Hundreds of thousands of individuals (like us), money exchangers, to banks, to hedge fund managers everybody participates in the forex market. This tutorial covers the fundamentals of forex trading. This tutorial is prepared for beginners to gain some knowledge before they begin their journey with trading. Professional who are already into forex trading can also draw benefit from this tutorial. We assume that you know the essential terms related to f orex trading and the basic standards of currency trade . Copyright 2018 by Tutorials Point (I) Pvt. Ltd. All the content and graphics published in this e – book are the property of Tutorials Point (I) Pvt. Ltd. The user of this e – book is prohibited to reuse, retain, copy, distribute or republish any contents or a part of contents of this e – book in any manner without written consent of the publisher. We strive to update the contents of our website and tutorials as timely and as precisely as possible, however, the contents may contain inaccuracies or errors. Tutorials Point (I) Pvt. Ltd. provides no guarantee regarding the accuracy, timeliness or completeness of our website or its contents including this tutorial. If you discover any errors on our website or in this tutorial, please notify us at contact@tutorialspoint.com
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Forex Trading ii About the Tutorial .. .. .. .. i Audience .. .. .. .. i Prerequisites .. .. .. .. i Copyright & Disclaimer .. .. .. .. .. i Table of Contents .. .. .. .. ii 1. Forex Trading Introduction .. .. .. 2 What is Forex? .. .. .. .. .. 2 Why Trade Forex? .. .. .. .. .. 2 Who Trades Forex? .. .. .. .. . 3 When can you trade forex? .. .. .. .. 3 Forex Market Hours .. .. .. .. 3 2. Forex Trading The structure of the forex market .. .. .. 5 Hierarchy of Participants .. .. .. .. . 6 Market Participants .. .. .. .. 6 Currency pair .. .. .. .. . 7 Commonly Used Currency Pair .. .. .. 7 The Bid – Ask Spread .. .. .. .. . 9 What are Bullish and Bearish Markets? .. .. .. . 9 What happens in a Bull Market? .. .. .. . 10 What happens in a Bear Market? .. .. .. 10 What is Lot size? .. .. .. .. 11 What is long in forex trade? .. .. .. .. 11 What is short in forex trade? .. .. .. . 11 What are Pending Orders in Forex Trade? .. .. .. . 11 What is Leverage and Margin? .. .. .. . 12 Hedging .. .. .. .. .. 1 3
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Forex Trading iii 3. Forex Trading Major Currencies and T rade Systems .. .. . 15 Major Currencies .. .. .. .. .. 15 Different Trade systems on Forex .. .. .. .. 17 4. Forex Trading Types of Market Analysis .. .. . 19 Fundamental Analysis .. .. .. .. . 19 When to use fundamental analysis for the forex market? .. .. 19 Key factors influencing fundamental analysis .. .. . 20 Technical Analysis .. .. .. .. . 21 Dow Theory for Technical Analysis .. .. .. . 21 Sentimental Analysis .. .. .. .. .. 21 What type of analysis is better? .. .. .. .. 22 5. Forex Trading Kinds of Foreign Exchange Market .. .. .. 23 Spot Market .. .. .. .. . 23 Major Participants on the Spot Exchange Market .. .. . 23 Forward Market .. .. .. .. . 24 Future Markets .. .. .. .. .. 25 Option Market .. .. .. .. 25 6. Forex Trading Benefits of Trading Forex .. .. . 27 UNIT 2: DRIVING FORCES BEHIN D FOREX MARKET .. .. 29 7. Forex Trading Fundamental Market Forces .. .. .. 31 Economic Growth and Outlook .. .. .. 31 Capital Flows .. .. .. .. 31 Trade Flows and Trade Balance .. .. .. 32 The socio political environment of a country .. .. .. 32 8. Forex Trading Technical Indicators .. .. .. . 33 What is a chart? .. .. .. .. . 33 Types of Charts .. .. .. .. .. 33
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Forex Trading iv 9. Forex T rading Pattern Study of Trends, Support and Resistance .. .. 38 Kinds of Trends .. .. .. .. .. 38 Percentage Retracement .. .. .. . 42 The Trendline .. .. .. .. .. 43 10. Forex Trading Technical Strategy i n Price Patterns .. .. 46 Price Action Patterns .. .. .. .. .. 46 Pattern Types .. .. .. .. .. 46 Building the Price Pattern Rules .. .. .. .. 47 Strength of a trend: length and steepness of trend – waves .. .. .. 48 Strength of trends: depth of pullbacks .. .. .. . 49 11. Forex Trading Oscillator Divergences .. .. .. 50 Categories of Indicators .. .. .. .. . 50 Relative Strength Index (RS I) .. .. .. . 53 Overbought and Oversold .. .. .. .. 54 Divergence .. .. .. .. 54 Estimating Price Targets .. .. .. .. 57 12. Forex Trading The Role of Inflation .. .. .. 58 Higher and L ower Inflation .. .. .. . 58 Gross National Product (GNP) .. .. .. .. 59 How GDP affects Forex market? .. .. .. .. 59 Producer Price Index .. .. .. .. .. 59 Consumer Price Index (CPI) .. .. .. 60 13. Forex Trading The Commodity Connection .. .. 61 UNIT 3: PUTTING IT T OGETHER .. .. .. . 62 14. Forex Trading Position Sizing & Money Management .. .. . 63 Determining your Position Size .. .. .. 63 Creating a Forex trading spreadsheet to track your performance .. .. 64
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Forex Trading v Foreign Exchange Risks .. .. .. .. .. 64 15. Forex Trading Foreign Exchange Risks .. .. .. .. 65 Exchange R ate Risk .. .. .. .. .. 65 Credit Risk .. .. .. .. . 65 Liquidity Risk .. .. .. .. 66 Operational Risk .. .. .. .. 66 Interest Rate Risk .. .. .. .. .. 66 Country Risk .. .. .. .. . 66 16. Forex Trading Trading Rules to Live By .. .. .. . 69
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Forex Trading 2 Forex Market is an exciting place . The one good thing about entering into the forex market is that you can trade anytime as per your convenience. world as measured by the daily turnover with more than US$5 trillion a day eclipsing the The forex market measuring a propelling turnover is one of th e many reasons why so many private investors and individual traders have entered the market . The investors have discovered several advantages many of which are not available in the other markets. Forex ( in simple terms, currency ) is also called the foreign exchange, FX or currency trading . It other. It is the largest liquid market in the world. The liquidity ( more buyers and sellers) and competitive pricing ( the spread is very small between bid and ask price) available in this marked are great. With the irregularity in the performance in other markets, the growt h of forex trading, investing and management is in upward trajectory. So , why trade Forex? There are many reasons to trade in Forex. If we ask four different people , you might get more than four different answers. Primarily, making mo ney is the most frequently cited reason for why trade Forex. Let us now consider the following reasons why so many people are choosing forex market: Forex market never sleeps The Forex market works 24 hours and 5 – 1/2 days a wee k . Because governments, corporates and private individual who require currency exchange services are spread around the world, so trading on the forex market never stops. Activity on the forex market follows the sun around the world, s o right from the Monday morning opening in Australia to the afternoon close in New York. At any point of the day you can find an active pair to trade. Long or Short A trader in forex can trade both ways. It means a forex trader can play the market and m ake profits irrespective of whether market is going up, down or is in tight range. So irrespective of the event that has triggered the movement forex traders do not care. Low transaction cost Most forex accounts trade with little or no co mmission and there is no exchange or data license fees. Generally , the retail transaction fee (the bid/ask spread) is typically less than 1. Forex Trading Introduction
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Forex Trading 3 0.1% under normal market conditions. With larger dealers (where volumes are huge), the spread could be as low as 0. 05%. Leverage plays a crucial role here. Leverage Leverage is the mechanism by which a trader can take position much larger than the initial investment. Leverage is one more reason why you should trade in forex. Few curr ency traders realize the advantage of financial leverage available to them. For example , if you are trading in equity market, the maximum leverage a stock broker is offered is 1:2 but in case of forex market, you will get a leverage up to 1:5 0 and in many parts of the world even higher leverage is available. For this reason, it is not hard to see that why forex trading is so popular. High leverage allows a trader with small investment to trade higher volumes of currencies and thus provide the opportunity to make significant profits from the small movement in the market. However , if the market is against your assumption you might lose significant amount too. Therefore, like any other market, it is a two – way sword. High Liquidity The size of forex market is enormous and liquid by nature . High liquidity means a trader can trade with any type of cu r rency . Timing is not a constraint as well; trading can be done as per your convenience. The buy ers and sellers across the world accept different types of currencies. In addition, forex market is active 24 hours a day and is closed only on the weekends. Accessibility Getting started as a currency trader would not cost a ton of money especially when compared to trading stocks, option or future market. We have online forex brokers offering with a minimum account deposit of $25. This allows an average individual with very less trading capital to open a forex trading account . The forex market is enormous in size and is the largest market with millions of participants. Hundreds of thousands of individuals (like us), money exchangers, to banks, to hedge fund managers everybody participates in the forex marke t. F orex market is open 24 hours a day and 5 days a week . However, it does not mean it is always active. Let us check what a 24 – hour day in the forex world looks like. The forex market is divi ded into four major trading sessions: the Sydney session, the Tokyo session, the London session and the New York session. The following table shows the opening and closing time of each session.
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Forex Trading 4 Summer Session ( Around April October) TIME ZONE EDT GMT Sydney open Sydney close 6:00 PM 3:00 AM 10:00 PM 07:00 AM Tokyo Open Tokyo Close 7:00 PM 4:00 AM 11:00 PM 08:00 AM London Open London Close 03:00 AM 12:00 PM 07:00 AM 04:00 PM New York Open New York C lose 08:00 AM 05:00 PM 12:00 PM 09:00 PM Winter ( Around October April) TIME ZONE EST GMT Sydney Open Sydney Close 04:00 PM 01:00 AM 09:00 PM 06:00 AM Tokyo Open Tokyo Close 06:00 PM 03:00 AM 11:00 PM 08:00 AM London Open London Close 03:00 AM 12:00 PM 08:00 AM 05:00 PM New York Open New York Close 08:00 AM 05:00 PM 01:00 PM 10:00 PM Note: The actual opening and closing timing of forex market depends on local business hours. We can see in the above chart that in be tween different forex trading session(region wise), there is a period of time where two sessions (region time) are open at the same time. There is always more volume of trade when two markets ( in different region s ) are open at the same time.
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Forex Trading 5 In this chapter, we will learn about the structure of the forex market. The structure of a typical stock market is as shown below : But the structure of the forex market is rather unique because major volumes of transacti ons are done in Over – The – Counter (OTC) market which is independent of any centralized system ( exchange) as in the case of stock markets. The participants in this market are: Central Banks Major commercial banks Investment banks Corporations f or international business transactions Hedge funds Speculators Pension and mutual funds Insurance companies Forex brokers 2. Forex Trading The structure of the forex market Buyers Centralised Exchanges (NSE, BSE, NYSE) Seller
609 KB – 75 Pages