Basic Fundamental Analysis

On 11.09.09, In Intro to Forex, By

The original title of this article was Fundamental vs. Technical analysis. This would have been a fallacy. Fundamental analysis is not in competition with technical analysis. They compliment each other. In order to be an effective trader on the Forex market a trader must consider both fundamental and technical principles.

Fundamental Analysis uses economic, political, and social circumstances. These forces affect the supply and demand.

There are 4 major forces that cause changes:

Unemployment
Increase=Lower prices
Decrease=Higher Prices

Gross Domestic Product (GDP)
Increase=Higher prices
Decrease=Lower Prices

Balance of Trade Deficit
Increase=Lower prices
Decrease=Higher Prices

Interest Rates
Increase=Higher Prices
Decrease=Lower Prices

Economists keep track of these forces using economic calendars. Economic calendars keep track of announcements and market moving events.

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Forex Vs. Stocks

On 11.09.09, In Intro to Forex, By

The Foreign Exchange Market

The Foreign Exchange Market is a currency trading market. It is open 24 hours a day, 5.5 days a week. This is possible because the market trades electronically.

There are 164 total currencies traded, but 8 major ones. These are the U.S. Dollar, Japanese Yen, Euro, British Pound, and Swiss Frank. The Australian Dollar, Canadian Dollar, and New Zealand Dollar are popular as well.

The leverage on the Forex market is much higher than the stock market. Some brokers offer upwards of 250:1. This gives the trader a greater chance to profit.

The probability of a major currency failing is very slim. A US dollar will fluctuate in value but never completely devalue the way a stock may.

The Stock Market

The stock market consists of stocks of publicly held corporations. It is open 6.5 hours a day Monday through Friday. Approximately 8000 different stocks are traded.

In order to trade on the stock market an investor must have a broker. This broker acts as n intermediary(middleman) and executes the trades. They usually charge fees on top of a commission to make the trade.

There is no capital requirement to trade stocks per se. A trader must be able to afford the stock and the commissions to purchase it. If a trader wants to open a margin account $2500 is the minimum deposit. A margin account uses money loaned by the bank for trading.

This can be risky because stocks can fail suddenly before a trader can act. Their trade volume may decline rapidly and stagnate the stock. Remember what is borrowed must be paid back.

There are government restrictions on stop orders and short selling.

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Pips? And Lots?!

On 11.07.09, In Intro to Forex, By

Pips?

The most repeated word in Forex currency trading is pip. Pip stands for percentage in point. A pip is the smallest unit of currency.

Ex.

$0.1234

The pip is in the fourth decimal place on every currency except Japanese (¥)

¥0.12

Pippin’ is easy

Different currencies have different pip values.

Ex.

For the USD/JPY
90
For JPY the pip is .01
Pip Value/Exchange Rate
.01/90=.0001111

For EUR/USD
1.5
For EUR use .0001
Pip Value/Exchange Rate
.0001/1.5=.00066

When a trade is completed the profit/loss is displayed in pip value. The pip value may be displayed as EUR instead of USD. A conversion will need to be done.

Ex.
Referring back to the EUR/USD example:

EUR/USD=1.5
Pip Value= .00066
Pip Value times USD conversion
.00066*1.5=.000999 (Rounds to .0001)

And Lots?

Why does Forex use such small numbers?

On the Foreign Exchange Market currency is purchased in lots. A trader cannot use $1 to buy €1.5. A lot of €s is purchased. The typical lot is $100,000, some brokers offer as low as $10,000. A much larger profit is realized through these purchases.

Ex.

Calculating Forex profit.

EUR/USD=1.50 (€1=$1.5)
I have $100,000 I buy €66,666.
EUR/USD rises to 1.5020
This is an increase of 20 pips.
I sell my € to buy $
Pip Value
(.0001/1.502)*100,000=$15.02 per pip
Profit
15.02*20pips=$300.40
That’s only one trade!

 
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Which Currency Trading Platform?

On 11.06.09, In Intro to Forex, By Forex Protege

Currency trading platforms are an important link between the individual trader and the currency exchange market. There are two types of trading platforms:

Client based platforms are downloaded onto the currency trader’s computer, while web based platforms operate using javascript on the brokers web page. The advantage of the web based currency trading platform is it can be used on any computer with internet access. The disadvantage is it is usually slower than the client based software.

There is no cookie cutter currency platform right for everybody. The trading platform usually come with a broker. When picking a currency trading broker a trader should ask himself these questions:

Is this broker trustworthy?

The internet is full of Forex platform reviews with the authors complaining of unscrupulous brokers. They deposit money in their brokerage account to find that the links to withdraw the money are dead, the fax number to send a written request has been disconnected, and there is no working telephone number on the website.

The best way to avoid this is to check to see if the broker is registered with the Futures Commission Merchant and overseen by the Commodity Futures Trading Commission. This is very important.

How effective is their currency trading platform?

Try out the currency platform provided by the currency broker. Is it simple to use accurate, and the charts readable? A currency trading platform that does not update the prices fast and accurately is completely useless.

What are the costs of trading with this currency broker?

Some brokers may offer great incentives to new arrivals, IF they deposit $10000. Others may be geared toward the beginner trader.

The main cost of trading with a broker is the spread. The spread is how most currency trading brokers make their money.

Ex.

Forexbroker charges a spread of 98.95/99.00 on ¥.

The trader uses $100 to by ¥9895.

Then immediately sells ¥9895 back for $95

The trade cost $5.

Spreads are calculated in pips.

The final charge to consider when choosing a Forex broker is the rollover charge. These are the charges that occur when a trade is postponed to the next trading day. They are based on the overnight interest rate of the country’s currencies being traded.

Foreign Exchange trading costs are kept low because of the size of the market.

What is leverage and margin?

Margin is stock equity placed as collateral on a loan given by the currency trading broker. This provides leverage for the investor to increase the profits made during trading. Some brokers offer up to 250:1 margins ( Every $1=$250). Margin trading may be required because of the currency buying requirements of the forex market.

Using margin trading is a great way to make huge profits, however if failed is a great way to accrue huge debts. A broker has the right to sell a margin investment to prevent further losses. If the investment plummets the broker may sell it and prevent any chance of recouping the loss.

Demo trading, DO IT!

Do not lose all your money! Before depositing real money into any Forex account an aspiring trader should demo trade for 3-6 months and develop a successful strategy.

Demo trade for at least 3-6months

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What is Forex?

On 11.04.09, In Intro to Forex, By Forex Protege

The Foreign Exchange Market

The foreign exchange market (Forex) is used to convert currency from one country into the currency of another. It allows individuals and companies from different countries to easily sell products.

Every country has its own currency.

The common Forex Currencies are:
U.S. Dollar($)
Euro(€)
Australian Dollar(A$)
Swiss Frank(CHF)
Japanese Yen(¥)

If a business exports something to another country they use the Foreign Exchange Market to convert payment.

How does an individual profit in forex?

The currency prices on the Forex market fluctuate due local, global, and economic factors. This gives the individual forex trader the opportunity to make a profit using arbitrage. Arbitrage is the buying of a currency at a low price and selling it at a higher price.

Ex.
($)= US Dollars (¥)=Yen
$1=¥130

I use $10,000 to buy ¥1,300,000

The value of the ¥ rises therefore it takes less ¥ to buy dollars.

$1=¥100

I use my ¥1,300,000 to buy $13,000 and make a profit of $3,000.

How are Forex rates determined?

Foreign exchange rates are determined in two ways.

Long Term

Foreign exchange rates are determined by the supply and demand of the money supply.
A country’s money supply is regulated by the government and its central bank. When the government wants to increase the money supply, it tells the central bank to print more money or lower the interest rates.

Ex.

The U.S. Government increased the nation’s money supply when they bailed out the failing US Banks in October of 2008. This caused the supply of the $ to increase, therefore lowering the demand and decreasing the price.

http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=airpxcdYO32M

A country’s money supply has little to do with short term Forex rate fluctuations.

Short-Term Investor Psychology

When investors act on expectations of the price of a currency it causes a bandwagon effect. This causes the price of the currency to fall or rise in the short term.

Ex.
A major hedge fund manage states the US Dollar is undervalued. The price of the US dollar rises regardless of the statements truth because the individuals act on this managers advice.

How do I predict Forex exchange rates?

There are two styles of analysis.

Fundamental Analysis

Fundamental Forex analysis uses the size of the money supply, interest rates, and inflation rates. It may also use a countries balance of payments (imports vs exports).

Technical Analysis

Technical analysis relies on analyzing past trends using price and volume data to predict future trends.

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