THE FOREX GUIDE

FOREX = FOREIGN EXCHANGE = CURRENCY TRADE

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0. The Content

A. The Basics

A.1. Definitions

Broker
A broker is a company that provides software and infrastructure for trading.
  • A direct market access broker
    Passes your orders through a third party like a bank and you pay a commission.
  • A market maker broker
    Acts as a liquidity provider to your trades.
    Potential conflict of interest. No third party.
    Buy and sell directly and the commission is lower or none.
Currency Pair
examples: EURUSD ; GBPJPY
The first currency of a pair we call the base currency
It decides what you are buying or selling.
The second currency we call the quote currency
It gives the price of the base currency in quote currency units
Leverage
If the leverage is 50 to 1.
So with 1 dollar on my account I can control 50 dollar.
Possible leverages are 50:1, 100:1, 500:1 sometimes even 1000:1.
Leverage is like a credit card, we should never use all.
Margin
Is the amount of money we paid to take our positions in a forex trading account.
Margin Call
Is when the current losses exceed the available margin.
The policy in that case depends on the broker.
  • Some will close all open trades! ITS VERY BAD.
  • Some will only close the loosing positions starting with the biggests.
Margin percentage
A margin percentage is related with the leverage.
example: A margin percentage of 50% means.
100/50% -> 2 so a 2:1 leverage 100 / margin percentage is the leverage.
Pip
Percentage-in-points to measure movements.
A pip value is the 4th number of the right of the decimal point for non JPY-pairs.
Pip value
The pip value of the move.
Multiply the position size by the number of pips moved.
The pips and values are allways in QUOTE currency.
If necessary you convert back to your deposit currency by multiplying with the current exchange rate.
example 1:
10K position EURUSD, the market moves 1 pip.
10.000 $ * 0,0001 = 1$
example 2
10K USDJPY position the market moves 1 pip.
10.000 * 0,01 Yen = 100 Yen
Divided by 102,51 (curent USDJPY exchange rate)
100 / 102,51 Yen = 0.9755 $ per pip.
Spread
The spread is the difference between buying and selling position expressed in pips.
10K EURUSD * 0,0002 = 2,00$ it takes two dollars to open that trade.
Rollover
Rollover is what you pay or earn by keeping a position overnight.
Those interest rates are determined by the central banks of the corresponding countries. (take the interest rate by day)
** Some brokers pay you the rollover some do not **
Stops and Limits
Stops and limits are made so the trader is able to protect himself.
example 1: A stop order 50 pips away from my entry order.
You put a limit order 50 pips away (higher) from your entry order.
Volatility
Volatility is measured by CIVX or ATR indicators.
CIVX
is measured in percentages and changes all the time so you have to take the average on long term.
ATR
Average True Range is the average beteween the highs and lows of 14 days.
Lot
A lot with volume 1.00 is 100.000 units like 100.000 EURO
0,01 is the minimum and can be equal to 1.000 EURO.
Points
A point is 1/10 of a PIP.
Long and Short Position
A long position is expressed in base currency.
Taking a Long Position means you Buy.
You open Long position is when you buy a base currency.
When you close a long position you sell that currency.

To go short means you sell without buying first.
It is expressed in base currency.
You open a short position when you want to sell a currency without buying the currency.
This permits you to earn money when the rate goes down.
Remark1: On the market the Long positions are matched with the short position.

Remark2: Some brokers do not permit you to open Short and Long positions on the same chart, some brokers do.
Opening short and long positions at the same time, is called hedging.

Remark3: For every position taken we can add a Stop Loss ST amount and a Take Profit TP-amount.
The difference the position open Price and the ST-price should be smaller than the difference with the position open price and the TP-price.
Order Types
  • Market Order
    Is done immediately with the current price. It can be very different from the average level.
    Use upper and lower bounds to prevent losses.
  • Limit Orders
    Is an order that will only be executed if certain conditions are met.
    The price passed the limit.
  • Take Profit Order
    A take profit order automatically closses an open order when the exchange rate reaches the specified threshold.
    Its a way to make profit when you have no time to monitor your open positions.
  • Stop-Loss Order
    Is the opposite of a take profit order.
    It closes an order when the price goes too low.
    It restricts your loss but it will never prevent them.
  • Trailing Stop Orders
    Simular to stop loss order but the stop loss is adapted if he rate goes up.
    So if there is some profit at a certain moment we adapt the stop loss.

A.2. TRADING

We use risk management to prevent losses.
We use a advicer to decide whether to take a long or short position or to take a position.

A.2.1. Trading Types based on the Advicing.

FUNDAMENTAL ANALYSIS
Analysis based on central banks, employment rate, sales of new houses, and GDP. An important aspect are the forecast of the rate by the central banks. They make it public 8 times a year. For some people the forecasts of the rate are more important then the current rate. If the forecast will be lower they want to sell. Used for longer terms.

Remark:
Fundamental Analysis will be used in combination with Interday Trading.
TECHNICAL ANALYSIS
Using math and statistics. Like moving averages, standard deviation, Bollinger Bands, etc...

A.2.2. Trading Types Based on the Time.

Day Trading -- Intra Day trading -- Scalping
We open and close positions mostly within a day.
Sometimes we keep those positions longer like a few days or 5 days maximum.
Interday trading -- long term
We trade over several days, weeks, months.
Remark:
We also have Carry Trade that is based on the interest rates of the currencies.
I will go deeper on it later.
Carry trade is an example of interday trading.

A.2.3. Trading Types Based on the Decision Maker.

Manual Trading
We look at the screen and create, modify or close orders.
Automated Trading
The trading is done by software.
We do not have to check the charts once we can trust the software.
Remark:
Automated Trading is handy for intra day trading because we can use the speed of the computer.

A.3. Carry Trade.

The carry happens at 5pm Eastern Time at North American Time every day except in the weekend.
You get 3 times the carry at Wednesday to compensate the weekend.

Priciple:
- You earn interest on a position you hold long.(if the interest is positif)
- You pay interest on a position you hold short.

By example for AUD/EUR
you receive the AUD interest and pay EUR interest.

So BUY high yielding Currencies like: AGAINST Low yielding currencies like:
AUD 1.5% against CHF NZD 1.75% EUR 0.0% ZAR ... JPY -0.1% USD 0.5%

OR Sell low yielding currencies AGAINST High yielding currencies
Example:
BUY ZAR/Denmark
BUY Turkey/EUR
SELL EUR/ZAR
SELL EUR/Turkey

Advice:
By experience I know Carry Trade is not a good idea.
You can get the swap by closing the position and currencies with a high rate are mostly less stable.
So mostly the position will have no profit.
If there is no profit you can loose the complete swap/carry value.
Also to profit from the swap you allways have to buy or you allways have to sell.
If you have to sell (go short) you have to take the position when the rate is high (near the maximum) if not there is a high risk of loosing you swap.
If you have to buy, you have to take the position when the rate is very low near the minimum.
If not the risk is high and the swap will not be enough to cover the losses.

A.4. The Relation between Leverage and Margin.

Balance is the money you have on your Forex account without taking in account the positions. So it is the money you do not use.

Equity = Balance - (Profit and Loss of all Open Positions).
You need Equity to be able to take positions(pay the margin),
but also as a buffer to the loosing positions.

For every position you take you have to pay margin.
The margin you see in your MT4 client is the total margin for your open positions.

The amount of your margin depends on the leverage and the lotsize of your position.
If the leverage is 1:1 then the margin is 100.000 units of your currency for lotsize 1.
If the leverage is 1:100 then the margin is 1.000 units of your currency for lotsize 1.
If the leverage is 1:500 then the margin is 200 units of your currency for lotsize 1,
or 20 units for lotsize 0.1

When you close your position you get your margin back.
The free Margin is the is the margin you can still use.
Use you leverage as a buffer for losses not to take as much positions as you can.

MarginLevel = (Equity/Margin)* 100
If the MarginLevel is 120 % you can no longer take positions.
If the Margin Level is 20% the broker starts to close your positions.
Advice: You should never go below 1000% for a margin level that is risky

Advice about positions:

A position is an opportunity (chance) to win money but also a risk to loose money.
So thats why it is good to close your position as fast as possible.

You can open a lot of positions and earn with positions that have profit.
But at the end you have a lot of open position left with loss.

If you have to leave the market by example due to a margin call,
then you loose a lot of money because the position which are left are the ones with losses.



Copyright © 2017 Bart Vertongen