Foreign exchange controls

Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by nonresidents.

Common foreign exchange controls include:
Banning the use of foreign currency within the country
Banning locals from possessing foreign currency
Restricting currency exchange to government-approved exchangers
Fixed exchange rates
Restrictions on the amount of currency that may be imported or exported

Countries with foreign exchange controls are also known as "Article 14 countries," after the provision in the International Monetary Fund agreement allowing exchange controls for transitional economies. Such controls used to be common in most countries, particularly poorer ones, until the 1990s when free trade and globalization started a trend towards economic liberalization. Today, countries which still impose exchange controls are the exception rather than the rule.

Current countries with foreign exchange controls

(list very incomplete)
This is an incomplete list, which may never be able to satisfy particular standards for completeness. You can help by expanding it with reliably sourced entries.
Argentina
Armenia
Bahamas
Barbados
Brazil
China
Cuba
Egypt
Fiji
Georgia (country)
Iceland
India
Sri Lanka
Libya
Malaysia
Mauritius
Theoretically speaking, exchange controls were abolished in 1994, but the rules still state that repatriation of foreign investment and the profits from it is subject to proof of the origin of the money, and subject to payment of any outstanding Mauritian taxes.
Morocco
Myanmar
Namibia
Nigeria
North Korea
Pakistan
Papua New Guinea
Samoa
Russia
Seychelles
South Africa
Tunisia
Ukraine
Venezuela
Zimbabwe

Foreign-exchange reserves

Foreign-exchange reserves (also called forex reserves or FX reserves) in a strict sense are 'only' the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, Special Drawing Rights (SDRs) and International Monetary Fund (IMF) reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. These are assets of the central bank held in different reserve currencies, mostly the United States dollar, and to a lesser extent the euro, the pound sterling, and the Japanese yen, and used to back its liabilities, e.g., the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions.
History

Official international reserves, the means of official international payments, formerly consisted only of gold, and occasionally silver. But under the Bretton Woods system, the US dollar functioned as a reserve currency, so it too became part of a nation's official international reserve assets. From 1944–1968, the US dollar was convertible into gold through the Federal Reserve System, but after 1968 only central banks could convert dollars into gold from official gold reserves, and after 1973 no individual or institution could convert US dollars into gold from official gold reserves. Since 1973, no major currencies have been convertible into gold from official gold reserves. Individuals and institutions must now buy gold in private markets, just like other commodities. Even though US dollars and other currencies are no longer convertible into gold from official gold reserves, they still can function as official international reserves.

Purpose

In a flexible exchange rate system, official international reserve assets allow a central bank to purchase the domestic currency, which is considered a liability for the central bank (since it prints the money or fiat currency as IOUs). This action can stabilize the value of the domestic currency.

Central banks throughout the world have sometimes cooperated in buying and selling official international reserves to attempt to influence exchange rates. This coordinated strategy was used to replace pound sterling with US dollar as the world reference currency during the 20th century.[1] The lack of such international cooperation is also a big concern for the replacement of US Dollar in this role of reference currency in foreign exchange reserves.

Recent Developments

Recent Developments

Financial market news is now being formatted by firms such as Need To Know News, Thomson Reuters, Dow Jones, and Bloomberg, to be read and traded on via algorithms.

"Computers are now being used to generate news stories about company earnings results or economic statistics as they are released. And this almost instantaneous information forms a direct feed into other computers which trade on the news."

The algorithms do not simply trade on simple news stories but also interpret more difficult to understand news. Some firms are also attempting to automatically assign sentiment (deciding if the news is good or bad) to news stories so that automated trading can work directly on the news story

"Increasingly, people are looking at all forms of news and building their own indicators around it in a semi-structured way," as they constantly seek out new trading advantages said Rob Passarella, global director of strategy at Dow Jones Enterprise Media Group. His firm provides both a low latency news feed and news analytics for traders. Passarella also pointed to new academic research being conducted on the degree to which frequent Google searches on various stocks can serve as trading indicators, the potential impact of various phrases and words that may appear in Securities and Exchange Commission statements and the latest wave of online communities devoted to stock trading topics.

"Markets are by their very nature conversations, having grown out of coffee houses and taverns", he said. So the way conversations get created in a digital society will be used to convert news into trades, as well, Passarella said.

“There is a real interest in moving the process of interpreting news from the humans to the machines” says Kirsti Suutari, global business manager of algorithmic trading at Reuters. "More of our customers are finding ways to use news content to make money."

An example of the importance of news reporting speed to algorithmic traders was an advertising campaign by Dow Jones (appearances included page W15 of the Wall Street Journal, on March 1, 2008) claiming that their service had beaten other news services by 2 seconds in reporting an interest rate cut by the Bank of England.

In July 2007, Citigroup, which had already developed its own trading algorithms, paid $680 million for Automated Trading Desk, a 19-year-old firm that trades about 200 million shares a day. Citigroup had previously bought Lava Trading and OnTrade Inc.

Transaction cost reduction

Transaction cost reduction

Most strategies referred to as Algorithmic Trading (as well as algorithmic liquidity seeking) fall into the cost-reduction category. Large orders are broken down into several smaller orders and entered into the market over time. This basic strategy is called "iceberging". The success of this strategy may be measured by the average purchase price against the VWAP for the market over that time period. One algorithm designed to find hidden orders or icebergs is called "Stealth". Most of these strategies were first documented in 'Optimal Trading Strategies' by Robert Kissell.

Strategies that only pertain to dark pools

Recently, HFT, which comprises a broad set of buy-side as well as market making sell side traders, has become more prominent and controversial.These algorithms or techniques are commonly given names such as "Stealth" (developed by the Deutsche Bank), "Iceberg", "Dagger", "Guerrilla", "Sniper", "BASOR" (developed by Quod Financial) and "Sniffer".[26] Yet are at their core quite simple mathematical constructs.[27] Dark pools are alternative electronic stock exchanges where trading takes place anonymously, with most orders hidden or "iceberged."[28] Gamers or "sharks" sniff out large orders by "pinging" small market orders to buy and sell. When several small orders are filled the sharks may have discovered the presence of a large iceberged order.

“Now it’s an arms race,” said Andrew Lo, director of the Massachusetts Institute of Technology’s Laboratory for Financial Engineering. “Everyone is building more sophisticated algorithms, and the more competition exists, the smaller the profits.”

One of the unintended adverse effects of algorithmic trading, has been the dramatic increase in the volume of trade allocations and settlements, as well as the transaction settlement costs associated with them. Since 2004, there have been a number of technological advances and service providers [30] by individuals like Scott Kurland, who have built solutions for aggregating trades executed across algorithms, in order to counter these rising settlement costs.

High-frequency trading
Main article: High-frequency trading

In the U.S., high-frequency trading (HFT) firms represent 2% of the approximately 20,000 firms operating today, but account for 73% of all equity trading volume.[31] As of the first quarter in 2009, total assets under management for hedge funds with HFT strategies were US$141 billion, down about 21% from their high.[32] The HFT strategy was first made successful by Renaissance Technologies.[33] High-frequency funds started to become especially popular in 2007 and 2008.Many HFT firms are market makers and provide liquidity to the market which has lowered volatility and helped narrow Bid-offer spreads making trading and investing cheaper for other market participants.HFT has been a subject of intense public focus since the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission implicated both algorithmic and HFT in the May 6, 2010 Flash Crash.

High-frequency trading is quantitative trading that is characterized by short portfolio holding periods (see Wilmott (2008), Aldridge (2009)). There are four key categories of HFT strategies: market-making based on order flow, market-making based on tick data information, event arbitrage and statistical arbitrage. All portfolio-allocation decisions are made by computerized quantitative models. The success of HFT strategies is largely driven by their ability to simultaneously process volumes of information, something ordinary human traders cannot do.

Market making

Market making is a set of HFT strategies that involves placing a limit order to sell (or offer) above the current market price or a buy limit order (or bid) below the current price in order to benefit from the bid-ask spread. Automated Trading Desk, which was bought by Citigroup in July 2007, has been an active market maker, accounting for about 6% of total volume on both NASDAQ and the New York Stock Exchange.[36]

Statistical Arbitrage

Another set of HFT strategies is classical arbitrage strategy might involve several securities such as covered interest rate parity in the foreign exchange market which gives a relation between the prices of a domestic bond, a bond denominated in a foreign currency, the spot price of the currency, and the price of a forward contract on the currency. If the market prices are sufficiently different from those implied in the model to cover transaction cost then four transactions can be made to guarantee a risk-free profit. HFT allows similar arbitrages using models of greater complexity involving many more than 4 securities. The TABB Group estimates that annual aggregate profits of low latency arbitrage strategies currently exceed US$21 billion.[5]

A wide range of statistical arbitrage strategies have been developed whereby trading decisions are made on the basis of deviations from statistically significant relationships. Like market-making strategies, statistical arbitrage can be applied in all asset classes.

Event Arbitrage

A subset of risk, merger, convertible, or distressed securities arbitrage that counts on a specific event, such as a contract signing, regulatory approval, judicial decision, etc., to change the price or rate relationship of two or more financial instruments and permit the arbitrageur to earn a profit.

Merger arbitrage also called risk arbitrage would be an example of this. Merger arbitrage generally consists of buying the stock of a company that is the target of a takeover while shorting the stock of the acquiring company.

Usually the market price of the target company is less than the price offered by the acquiring company. The spread between these two prices depends mainly on the probability and the timing of the takeover being completed as well as the prevailing level of interest rates.

The bet in a merger arbitrage is that such a spread will eventually be zero, if and when the takeover is completed. The risk is that the deal "breaks" and the spread massively widens

History of algorithmic trading

Computerization of the order flow in financial markets began in the early 1970s with some landmarks being the introduction of the New York Stock Exchange’s “designated order turnaround” system (DOT, and later SuperDOT) which routed orders electronically to the proper trading post to be executed manually, and the "opening automated reporting system" (OARS) which aided the specialist in determining the market clearing opening price (SOR; Smart Order Routing).

Program trading is defined by the New York Stock Exchange as an order to buy or sell 15 or more stocks valued at over US$1 million total. In practice this means that all program trades are entered with the aid of a computer. In the 1980s program trading became widely used in trading between the S&P500 equity and futures markets.

In stock index arbitrage a trader buys (or sells) a stock index futures contract such as the S&P 500 futures and sells (or buys) a portfolio of up to 500 stocks (can be a much smaller representative subset) at the NYSE matched against the futures trade. The program trade at the NYSE would be pre-programmed into a computer to enter the order automatically into the NYSE’s electronic order routing system at a time when the futures price and the stock index were far enough apart to make a profit.

At about the same time portfolio insurance was designed to create a synthetic put option on a stock portfolio by dynamically trading stock index futures according to a computer model based on the Black-Scholes option pricing model.

Both strategies, often simply lumped together as "program trading", were blamed by many people (for example by the Brady report) for exacerbating or even starting the 1987 stock market crash. Yet the impact of computer driven trading on stock market crashes is unclear and widely discussed in the academic community.

Financial markets with fully electronic execution and similar electronic communication networks developed in the late 1980s and 1990s. In the U.S., decimalization, which changed the minimum tick size from 1/16 of a dollar (US$0.0625) to US$0.01 per share, may have encouraged algorithmic trading as it changed the market microstructure by permitting smaller differences between the bid and offer prices, decreasing the market-makers' trading advantage, thus increasing market liquidity.

This increased market liquidity led to institutional traders splitting up orders according to computer algorithms in order to execute their orders at a better average price. These average price benchmarks are measured and calculated by computers by applying the time weighted (i.e. unweighted) average price TWAP or more usually by the volume weighted average price VWAP.

As more electronic markets opened, other algorithmic trading strategies were introduced. These strategies are more easily implemented by computers because machines can react more rapidly to temporary mispricing and examine prices from several markets simultaneously. For example Stealth (developed by the Deutsche Bank), Sniper and Guerilla (developed by Credit Suisse), arbitrage, statistical arbitrage, trend following, and mean reversion.

This type of trading is what is driving the new demand for Low Latency Proximity Hosting and Global Exchange Connectivity. It is imperative to understand what is latency when putting together a strategy for electronic trading. Latency refers to the delay between the transmission of information from a source and the reception of the information at a destination. Latency has as a lower bound the speed of light; this corresponds to about 3.3 milliseconds per 1,000 kilometers of optical fibre. Any signal regenerating or routing equipment will introduce greater latency than this speed-of-light baseline.

Retail foreign exchange platform

Retail foreign exchange trading is a small segment of the large foreign exchange market. In 2007 it had been speculated that volume from retail foreign exchange trading represents 5 percent of the whole foreign exchange market which amounts to $50–100 billion in daily trading turnover. The retail foreign exchange market has been growing. In general retail customers are able to trade spot currencies. Due to the increasing tendency in the past years of the gradual shift from traditional intrabank 'paper' trading to the more advanced and accurate electronic trading, there has been spur in software development in this field. This change provided different types of trading platforms and tools intended for the use by banks, portfolio managers, retail brokers and retail traders.

One of the most important tools required to perform a foreign exchange transaction is the trading platform providing retail traders and brokers with accurate currency quotes.



History and new developments

Since 1996, when retail foreign exchange trading was first introduced, several brokers who lacked the sufficient tools developed their own trading platforms tailored specifically to their needs. The 1st retail FX brokers were MG Forex, The Matchbook FX ECN, GFT, CMC Markets, Saxo Bank (then known as Midas) and a handful of others. Most except CMC, Saxo & Matchbook FX were based on the ACT foreign exchange trading technology and GUI. These platforms were good enough at the time but required constant investments in research and development and this development cost too much. This was the first wave.

The second wave was in the early 2000s: several software companies entered the retail foreign exchange trading market by launching their own versions of trading platforms, like Apbg Group, Ctn Systems and MetaQuotes Software. Typically these versions were cumbersome for both front-end users (retail traders) and back-end users (retail brokers) due to the misunderstanding of the developers about the foreign exchange market and also because of the insufficient programming tools/languages at the time. Simultaneously most of the retail brokers kept using and developing their own systems as they waited for better platforms which were yet to be developed.

It is only in the last couple of years that the advanced trading platforms started to emerge. Platforms like Multicharts, cTrader put much stronger emphasis on the user interface (GUI) making it more accessible to the retail traders while making trading on it very simple and intuitive. Platforms started to focus on social networking as a way to attract new users, after the emergence of Facebook, Twitter and other social media networks. Social trading has been growing intensely in the last years, especially after platforms like Currensee, Zecco.com, eToro or FXStat appeared.

Moreover, a very strong emphasis was put on the back-end which allowed the retail brokers better control over their operations, better reporting and accurate system and ways to manage marketing campaigns.

Gradually this wave is replacing the previous second wave with a major shift now to the friendlier and more intuitive systems of the third wave which according to Aite Group are necessary in order to maintain growth.

Financial instruments

Financial instruments

Spot

A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira, EURO and Russian Ruble, which settle the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction.

Forward


One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties.




The most common type of forward transaction is the swap. In an swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange. A deposit is often required in order to hold the position open until the transaction is completed.

Future


Futures are standardized forward contracts and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.

Option


A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The options market is the deepest, largest and most liquid market for options of any kind in the world.

Non-bank foreign exchange companies

Non-bank foreign exchange companies

Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but rather currency exchange with payments (i.e., there is usually a physical delivery of currency to a bank account).

It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.

Money transfer/remittance companies and bureaux de change

Money transfer companies/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally followed by UAE Exchange[citation needed]

Bureaux de change or currency transfer companies provide low value foreign exchange services for travelers. These are typically located at airports and stations or at tourist locations and allow physical notes to be exchanged from one currency to another. They access the foreign exchange markets via banks or non bank foreign exchange companies.

Foreign exchange market

The foreign exchange market (forex, FX, or currency market) is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.

The foreign exchange market assists international trade and investment, by enabling currency conversion. For example, it permits a business in the United States to import goods from the United Kingdom and pay pound sterling, even though its income is in United States dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation on the change in interest rates in two currencies.

In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

The foreign exchange market is unique because of
its huge trading volume representing the largest asset class in the world leading to high liquidity;
its geographical dispersion;
its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
the variety of factors that affect exchange rates;
the low margins of relative profit compared with other markets of fixed income; and
the use of leverage to enhance profit and loss margins and with respect to account size.

As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. According to the Bank for International Settlements, as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.

The $3.98 trillion break-down is as follows:
$1.490 trillion in spot transactions
$475 billion in outright forwards
$1.765 trillion in foreign exchange swaps
$43 billion currency swaps
$207 billion in options and other products

some rules of forex trading

ok now let us go through some rules of forex trading

1)Trading Is An Art, Not A Science
The systems and ideas presented here stem from years of observation of price action in this market and provide high probability approaches to trading both trend and countertrend setups, but they are by no means a surefire guarantee of success. No trade setup is ever 100% accurate. Therefore, no rule in trading is ever absolute (except the one about always using stops!). Nevertheless, these 10 rules work well across a variety of market environments, and will help to keep you out of harm's way.

2)Never Let A Winner Turn Into A Loser
The FX markets can move fast, with gains turning into losses in a matter of minutes, making it critical to properly manage your capital. There is nothing worse than watching your trade be up 30 points one minute, only to see it completely reverse a short while later and take out your stop 40 points lower. You can protect your profits by using trailing stops and trading more than one lot. For more on this

3)Logic Wins; Impulse Kills
It can be a huge rush when a trader is on a winning streak, but just one bad loss can make the same trader give all of the profits and trading capital back to the market. Reason always trumps impulse because logically focused traders will know how to limit their losses, while impulsive traders are never more than one trade away from total bankruptcy. To get a better understanding of traders

4)Never Risk More Than 2% Per Trade
This is the most common and most violated rule in trading. Trading books are littered with stories of traders losing one, two, even five years' worth of profits in a single trade gone terribly wrong. By setting a 2% stop-loss for each trade, you would have to sustain 10 consecutive losing trades in a row to lose 20% of your account.

5)Use Both Technical And Fundamental Analysis
Both methods are important and have a hand in impacting price action. Fundamentals are good at dictating the broad themes in the market that can last for weeks months or even years. Technicals can change quickly and are useful for identifying specific entry and exit levels. A rule of thumb is to trigger fundamentally and enter and exit technically. For example, if the market is fundamentally a dollar-positive environment, we'd technically look for opportunties to buy on dips rather than sell on rallies.

6)Always Pair Strong With Weak
When a strong army is positioned against a weak army, the odds are heavily skewed toward the strong army winning. This is the way you should approach trading. When we trade currencies, we are always dealing in pairs - every trade involves buying one currency and shorting another. Because strength and weakness can last for some time as economic trends evolve, pairing the strong with the weak currency is one of the best ways for traders to gain an edge in the currency market

7) Being Right And Early Means You Are Wrong
In FX, successful directional trades not only need to be right in analysis, but they also need to be right in timing as well. If the price action moves against you, even if the reasons for your trade remain valid, trust your eyes, respect the market and take a modest stop. In the currency market, being right and being early is the same as being wrong. Consider a scenario where a trader takes a short position during a rally in anticipation of a turnaround. The rally continues for longer than anticipated, so the trader exits early and takes a loss - only to find that the rally eventually did turn around and their original position could have been profitable

8)Differentiate Between Scaling In And Adding To A Loser
The difference between adding to a loser and scaling in is your initial intent before you place the trade. Adding to a losing position that has gone beyond the point of your original risk is the wrong way to trade. There are, however, times when adding to a losing position is the right way to trade. For example, if your ultimate goal is to buy a 100,000 lot, and you establish a position in clips of 10,000 lots to get a better average price, this type of strategy is known as scaling in

9)What Is Mathematically Optimal Is Psychologically Impossible
Novice traders who first approach the markets will often design very elegant, very profitable strategies that appear to generate millions of dollars on a computer backtest. Armed with such stellar research, these newbies fund their FX trading accounts and promptly proceed to lose all of their money. Why? Because trading is not logical but psychological in nature, and emotion will always overwhelm the intellect in the end. Conventional wisdom in the markets is that traders should always trade with a 2:1 reward-to-risk ratio, the trader can be wrong 6.5 times out of 10 and still make money. In practice this is quite difficult to achieve.

10)Risk Can Be Predetermined; Reward Is Unpredictable
Before entering every trade, you must know your pain threshold. You need to figure out what the worst-case scenario is and place your stop based on a monetary or technical level. Every trade, no matter how certain you are of its outcome, is an educated guess. Nothing is certain in trading. Reward, on the other hand, is unknown. When a currency moves, the move can be huge or small

11)No Excuses, Ever
The "no excuses" rule is applicable to those times when the trader does not understand the price action of the markets. For example, if you are short a currency because you anticipate negative fundamental news and that news occurs, but the currency rallies instead, you must get out right away. If you do not understand what is going on in the market, it is always better to step aside and not trade. That way, you will not have to come up with excuses for why you blew up your account. It's acceptable to sustain a drawdown of 10% if it was the result of five consecutive losing trades that were stopped out at a 2% loss each. However, it is inexcusable to lose 10% on one trade because the trader refused to cut his losses

Developing a Trading Plan

The difference between making money and losing money can be as simple as trading with a plan or trading without one. A trading plan is an organized approach to executing a trading system that you've developed based on your market analysis and outlook while factoring in risk management and personal psychology.

No matter how good your trading plan is, it won't work if you don't follow it.

Traders who follow a disciplined approach are the ones who survive year after year after year. They can even have more losing trades than winning ones and still be profitable because they follow a disciplined approach.

Here is a summary of what the key benefits are:
Trading that is simpler with a plan than it is without one.
Reduced stress which means better health.
Ability to gauge your performance, identify problems, and make corrections.
A trading plan helps to prevent many psychological issues from taking root.
A trading plan that is adhered to strictly will reduce the number of bad trades.
A trading plan will help prevent irrational behavior in the heat of the moment.
A trading plan enables you to control the only thing you can control... yourself!
A trading plan will instill a large measure of discipline into your trading. Gamblers lack both discipline and a trading plan.
A plan will enable you to trade outside your comfort zone. How many times have you let a loss run and cut a profit short because it was the comfortable thing to do? A plan, executed with discipline, will help to prevent this from happening.
A plan is your GPS which will enable you to get from wherever you are now to wherever you want to be: consistent profitability.
Your trading plan is designed in such a way that if you do take a "wrong turn", you will know about it very quickly and have the opportunity to correct the problem before losses spiral out of control.
Always remember that the trading plan is a work in progress.

As things change, the trading plan must change, too. Assess your trading plan and processes periodically, especially when you have changes in your financial or life situation. Also, as your research leads to changes in your trading system or methods, be sure to reflect those adjustments in your trading plan.
Remember, the main purpose of the trading plan is to keep you on task, and to operate in an effective and efficient manner to make good trading decisions. It is, however, only as good as you make it, and it is completely useless if it is not

Each Trader is Unique
There are over 8 billion people in the world (including space aliens disguised as humans) and not one person is exactly the same as another. Even identical twins will have different fingerprints.
Everyone has their own look, personality, talents, and pizza topping preferences (we like pepperoni and potato chips). We all like different things and are unique in our own way.Trading is the same way. Our unique personalities will lead us to trade differently from one another. Some may be aggressive, "type A" personality traders while others may be more relax, "type B" personality traders. Some may like taking small wins all the time, while others don't mind losing a bit in order to make those huge gains when they do win.
The point is that no two traders are alike. Even if a group of people were to trade the same system rules, each person's end results would most likely be different from everyone else.

Is that a bad thing? Not at all!
Our uniqueness is what makes the world go round, so it's important to know your lifestyle and personality to help identify trading strengths and weaknesses. Trying to force a trade that doesn't match your personality will result in frustration and can hinder you from making consistent profits.

Day Trading

Day trading is another short term trading style, but unlike scalping, you are typically only taking one trade a day and closing it out when the day is over. These traders like picking a side at the beginning of the day, acting on their bias, and then finishing the day with either a profit or a loss. They DON'T like holding their trades overnight.

Day traders are suited for those that have enough time throughout the day to analyze, execute and monitor a trade. If you think scalping is too fast but swing trading is a bit slow for your taste, then day trading might be for you.


You might be a day trader if:
You like beginning and ending a trade within one day.
You have time to analyze the markets at the beginning of the day and can monitor it throughout the day.
You like to know whether or not you win or lose at the end of the day.


You might NOT be a day trader if:
You like longer or shorter term trading.
You don't have time to analyze the markets and monitor it throughout the day.
You have a day job.
Some things to consider if you decide to day trade:
Stay informed on the latest fundamentals events to help you choose a direction

You will want to keep yourself up-to-date on the latest economic news so that you can make your trading decisions at the beginning of the day.
Do you have time to monitor your trade?

If you have a full time job, consider how you will manage your time between your work and trading. Basically....don't get fired from your job because you are always looking at your charts!

Swing Trading
Swing trading is a longer term trading style that requires patience to hold your trades for several days at a time.
It is ideal for those who can't monitor their charts throughout the day but can dedicate a couple of hours analyzing the market every night.

This is probably best suited for those who have full time jobs or school, but have enough free time to stay up-to- date with what is going on in the global economies.

Swing trading attempts to identify medium term trends and enter only when there seems to be a high probability of winning.

Because trades last much longer than one day, larger stop losses are required to weather volatility, and a trader must adapt that to their money management plan.

You will most likely see trades go against you during the holding time since there can be many fluctuations of the price during the shorter time frames.

It is important that you are able to remain calm during these times and trust in your analysis.

Since trades usually have larger targets, spreads won't have as much of an impact to your overall profits. As a result, trading pairs with larger spreads and lower liquidity is acceptable.


You might want to be a swing trader if:
You don't mind holding your trades for several days.
You are willing to take fewer trades, but more careful to make sure your trades are very good setups.
You don't mind having large stop losses.
You are patient.
You are able to remain calm when trades move against you.


You might NOT want to be a swing trader if:
You like fast paced, action-packed trading.
You are impatient and like to know whether you are right or wrong immediately.
You get sweaty and anxious when trades go against you.
You can't spend a couple of hours every day to analyze the markets.
You can't give up your World of Warcraft raiding sessions.
If you have a full time job but enjoy trading on the side, then swing trading might be more your style! Make sure you swing by our "Show me the Money" thread so that you can interact with other swing traders.

Position Trader
Position trading is the longest term trading and can have trades that last for several months to several years!
This kind of trading is reserved for the ultra-patient traders, and requires a good understanding of the fundamentals.

Because position trading is held for so long, fundamental themes will be the predominant focus when analyzing the markets.
Fundamentals dictate the long term trends of currency pairs and it is important that you understand how economic data affects your countries and its future outlook.
Because of the lengthy holding time of your trades, your stop losses will be very large.
You must make sure you are well capitalized or you will most likely get margin called.

Position trading also requires thick skin because it is almost guaranteed that your trades will go against you at one point or another.

These won't just be little retracements either.

You may experience huge swings and you must be ready and have absolute trust in your analysis in order to remain calm during these times.
You might be a position trader if:
You are an independent thinker. You have to be able to ignore popular opinion and make your own educated guesses as to where the market is going.
You have a great understanding of fundamentals and have good foresight into how they affect your currency pair in the long run.
You have thick skin and can weather any retracements you face.
You have enough capital to withstand several hundred pips if the market goes against you
You don't mind waiting for your grand reward. Long term trading can net you several hundred to several thousands of pips. If you get excited being up 50 pips and already want to exit your trade, consider moving to a shorter term trading style.
You are extremely patient and calm.

You might NOT be a position trader if:
You easily get swayed by popular opinions on the markets.
You don't have a good understanding of how fundamentals affect the markets in the long run.

You aren't patient. Even if you are somewhat patient, this still might not be the trading style for you. You have to be the ultimate zen master when it comes to being this kind of patient!
You don't have enough starting capital.
You don't like it when the market goes against you.
You like seeing your results fast. You may not mind waiting a few days, but several months or even years is just too long for you to wait.

What is a Trading Plan?

What is a Trading Plan?
Now that you're about half way through college, here's one piece of advice you should always remember.
Be your own trader.
Don't follow someone else's trading advice blindly. Just because someone may be doing well with their method, it doesn't mean it will work for you. We all have different market views, thought processes, risk tolerance levels, and market experience.

Have your own personalized trading plan and update it as you learn from the market.

Developing a Trading Plan and sticking to it are the two main ingredients of trading discipline.
But trading discipline isn't enough.
Even solid trading discipline isn't enough.
It has to be rock solid discipline.
We repeat: rock solid. Like Jacob Black's abs.
Plastic solid discipline won't do. Nor will discipline made from straws and sticks.

We don't want to be little piggies. We want to be successful traders!
And having rock solid trading discipline is the most important characteristic of successful traders.
A trading plan defines what is supposed to be done, why, when, and how. It covers your trader personality, personal expectations, risk management rules, and trading system(s).
When followed to, a trading plan will help limit trading mistakes and minimize your losses. After all, "if you fail to plan, then you've already planned to fail."


A trading plan removes any bad decision making in the heat of the moment. Your emotions can consume you when money is on the line, causing you to make irrational decisions. You don't want that to happen.
The best way to prevent it from happening is to minimize (notice we did not say eliminate) thinking by having a plan for every potential market action.
With the right trading plan, every action is spelled out, so that in the heat of the moment you don't have to make any rash decisions. You just simply stick to your trading plan.
Before we continue, we have to quickly distinguish the difference between a trading plan and a trading system.
A trading system describes how you will enter and exit trades. A trading system is part of your trading plan but is just one of several important parts, i.e., analysis, executions, risk management, etc. Since market conditions are always changing, a good trader will usually have two or more trading systems in his or her trading plan.

Trading systems will be covered more in-depth later on in the lesson, but we thought that it was important to point out the difference between the two upfront to avoid any confusion.

Importance of News

Importance of News

It's not enough to only know technical analysis when you trade. It's just as important to know what makes the market move.

Just like in the great Star Wars world, behind the trend lines, double tops, and head and shoulder patterns, there is a fundamental force behind these movements. This force is called the news!

To understand the importance of the news, imagine this scenario (purely fictional of course!)

Let's say, on your nightly news, there is a report that the biggest software company that you have stock with just filed bankruptcy.

What's the first thing you would do? How would your perception of this company change? How do you think other people's perceptions of this company would change?

The obvious reaction would be that you would immediately sell off your shares. In fact, this is probably what just about everyone else who had any stake in that company would do.

The fact is that news affects the way we perceive and act on our trading decisions. It's no different when it comes to trading currencies.

There is, however, a distinct difference with how news is handled in the stock market and the forex market.

Let's go back to our example above and imagine that you heard that same report of the big software company filing bankruptcy, but let's say you heard the report a day before it was actually announced in the news.

Naturally you would sell off all your shares, and as a result of you hearing the news a day earlier, you would make (save) more money than everyone else who heard it on their nightly news.
Sounds good for you right? Unfortunately this little trick is called INSIDER TRADING, and it would have you thrown in jail.

Martha Stewart did it and now she has a nice mug-shot to go along with her magazine covers.
In the stock market, when you hear news before everyone else it is illegal. In the forex market, it's called FAIR GAME!
The earlier you hear or see the news, the better it is for your trading, and there is absolutely no penalty for it!
Add on some technology and the power of instant communication, and what you have is the latest and greatest (or not so greatest) news at the tip of your fingers.

This is great... Uhmmm... "news" for retail traders because it allows U.S. to react fairly quickly to the market's speculations.
Big traders, small traders, husky traders, or skinny traders all have to depend on the same news to make the market move because if there wasn't any news, the market would hardly move at all!
The news is important to the Forex market because it's the news that makes it move. Regardless of the technicals, news is the fuel that keeps the market going!

Why Trade the News
The simple answer to that question is "To make more money!"
But in all seriousness, as we learned in the previous section, news is a very important part to the market because it has the potential to make it move!

When news comes out, especially important news that everyone is watching, you can almost expect to see some major movement. Your goal as a trader is to get on the right side of the move, but the fact that you know the market will most likely move somewhere makes it an opportunity definitely worth looking at

Dangers of trading the news
As with any trading strategy, there are always possible dangers that you should be aware of.
Here are some of those dangers:
Because the market is very volatile during important news events, many dealers widen the spread during these times. This increases trading costs and could hurt your bottom line.
You could also get "locked out" which means that your trade could be executed at the right time but may not show up in your trading station for a few minutes. Obviously this is bad for you because you won't be able to make any adjustments if the trade moves against you!

Imagine thinking you didn't get triggered, so you try to enter at market... then you realize that your original ordered got triggered! You'd be risking twice as much now!
You could also experience slippage. Slippage occurs when you wish to enter the market at a certain price, but due to the extreme volatility during these events, you actually get filled at a far different price.

Big market moves made by news events often don't move in one direction. Often times the market may start off flying in one direction, only to be whipsawed back in the other direction. Trying to find the right direction can sometimes be a headache!
Profitable as it may be, trading the news isn't as easy as beating Pipcrawler at Call of Duty. It will take tons of practice, practice and you guessed it... more practice! Most importantly, you must ALWAYS have a plan in place. In the following lessons, we'll give you some tips on how to trade news reports.

Which News Reports are Trade-Worthy?
Before we even look at strategies for trading news events, we have to look at which news events are even worth trading.
Remember that we are trading the news because of its ability to increase volatility in the short term, so naturally we would like to only trade news that has the best market moving potential.

While the markets react to most economic news from various countries, the biggest movers and most watched news comes from the U.S.
The reason is that the U.S. has the largest economy in the world and the U.S. Dollar is the world's reserve currency. This means that the U.S. Dollar is a participant in about 90% of all Forex transactions, which makes U.S. news and data important to watch.

In addition to inflation reports and central bank talks, you should also pay attention to geo-political news such as war, natural disasters, political unrest, and elections. Although these may not have as big an impact as the other news, it's still worth paying attention to them.

Summary: Trading the News

There you have it! Now you know how to trade the news! Just keep these things in mind when trading:
When you have a directional bias, you are expecting price to move a certain direction, and you've got your orders in already.

It is always good to understand the underlying reasons why the market moves in a certain direction when news is released.
When you have a non-directional bias, you don't care which way price heads. You just want to get triggered.
Setups for the non-directional bias are also called straddle trades.
That's pretty much it...
Is it really that easy???

You'll have to practice and trade many different reports before you get a feel of which news reports will make the market move, how much of a surprise is needed for the market to move, and which reports to avoid trading.

Like in any other trading method, your success depends on your preparation.

This will take time and practice. Do your homework and study the economic indicators to understand why they are important.

Remember, nothing worth having comes easy, so stick with it and you'll find that trading news report will be very rewarding once you get the hang of it!

Which Type of Analysis is Best?

Which Type of Analysis is Best?
Ahhhh, the million dollar question....
Throughout your journey as an aspiring forex trader you will find strong advocates for each type of analysis. Do not be fooled by these one-sided extremists! One is not better than the other...they are all just different ways to look at the market.

At the end of the day, you should trade based on the type of analysis you are most comfortable and profitable with.
To recap, technical analysis is the study of price movement on the charts while fundamental analysis takes a look at how the country's economy is doing.
Market sentiment analysis determines whether the market is bullish or bearish on the current or future fundamental outlook.

Fundamental factors shape sentiment, while technical analysis helps us visualize that sentiment and apply a framework for our trades.
Those three work hand-in-hand-in-hand to help you come up with good trade ideas. All the historical price action and economic figures are there - all you have to do is put on your thinking cap and put those analytical skills to the test!

in order to become a true forex master you will need to know how to effectively use these three types of analysis.

Don't believe us?
Let us give you an example of how focusing on only one type of analysis can turn into a disaster.
Let's say that you're looking at your charts and you find a good trading opportunity.
You get all excited thinking about the money that's going to be raining down from the sky.
You say to yourself, "Man, I've never seen a more perfect trading opportunity in GBP/USD. I love my charts. Mwah. Now show me the money!"
You then proceed to buy GBP/USD with a big fat smile on your face (the kind where all your teeth are showing).

But wait! All of a sudden the trade makes a 100 pip move in the OTHER DIRECTION! Little did you know, one of the major banks in London filed for bankruptcy! Suddenly, everyone's sentiment towards Britain's market turns sour and everyone trades in the opposite direction!
Your big fat smile turns into mush and you start getting angry at your charts. You throw your computer on the ground and begin to pulverize it. You just lost a bunch of money, and now your computer is broken into a billion pieces.

And it's all because you completely ignored fundamental analysis and sentimental analysis.
(Note: This was not based on a real story. This did not happen to us. We were never this naive. We were always smart traders.... From the overused sarcasm, we think you get the picture.)
Ok, ok, so the story was a little over-dramatized, but you get the point.
Remember how your mother used to tell you as a kid that too much of anything is never good?

Well you might've thought that was just hogwash back then but in forex, the same applies when deciding which type of analysis to use.
Don't rely on just one.
Instead, you must learn to balance the use of all of them. It is only then that you can really get the most out of your trading.

Types of Charts
Let's take a look at the three most popular types of charts:
Line chart
Bar chart
Candlestick chart
Now, we'll explain each of the charts, and let you know what you should know about each of them.
Line Charts
A simple line chart draws a line from one closing price to the next closing price. When strung together with a line, we can see the general price movement of a currency pair over a period of time.
Here is an example of a line chart for EUR/USD:


Bar Charts
A bar chart is a little more complex. It shows the opening and closing prices, as well as the highs and lows. The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid.
The vertical bar itself indicates the currency pair's trading range as a whole.
The horizontal hash on the left side of the bar is the opening price, and the right-side horizontal hash is the closing price.
Here is an example of a bar chart for EUR/USD:


Take note, throughout our lessons, you will see the word "bar" in reference to a single piece of data on a chart.
A bar is simply one segment of time, whether it is one day, one week, or one hour. When you see the word 'bar' going forward, be sure to understand what time frame it is referencing.
Bar charts are also called "OHLC" charts, because they indicate the Open, the High, the Low, and the Close for that particular currency.

Candlesticks Charts
Candlestick chart show the same information as a bar chart, but in a prettier, graphic format.
Candlestick bars still indicate the high-to-low range with a vertical line.
However, in candlestick charting, the larger block (or body) in the middle indicates the range between the opening and closing prices. Traditionally, if the block in the middle is filled or colored in, then the currency closed lower than it opened.

In the following example, the 'filled color' is black. For our 'filled' blocks, the top of the block is the opening price, and the bottom of the block is the closing price. If the closing price is higher than the opening price, then the block in the middle will be "white" or hollow or unfilled.

Here is an example of a candlestick chart for EUR/USD. Isn't it pretty?


The purpose of candlestick charting is strictly to serve as a visual aid, since the exact same information appears on an OHLC bar chart. The advantages of candlestick charting are:
Candlesticks are easy to interpret, and are a good place for beginners to start figuring out chart analysis.
Candlesticks are easy to use! Your eyes adapt almost immediately to the information in the bar notation. Plus, research shows that visuals help in studying, it might help with trading as well!
Candlesticks and candlestick patterns have cool names such as the shooting star, which helps you to remember what the pattern means.
Candlesticks are good at identifying marketing turning points - reversals from an uptrend to a downtrend or a downtrend to an uptrend.

How You Make Money in Forex

How You Make Money in Forex
In the forex market, you buy or sell currencies.
Placing a trade in the foreign exchange market is simple: the mechanics of a trade are very similar to those found in other markets (like the stock market), so if you have any experience in trading, you should be able to pick it up pretty quickly.

The object of forex trading is to exchange one currency for another in the expectation that the price will change, so that the currency you bought will increase in value compared to the one you sold.

Example:

You purchase 10,000 euros at the EUR/USD exchange rate of 1.1800

Two weeks later, you exchange your 10,000 euros back into U.S. dollar at the exchange rate of 1.2500

You earn a profit of $700

Three Types of Market Analysis
To begin, let's look at three ways on how you would analyze and develop ideas to trade the market. There are three basic types of market analysis:
Technical Analysis
Fundamental Analysis
Sentiment Analysis
There has always been a constant debate as to which analysis is better, but to tell you the truth, you need to know all three.

It's kind of like standing on a three-legged stool - if one of the legs is weak, the stool will break under your weight and you'll fall flat on your face. The same holds true in trading. If your analysis on any of the three types of trading is weak and you ignore it, there's a good chance that it will cause you to lose out on your trade!

Technical Analysis
Technical analysis is the framework in which traders study price movement.
The theory is that a person can look at historical price movements and determine the current trading conditions and potential price movement.
The main evidence for using technical analysis is that, theoretically, all current market information is reflected in price. If price reflects all the information that is out there, then price action is all one would really need to make a trade.
Now, have you ever heard the old adage, "History tends to repeat itself"?

Well, that's basically what technical analysis is all about! If a price level held as a key support or resistance in the past, traders will keep an eye out for it and base their trades around that historical price level.
Technical analysts look for similar patterns that have formed in the past, and will form trade ideas believing that price will act the same way that it did


In the world of trading, when someone says technical analysis, the first thing that comes to mind is a chart. Technical analysts use charts because they are the easiest way to visualize historical data!
You can look at past data to help you spot trends and patterns which could help you find some great trading opportunities.
What's more is that with all the traders who rely on technical analysis out there, these price patterns and indicator signals tend to become self-fulfilling.

As more and more traders look for certain price levels and chart patterns, the more likely that these patterns will manifest themselves in the markets.
You should know though that technical analysis is VERY subjective.
Just because Ralph and Joseph are looking at the exact same chart setup or indicators doesn't mean that they will come up with the same idea of where price may be headed.
The important thing is that you understand the concepts under technical analysis so you won't get nosebleeds whenever somebody starts talking about Fibonacci, Bollinger bands, or pivot points.ow we know you're thinking to yourself, "Geez, these guys are smart. They use crazy words like 'Fibonacci' and 'Bollinger'. I can never learn this stuff!" Don't worry yourself too much. After you're done with the School of Pipsology, you too will be just as... uhmmm... "smart" as us.

Fundamental Analysis
Fundamental analysis is a way of looking at the market by analyzing economic, social, and political forces that affects the supply and demand of an asset. If you think about it, this makes a whole lot of sense! Just like in your Economics 101 class, it is supply and demand that determines price
Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all the factors that affect supply and demand.

In other words, you have to look at different factors to determine whose economy is rockin' like a Taylor Swift song, and whose economy sucks. You have to understand the reasons of why and how certain events like an increase in unemployment affect a country's economy, and ultimately, the level of demand for its currency.

The idea behind this type of analysis is that if a country's current or future economic outlook is good, their currency should strengthen. The better shape a country's economy is, the more foreign businesses and investors will invest in that country. This results in the need to purchase that country's currency to obtain those assets.

For example, let's say that the U.S. dollar has been gaining strength because the U.S. economy is improving. As the economy gets better, raising interest rates may be needed to control growth and inflation.

Higher interest rates make dollar-denominated financial assets more attractive. In order to get their hands on these lovely assets, traders and investors have to buy some greenbacks first. As a result, the value of the dollar will increase.

Later on in the course, you will learn which economic data drives currency prices, and why they do so. You will know who the Fed Chairman is and how retail sales data reflects the economy. You'll be spitting out interest rates like baseball statistics.

But that's for another lesson for another time. For now, just know that the fundamental analysis is a way of analyzing a currency through the strength or weakness of that country's economy. It's going to be awesome, we promise!


Sentimental Analysis

Earlier, we said that price should theoretically accurately reflect all available market information. Unfortunately for us traders, it isn't that simple. The markets do not simply reflect all the information out there because traders will all just act the same way. Of course, that isn't how things work.

Each trader has his own opinion or explanation of why the market is acting the way they do. The market is just like Facebook - it's a complex network made up of individuals who want to spam our news feeds.
Kidding aside, the market basically represents what all traders - you, Pipcrawler, Celine from the donut shop - feel about the market. Each trader's thoughts and opinions, which are expressed through whatever position they take, helps form the overall sentiment of the market.

The problem is that as traders, no matter how strongly you feel about a certain trade, you can't move the markets in your favor (unless you're one of the GSs - George Soros or Goldman Sachs!). Even if you truly believe that the dollar is going to go up, but everyone else is bearish on it, there's nothing much you can do about it.
As a trader, you have to take all this into consideration. It's up to you to gauge how the market is feeling, whether it is bullish or bearish. Ultimately, it's also up to you to find out how you want to incorporate market sentiment into your trading strategy. If you choose to simply ignore market sentiment, that's your choice. But hey, we're telling you now, it's your loss!

Being able to gauge market sentiment can be an important tool in your toolbox. Later on in school, we'll teach you how to analyze market sentiment and use it to your advantage like Jedi mind tricks.

Advantages of Forex

There are many benefits and advantages of trading forex. Here are just a few reasons why so many people are choosing this market:
No commissions


No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail brokers are compensated for their services through something called the "bid-ask spread".
No middlemen
Spot currency trading eliminates the middlemen and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
No fixed lot size
In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5,000 ounces. In spot forex, you determine your own lot, or position size. This allows traders to participate with accounts as small as $25 (although we'll explain later why a $25 account is a bad idea).
Low transaction costs
The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions. At larger dealers, the spread could be as low as 0.07%. Of course this depends on your leverage and all will be explained later.

A 24-hour market
There is no waiting for the opening bell. From the Monday morning opening in Australia to the afternoon close in New York, the forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.
No one can corner the market
The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank or the mighty Chuck Norris himself) can control the market price for an extended period of time.
Leverage
In forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.
For example, a forex broker may offer 50-to-1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $2,500 worth of currencies. Similarly, with $500 dollars, one could trade with $25,000 dollars and so on. While this is all gravy, let's remember that leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
High Liquidity.


Because the forex market is so enormous, it is also extremely liquid. This means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will as there will usually be someone in the market willing to take the other side of your trade. You are never "stuck" in a trade. You can even set your online trading platform to automatically close your position once your desired profit level (a limit order) has been reached, and/or close a trade if a trade is going against you (a stop loss order).
Low Barriers to Entry


You would think that getting started as a currency trader would cost a ton of money. The fact is, when compared to trading stocks, options or futures, it doesn't. Online forex brokers offer "mini" and "micro" trading accounts, some with a minimum account deposit of $25.
We're not saying you should open an account with the bare minimum, but it does make forex trading much more accessible to the average individual who doesn't have a lot of start-up trading capital.
Free Stuff Everywhere!
Most online forex brokers offer "demo" accounts to practice trading and build your skills, along with real-time forex news and charting services.
And guess what?! They're all free!
Demo accounts are very valuable resources for those who are "financially hampered" and would like to hone their trading skills with "play money" before opening a live trading account and risking real money.
Now that you know the advantages of the forex market, see how it compares with the stock market!

Trading Sessions

Now that you know what forex is, why you should trade it, it's about time you learned when you can trade.
Yes, it is true that the forex market is open 24 hours a day, but that doesn't mean it's always active the whole day.
You can make money trading when the market moves up, and you can even make money when the market moves down.
BUT you will have a very difficult time trying to make money when the market doesn't move at all.
And believe us, there will be times when the market is as still as the victims of Medusa. This lesson will help determine when the best times of the day are to trade.

Market Hours
Before looking at the best times to trade, we must look at what a 24-hour day in the forex world looks like.
The forex market can be broken up into four major trading sessions: the Sydney session, the Tokyo session, the London session, and Pipcrawler's favorite time to trade, the New York session. Below are tables of the open and close times for each session:


You can see that in between each session, there is a period of time where two sessions are open at the same time. From 3:00-4:00 am EDT, the Tokyo session and London session overlap, and from 8:00-12:00 am EDT, the London session and the New York session overlap.

Naturally, these are the busiest times during the trading day because there is more volume when two markets are open at the same time. This makes sense because during those times, all the market participants are wheelin' and dealin', which means that more money is transferring hands.

Now, you're probably looking at the Sydney open and thinking why it shifts two hours. You'd think that Sydney's open would only move one hour when the U.S. adjusts for standard time, but remember that when the U.S. shifts one hour back, Sydney actually moves forward by one hour (seasons are opposite in Australia). You should always remember this if you ever plan to trade during that time period.

Market Size and Liquidity

Market Size and Liquidity

Unlike other financial markets like the New York Stock Exchange, the forex spot market has neither a physical location nor a central exchange.
The forex market is considered an Over-the-Counter (OTC), or "Interbank", market due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.

This means that the spot forex market is spread all over the globe with no central location. They can take place anywhere, even at the top of Mt. Fiji!
The forex OTC market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organizations.In the OTC market, participants determine who they want to trade with depending on trading conditions, attractiveness of prices, and reputation of the trading counterpart.

The chart below shows the ten most actively traded currencies.

The dollar is the most traded currency, taking up 84.9% of all transactions. The euro's share is second at 39.1%, while that of the yen is third at 19.0%. As you can see, most of the major currencies are hogging the top spots on this list!




The Dollar is King
You've probably noticed how often we keep mentioning the U.S. dollar (USD). If the USD is one half of every major currency pair, and the majors comprise 75% of all trades, then it's a must to pay attention to the U.S. dollar. The USD is king! In fact, according to the International Monetary Fund (IMF), the U.S. dollar comprises almost 62% of the world's official foreign exchange reserves! Because almost every investor, business, and central bank own it, they pay attention to the U.S. dollar.

There are also other significant reasons why the U.S. dollar plays a central role in the forex market:
The United States economy is the LARGEST economy in the world.
The U.S. dollar is the reserve currency of the world.
The United States has the largest and most liquid financial markets in the world.
The United States has a super stable political system.
The United States is the world's sole military superpower.
The U.S. dollar is the medium of exchange for many cross-border transactions. For example, oil is priced in U.S. dollars. So if Mexico wants to buy oil from Saudi Arabia, it can only be bought with U.S. dollar. If Mexico doesn't have any dollars, it has to sell its pesos first and buy U.S. dollars.



Different Ways to Trade Forex

Because forex is so awesome, traders came up with a number of different ways to invest or speculate in currencies. Among these, the most popular ones are forex spot, futures, options, and exchange-traded funds (or ETFs).
Spot Market
In the spot market, currencies are traded immediately or "on the spot," using the current market price. What's awesome about this market is its simplicity, liquidity, tight spreads, and round-the-clock operations. It's very easy to participate in this market since accounts can be opened with as little as a $25! (Not that we suggest you do) - you'll learn why in our Capitalization lesson! Aside from that, most brokers usually provide charts, news, and research for free.
Futures
Futures are contracts to buy or sell a certain asset at a specified price on a future date (That's why they're called futures!). Forex futures were created by the Chicago Mercantile Exchange (CME) way back in 1972, when bell bottoms and platform boots were still in style. Since futures contracts are standardized and traded through a centralized exchange, the market is very transparent and well-regulated. This means that price and transaction information are readily available.
Options
An "option" is a financial instrument that gives the buyer the right or the option, but not the obligation, to buy or sell an asset at a specified price on the option's expiration date. If a trader "sold" an option, then he or she would be obliged to buy or sell an asset at a specific price at the expiration date.
Just like futures, options are also traded on an exchange, such as the Chicago Board Options Exchange, the International Securities Exchange, or the Philadelphia Stock Exchange. However, the disadvantage in trading forex options is that market hours are limited for certain options and the liquidity is not nearly as great as the futures or spot market.
Exchange-traded Funds
Exchange-traded funds or ETFs are the youngest members of the forex world.An ETF could contain a set of stocks combined with some currencies, allowing the trader to diversify with different assets. These are created by financial institutions and can be traded like stocks through an exchange. Like forex options, the limitation in trading ETFs is that the market isn't open 24 hours. Also, since ETFs contain stocks, these are subject to trading commissions and other transaction costs.


Best Days of the Week to Trade
So now we know that the London session is the busiest out of all the other sessions, but there are also certain days in the week where all the markets tend to show more movement.
Below is a chart of average pip range for the major pairs for each day of the week:

Major Currency Pairs

The currency pairs listed below are considered the "majors". These pairs all contain the U.S. dollar (USD) on one side and are the most frequently traded. The majors are the most liquid and widely traded currency pairs in the world.
EUR/USD Euro zone / United States
USD/JPY United States / Japan
GBP/USD United Kingdom / United States
USD/CHF United States/ Switzerland
USD/CAD United States / Canada
AUD/USD Australia / United States
NZD/USD New Zealand / United States

Major Cross-Currency Pairs or Minor Currency Pairs
Currency pairs that don't contain the U.S. dollar (USD) are known as cross-currency pairs or simply as the "crosses." Major crosses are also known as "minors." The most actively traded crosses are derived from the three major non-USD currencies: EUR, JPY, and GBP.

Euro Crosses
EUR/CHF Euro zone / Switzerland
EUR/GBP Euro zone / United Kingdom
EUR/CAD Euro zone / Canada
EUR/AUD Euro zone / Australia
EUR/NZD Euro zone / New Zealand



Pound Crosses
GBP/CHF United Kingdom / Switzerland
GBP/AUD United Kingdom / Australia
GBP/CAD United Kingdom / Canada
GBP/NZD United Kingdom / New Zealand
Yen Crosses
EUR/JPY Euro zone / Japan
GBP/JPY United Kingdom / Japan
CHF/JPY Switzerland / Japan
CAD/JPY Canada / Japan
AUD/JPY Australia / Japan
NZD/JPY New Zealand / Japan



Other Crosses
AUD/CHF Australia / Switzerland
AUD/CAD Australia / Canada
AUD/NZD Australia / New Zealand
CAD/CHF Canada / Switzerland
NZD/CHF New Zealand / Switzerland
NZD/CAD New Zealand / Canada


now that you have known some basic fact about forex then follow us to the nursery school so that we can get started. click the nursery sub page link at the to right of this page. see you at the inside

What is Traded?

The simple answer is MONEY.

Because you're not buying anything physical, this kind of trading can be confusing.Think of buying a currency as buying a share in a particular country, kinda like buying stocks of a company. The price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.

When you buy, say, the Japanese yen, you are basically buying a "share" in the Japanese economy. You are betting that the Japanese economy is doing well, and will even get better as time goes. Once you sell those "shares" back to the market, hopefully, you will end up with a profit.

In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to other countries' economies.

By the time you graduate from this forex academy, you'll be eager to start working with currencies.
Currencies Are Traded in Pairs

Forex trading is the simultaneous buying of one currency and selling another. Currencies are traded through a broker or dealer, and are traded in pairs; for example the euro and the U.S. dollar (EUR/USD) or the British pound and the Japanese yen (GBP/JPY).
When you trade in the forex market, you buy or sell in currency pairs.

Studying Forex is crucial for beginners.

Studying Forex is crucial for beginners.
This is why we created the forex academy.
The forex academy is designed to help you acquire the skills, knowledge, and special abilities to become a successful trader in the foreign exchange market.

What is Forex?

Ok let us give this example. If you've ever traveled to another country, you usually had to find a currency exchange booth at the airport, and then exchange the money you have in your wallet (if you're a dude) or purse (if you're a lady) into the currency of the country you are visiting.

You go up to the counter and notice a screen displaying different exchange rates for different currencies. You find "Japanese yen" and think to yourself, "WOW! My one dollar is worth 100 yen?! And I have ten dollars! I'm going to be rich!!!" (This excitement is quickly killed when you stop by a shop in the airport afterwards to buy a can of soda and, all of a sudden, half your money is gone.)

When you do this, you've essentially participated in the forex market! You've exchanged one currency for another. Or in forex trading terms, assuming you're an American visiting Japan, you've sold dollars and bought yen.

Before you fly back home, you stop by the currency exchange booth to exchange the yen that you miraculously have left over (Tokyo is expensive!) and notice the exchange rates have changed. It's these changes in the exchanges rates that allow you to make money in the foreign exchange market.

The foreign exchange market, which is usually known as "forex" or "FX," is the largest financial market in the world. Compared to the measly $74 billion a day volume of the New York Stock Exchange, the foreign exchange market looks absolutely ginormous with its $4 TRILLION a day trade volume

Algorithmic trading

In electronic financial markets, algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading, is the use of computer programs for entering trading orders with the computer algorithm deciding on aspects of the order such as the timing, price, or quantity of the order, or in many cases initiating the order without human intervention.

Algorithmic trading is widely used by pension funds, mutual funds, and other buy side (investor driven) institutional traders, to divide large trades into several smaller trades in order to manage market impact, and risk Sell side traders, such as market makers and some hedge funds, provide liquidity to the market, generating and executing orders automatically.

A special class of algorithmic trading is "high-frequency trading" (HFT), in which computers make elaborate decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe. This has resulted in a dramatic change of the market microstructure, particularly in the way liquidity is provided.

Algorithmic trading may be used in any investment strategy, including market making, inter-market spreading, arbitrage, or pure speculation (including trend following). The investment decision and implementation may be augmented at any stage with algorithmic support or may operate completely automatically ("on auto-pilot").

A third of all EU and US stock trades in 2006 were driven by automatic programs, or algorithms, according to Boston-based financial services industry research and consulting firm Aite Group.As of 2009, HFT firms account for 73% of all US equity trading volume.

In 2006 at the London Stock Exchange, over 40% of all orders were entered by algo traders, with 60% predicted for 2007. American markets and European markets generally have a higher proportion of algo trades than other markets, and estimates for 2008 range as high as an 80% proportion in some markets. Foreign exchange markets also have active algo trading (about 25% of orders in 2006).[6] Futures and options markets are considered to be fairly easily integrated into algorithmic trading,with about 20% of options volume expected to be computer generated by 2010.Bond markets are moving toward more access to algorithmic traders.

One of the main issues regarding HFT is the difficulty in determining just how profitable it is. A report released in August 2009 by the TABB Group, a financial services industry research firm, estimated that the 300 securities firms and hedge funds that specialize in this type of trading took in roughly US$21 billion in profits in 2008.

Algorithmic and HFT have been the subject of much public debate since the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission implicated them in the May 6, 2010 Flash Crash,when the Dow Jones Industrial Average suffered its second largest intraday point swing ever to that date, though prices quickly recovered. A July, 2011 report by the International Organization of Securities Commissions (IOSCO), an international body of securities regulators, concluded that while "algorithms and HFT technology have been used by market participants to manage their trading and risk, their usage was also clearly a contributing factor in the flash crash event of May 6, 2010."