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A Beginnerís Guide to the FX Market Part 1

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A Beginnerís Guide to the FX Market Part 1

Post by Sean on Fri Jul 11, 2008 6:51 pm

Good Day Currency Traders!

Like many first-time currency traders, I'm sure you've heard about the opportunities available in the foreign exchange (a.k.a. the "Forex" or "spot" or "FX") market.

You've probably heard you can trade currency pairs against each other just like the professional traders do every single day. You've probably heard this monster US$3.2 trillion spot market is 10 times bigger than any stock exchange and trades 24 hours a day, five days a week.

You may have also heard the spot market is the most liquid market on the planet, because it's absolutely impossible to manipulate. You don't have to pay commissions. And you can start trading with a relatively low amount.

So you're interested in trying out the spot market...But what do you do next?

That's what I'd like to explain today. I'm going to take you through the basics so you can start trading currencies for yourself.

The First Thing You Need to Trade "The Spot"
For starters to trade in the spot market, you need a currency broker (or really a "market maker"), at a firm who specifically handles foreign-exchange or "Forex" trades. But where the heck do you find one of these Forex/Currency firms anyway?

Whatever you do ó don't choose a small, undercapitalized firm in this market. Also make sure your firm is well regulated. (Don't be afraid to ask who regulates any prospective firm.)

Here's what you're looking for: You want a firm that has 50,000 to 100,000 accounts on their books, that's been around since at least 2000 or 2001. You also want your firm to be regulated by either the U.S., Canada, U.K., or Hong Kong because these four countries have the strictest regulations.

Just last year about 10 or more of the 30+ firms out there had to shut down because they couldn't meet the regulator's minimal capital requirements. If you're using a firm that's forced to shut down, then it can take a while to get your trading account back...If you can at all.

So go with the big guys that are flush with cash and highly regulated. It's the only way to go into this market. Anything else is a real gamble.

Once you've chosen your firm, you have to go through the application process. Fill out the appropriate forms; send the firm your proof of I.D. and proof of address (required by the regulators and also U.S. law).

Now you're ready to fund your account.


Set Up Your Account and Get Ready to Trade!
Many firms have several ways you can fund an account including check, debit/credit card or wire transfer. These are the most common options. Notice that cash isn't one of them. Also, most firms won't accept cashier's checks or money orders.

A few firms only allow you to use certain payment methods depending on how much cash you're investing. (Tip: If you're sending in a large amount such as US$25,000 or more, many firms will waive the wiring fee for you.)

Now, with that said, you can start a FX account with as little as US$300 with many firms. However, I'd caution you against this from a practical stand point.

If you lose on one or two trades, then you could lose a third or two thirds of your account if you only start with US$300. So start out your account with at least US$2,000 to US$5,000 minimally. The more you have in the account, the less percentage you risk losing on any one trade.

After all, is it easier to recover from a 3% loss or a 33% loss? I'll take the former any day.

Usually it will only take a few days to get your account up and running. Some firms may need a week to get this going for you. The larger firms usually set up your account very quickly because their huge operations department runs 24 hours a day.

Oh that's one more thing...This market trades 24 hours a day so make sure they have good customer service personnel who can help you around the clock. Ask if they have someone either at the sales desk or in their dealing room (which is where they take phone orders), who can take your questions day and night.

Because if you're having a hard time getting an order put in (especially to exit a position), then you may need some assistance. Make sure they are ready to help you.

Okay, so now that we've got a live, funded account, we're ready to start trading. Tune in tomorrow and I'll tell you how to place your first trade.

Sean

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A Beginnerís Guide to the FX Market Part 2

Post by Sean on Mon Jul 14, 2008 8:22 am

Good Day Currency Traders!

Yesterday, I explained to you how to set up and fund your FX trading account, so you can start trading currencies on the FX "spot" market.

But honestly, setting up your account is only half the battle. The next step is actually placing your first trade. This can be tricky if you've never traded on the Forex market before. So today, I'm going to take you through the basics, so you feel more comfortable trading online.

Here's the first thing you need to know: When you start trading in the FX market, you should always, ALWAYS place practice or "demo" trades first, before you actually dip into your newly funded trading account. This way, you become familiar with how to place a buy, sell, stop order, etc., without spending a dime.

To take this first step, simply sign up for a demo trading account through your FX firm. Your broker (or "market maker") will have free software that you can download and use to place your demo trades.

Then when you're ready to place live trades, you'll use this same software. The only difference is the software will have your live account info in it. This means you will execute your trades on live servers rather than demo (fake) servers.

Exactly What Am I Trading Again?
Currencies trade in pairs on the FX market because they go up and down when compared to something else. Is the euro expensive? Well, compared to what? The U.S. dollar? Or the Japanese yen? It's all relative.

It's like saying is your house expensive...Well compared to what? The other houses in your neighborhood or in other cities across the nation or in other nations? It's all relative.

My house is priced like a mansion when compared to a house price in India, yet it's not considered much at all in comparison to the prices in Manhattan.

The same goes with currencies...They are expensive or cheap relative only to the other currency that it's being compared to.

This means you just can't trade euro, Swiss francs, or U.S. dollars by themselves.

The Crucial Difference Between Buy and Sell Orders
Just like in stocks, there are two main types of trades in the FX market: Buy trades and sell trades. When you place a buy order, you're betting the first currency in your pair will rise against the second. A sell order simply means you're betting the first currency in your pair will fall in price against the second currency.

So say you believed the euro was going to rise, and the dollar was going to fall. How would you place that trade?

Well, first of all, you have to know the trading symbol. In this case, you're trading EUR/USD (euro vs. U.S. dollar) pair. (NOTE: There is NO "USD/EUR" pair so if you want to trade the euro and U.S. dollar you have to use the EUR/USD symbol.)

If you're betting the euro will rise against the dollar, you would be buying euro against the dollar. In other words, you feel that the euro will appreciate much faster than the dollar. To do this, you would place a "buy order" for the EUR/USD.

At this point, if the EUR/USD pair goes up in price then you make money.

On the other hand, if you feel the euro will go down and the dollar will rise, then you would want to sell the EUR/USD pair. To do this, you place a "sell order on the EUR/USD." That trade effectively sells euro and buys dollars at the same time (some refer to this as "selling short").

If you want to bet on the dollar rising against the euro, you would do the exact same thing. You would still place a "sell order on the EUR/USD," because you're still selling euro and buying dollars.

At this point, if the EUR/USD pair goes down, you make money.

Time to Exit Your Trade!
So let's say you call the trade correctly. You placed a buy order on the EUR/USD, and now the EUR/USD is rising. Now you want to exit the position and collect your profits.

To exit the EUR/USD pair, you can either place an opposing order or in some cases, you can place a "close" order.

With many online trading platforms, you simply place the opposing trade. If you originally bought EUR/USD, then you would just hit the sell button for the same amount of currency. That order effectively cancels your first trade and closes it out (or some call it "flattening") your position.

If you're using a trading station like FXCM's, then you just simply hit the "close" price and hit "ok." That will automatically close out your order by giving you an opposing trade with the proper amount of currency.

Micro, Mini, or Standard Lot?
Some firms have software that's a lot more "user friendly" than others. So I'd encourage you to test out several platforms before you choose one.

Before you place those first trades, be sure to read over their user manuals or watch online videos that demonstrate their trading station. I can't emphasize this enough. That way you'll really be executing what you want, instead of what you don't want.

One more tip: When you open an account...Open either a micro or a mini account, as opposed to a standard account.

In a micro account, you can buy 1,000 units of currency at a time. In a mini account, "one lot" is 10,000 units of currency. However, in a standard account, each "lot" is 100,000 units of currency.

So it's better to be able to buy 1,000 euro vs. the dollar or 10,000 euro vs. the dollar as opposed to 100,000 euro vs. the dollar. Better to bite off smaller pieces as this gives you more flexibility.

If you're always trading 100,000 units of currency in a standard account, you can lose money in your trading account quickly if you have a few busted trades.

How Many "Lots" You Should Trade
Inside a micro, mini, or standard account, you trade "lots." A lot is just the amount that you're wishing to trade in the FX market. For instance, in stocks I can buy 100 shares or 1,000 shares of Google.

It's the same thing in the FX market. Only I can buy 1 mini lot (10,000 euro vs. the dollar) or I can buy 5 mini lots (50,000 euro vs. the dollar).

When you're just starting out, I suggest only trading 1 lot at a time. Do not trade multiple lots. Once you get the hang of that and you're becoming more profitable, then you can choose to up your lot size then.

Once you understand the "pair thing" and "lots," it's all downhill from there. After a while it becomes like riding a bike

Sean

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Three Signs That a Currency Is about to Crumble

Post by Sean on Sat Aug 16, 2008 5:21 am

Happy Friday Currency Traders! Very Happy

As you probably know, professional currency traders watch dozens of different indicators every single day to figure out where currencies are headed next.

Currency traders - particularly day traders - are always ready and waiting to make trades based on the next piece of news or economic data that hits the markets.

But with all this data out there cluttering the markets, how in the world is a normal retail investor (with a day job) supposed to tell which currency is about crumble next? Rolling Eyes

The truth is you don't have to watch every single piece of news in the markets like the professionals. You just have to focus only on the "hottest, most important" data and let the rest fall by the way side.

To make it easier, here are my three "simple gauges" I watch for to determine which currency will fall next.


Indicator #1: Watch the CPI Numbers!

One of the first signs of a cracking economy (as far as the country's currency is concerned) is slowing inflation. When inflation is slowing, a central bank doesn't need to raise interest rates. Currency traders want to invest in countries with "ever increasing" interest rates because they earn more money on their currency the higher the rates go.

So watch the Consumer Price Index (CPI) numbers, especially the year-over-year inflation number. These numbers come out each month for each country. You can find these numbers on the calendars at either [You must be registered and logged in to see this link.] or [You must be registered and logged in to see this link.]

If the CPI number is lowering, then the central bank will either hold interest rates steady or cut interest rates. Either way, currency investors don't like it.

Once currency investors feel that interest rate hikes are over and the economy is softening, they start looking for other places to put their money where the economy, inflation and interest rate situation is much more favorable.


Indicator #2: Slower Inflation = Slower GDP
When inflation is slowing, it means the demand upon products and services is slowing. That's usually because the economy is slowing too. You can tell how the economy is increasing or decreasing by watching the Gross Domestic Product (GDP) numbers.

Again, if this number is coming down overall or even worse, in negative territory, then you know you have an "ugly currency" on your hands. Why invest in an economy that is slowing? Why not invest in a place where things are thriving, growing and rate hikes are happening? If you look at it that way, it's no wonder currency traders run for the exit when they see slowing CPI or slowing GDP numbers.

Both of these are signs that a central bank is done hiking rates and will likely start cutting rates soon. No one wants to be the last one out the exit door, so currency traders tend to move fast when they see an economic condition deteriorating like this.

Indicator #3: Listen to What the Central Bankers Have to Say

My third indicator is listening to what their own central bankers say about their economy. Sure, the central bankers may hold the cards to their chest on occasion, but usually you can actually tell what they'll do next based on their remarks.

So when you hear negative comments or "clues" from the central bankers that something isn't right, then you have an additional confirmation that an economy may be heading south quickly. That's how I tell that a low CPI and GDP will likely continue.

After all, these guys get "real time" data pumped into their central banks and they know the "pulse of the nation" better than anyone. So it pays to listen to what they have to say. This is why their speeches move the markets so fast. Investors know they are going to be honest about their nation's condition.

For instance, Governor King (central banker in the U.K.) said on the 13th that a "painful adjustment" will have to take place in the U.K. economy. He just gave all us traders a couple of very serious clues. He basically told investors everywhere that the downward economic readings will likely continue for a while.

Well if that's the case, why would you want to stick around and wait it out? Instead, you can quickly sell your pounds within seconds and buy into another "more favorable" currency.

Investors around the world listened to Governor King's speech and they knew what to do...get the heck out of the British pound! That's exactly what they did. That caused the GBP/USD pair to drop almost 400 pips in just one day. That's huge!

That's a US$4,000 move for every standard lot that an investor held of GBP/USD just that day alone.

How to Predict the "Ugliest Currency"
Sometimes central bankers will be transparent enough to say they may have to cut interest rates in the near future. New Zealand did this recently and sure enough they cut rates at their last meeting.

Now Australia is finally talking about the possibility of rate cuts. As both of these countries' central bankers said this, their currencies got whacked and went into a hard downward spiral.

So you can make a lot of money by listening to these guys and "preying" upon the economic weakness by shorting the currency. Oh and by the way, you'll be helping them out because a lower currency exchange rate will help them to get back on track too.

Don't think you are doing them a disservice. These "ugly currencies" need both their exchange rate and their interest rates to decrease to make their economies healthy again.

Just to recap, look for slowing CPI numbers which precedes the interest rate cuts. Also look at how the economy is growing or slowing by checking its GDP numbers. Then listen for confirming comments from the central bankers.

Remember: Generally the data moves first. You'll see the CPI and GDP numbers drop before the central bankers confirm it. When they do, it means the "downward trend" in their economy is usually going to last for a while. It means their currency is now in the running for the "ugliest currency" prize.

It's also a signal for you to exit this currency OR get ready to short it as the economic condition gets worse. affraid

Sean

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