Sunday, September 26, 2010
Technical Analysis
Technical Analysis is one more system for investors to strategize their trading methods. These analysts examine price data of foreign exchange rates to determine if those prices will continue in the future. Technical analysis involves the uses of charts as a tool to identify patterns or trends in a currency market.
Although technical analysis is akin to fundamental analysis, it focuses on the effects of market movements, rather than the causes. Investors who use this strategy will look at a currency's past price to determine what might happen in the future.
Technical analysis is not a method for those who prefer to use intuition as part of their trading strategy.
Although technical analysis is akin to fundamental analysis, it focuses on the effects of market movements, rather than the causes. Investors who use this strategy will look at a currency's past price to determine what might happen in the future.
Technical analysis is not a method for those who prefer to use intuition as part of their trading strategy.
Quantitative Analysis
Essentially, the trading concept of Quantitative Analysis involves the process of applying a business or financial technique that seeks to understand behavior within the currency market by applying a complex system of mathematical and statistical modeling, along with measuring of market values and research.
Generally this is made possible through the method of applying a series of numerical values to certain variables, with which quantitative analysts try to replicate reality mathematically and so predict changes and moves with the markets.
There are many reasons for employing a quant (as quantitative analysts are often affectionately known) as quantitative analysis itself can be carried out for a number of reasons, such as a performance evaluation, measurement, or valuation of a certain financial instrument. For example in foreign exchange terms for a certain trading pattern or style, while it can also be used to quite accurately to predict certain real world events such as changes in the price of shares and turning points in inflation.
In broader terms, however, quantitative analysis is more simply a way of measuring and interpreting certain things and events and can be used for more common paced tasks as calculating simple financial ratios such as earnings gained per share, or for more complicated reasons such as to calculate option pricing or discounted cash flow.
While there is no doubt that although quantitative analysis is indeed a powerful tool for evaluating investment potential, it's really only one side of the story and its counterpart, qualitative analysis must also be utilized in order to gain the full picture.
Generally this is made possible through the method of applying a series of numerical values to certain variables, with which quantitative analysts try to replicate reality mathematically and so predict changes and moves with the markets.
There are many reasons for employing a quant (as quantitative analysts are often affectionately known) as quantitative analysis itself can be carried out for a number of reasons, such as a performance evaluation, measurement, or valuation of a certain financial instrument. For example in foreign exchange terms for a certain trading pattern or style, while it can also be used to quite accurately to predict certain real world events such as changes in the price of shares and turning points in inflation.
In broader terms, however, quantitative analysis is more simply a way of measuring and interpreting certain things and events and can be used for more common paced tasks as calculating simple financial ratios such as earnings gained per share, or for more complicated reasons such as to calculate option pricing or discounted cash flow.
While there is no doubt that although quantitative analysis is indeed a powerful tool for evaluating investment potential, it's really only one side of the story and its counterpart, qualitative analysis must also be utilized in order to gain the full picture.
Psychology
Psychology in Forex is almost as important as the money that traders invest in the market. Without the proper mind-set, trading can be intimidating and confusing. Those who lose the most money in the market are those who don't grasp this fundamental truth. Thought is reality here. Emotions have to be faced down and controlled in order to become a successful Forex trader.
It is often easier for traders to say that they can control their impulses, but when profit is staring them in the face, it can be hard to deny the chance for a better life. But it is just as important to stay in the trading game as it is to realize a profit. To guarantee a future in the Forex market, traders need to know how to control their impulses, remain motivated and persistent even as loss stares them in the face, and develop a self-awareness that will intuitively point them in the direction to success.
Scientists are only now beginning to realize the effect of emotions on a person's thought process. It has been found that emotions are “indispensable” components of rational thought. For those who don't have the ability to control their emotions, it becomes more important for them to realize their limitations and make them work to their advantage.
It is often easier for traders to say that they can control their impulses, but when profit is staring them in the face, it can be hard to deny the chance for a better life. But it is just as important to stay in the trading game as it is to realize a profit. To guarantee a future in the Forex market, traders need to know how to control their impulses, remain motivated and persistent even as loss stares them in the face, and develop a self-awareness that will intuitively point them in the direction to success.
Scientists are only now beginning to realize the effect of emotions on a person's thought process. It has been found that emotions are “indispensable” components of rational thought. For those who don't have the ability to control their emotions, it becomes more important for them to realize their limitations and make them work to their advantage.
Money Management
Money management is perhaps the least realized and most important weapon in a trader's arsenal. A large percentage of Forex traders fail because they don't have the concept of money management firmly in their grasp. In order to constantly wager hundreds or thousands of dollars, traders have to know the potential of every penny they are risking.
Keys to managing money in the Forex market inevitably involve understanding how much can be put on one trade and how much can be lost on one trade without it affecting the ability to trade in the future.
A good way for traders to minimize profit loss and manage their money is to remember that they are not in a pool hall or casino. Unlike gambling rules, which state that losers need to wage higher bets to increase profits, Forex rules go in the opposite direction. Some traders call this the Anti-Martingale rule: bet more when you are on a winning streak and less when you are losing. Also, never bet more than 1% of your core equity (starting balance-amount in open positions).
Keys to managing money in the Forex market inevitably involve understanding how much can be put on one trade and how much can be lost on one trade without it affecting the ability to trade in the future.
A good way for traders to minimize profit loss and manage their money is to remember that they are not in a pool hall or casino. Unlike gambling rules, which state that losers need to wage higher bets to increase profits, Forex rules go in the opposite direction. Some traders call this the Anti-Martingale rule: bet more when you are on a winning streak and less when you are losing. Also, never bet more than 1% of your core equity (starting balance-amount in open positions).
Fundamental Analysis
Forex traders who utilize Fundamental analysis often keep one eye focused on the market and the other on a television set tuned to CNN. They will study the news for information on political climate, international relations, natural disasters and other worldly events in order to determine what might be coming up in the trading arena.
Fundamental factors that many traders use when deciding whether to stay with a trade or sell, besides those already mentioned, include unemployment rates, inflation, fiscal policy changes, and stocks/bonds/money markets. If an Earthquake occurs in India, for example, fundamental analysts will keep a close eye on the impending changes in the value of Indian currency to determine when to buy or sell.
Fundamental analysis studies the causes of market movements. This distinguishes it from technical analysis, which focuses on the effects brought about from those changes. Traders can often use fundamental analysis as a back-up system to confirm whether the market would support a trade that was recommended through technical analysis.
Fundamental factors that many traders use when deciding whether to stay with a trade or sell, besides those already mentioned, include unemployment rates, inflation, fiscal policy changes, and stocks/bonds/money markets. If an Earthquake occurs in India, for example, fundamental analysts will keep a close eye on the impending changes in the value of Indian currency to determine when to buy or sell.
Fundamental analysis studies the causes of market movements. This distinguishes it from technical analysis, which focuses on the effects brought about from those changes. Traders can often use fundamental analysis as a back-up system to confirm whether the market would support a trade that was recommended through technical analysis.
Glossary of EconomicTerms
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
A
Auto Sales
Car sales are tremendously important to the US economy but their volatility can make them an unreliable indicator. New models introduced at the end of summer and in early spring tend to have a disproportionate influence on sales figures. That said, strong figures are a good sign that consumer demand is picking up. They can be seen as indicating higher future production if demand is sustained over three or four months. The size of the item in question and the timeliness of the release allow auto sales to be a useful leading indicator of retail sales and personal consumption expenditures data.Release Date: Around the 13th of each month
Release Time: 13:30 GMT
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B
Balance of Payments (BOP)
The Balance of Payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time. Usually, the BOP is calculated every quarter and every calendar year. All trades conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money is going in and out of a country. If a country has received money, this is known as a credit, and, if a country has paid or given money, the transaction is counted as a debit. Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should balance. But in practice this is rarely the case and, thus, the BOP can tell the observer if a county has a deficit or a surplus and from which part of the economy the discrepancies are stemming.Balance of Trade
The largest component of a country's balance of payments. It is the difference between exports and imports. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy, and foreign investments in the domestic economy. The US merchandise trade balance has been in a deficit since the mid-1970s. Rising deficits can be reflective of increased consumption, which can be a sign of a strengthening economy.Release Date: Around the 12th of each month
Release Time: 13:30 GMT
Beige Book Fed Survey
Officially known as the Survey on Current Economic Conditions, the Beige Book is published eight times per year by a Federal Reserve Bank, containing anecdotal information on current economic and business conditions in its District through reports from Bank and Branch directors, and interviews with key business contacts, economists, market experts, and other sources. The Beige Book highlights the activity information by District and sector. The survey normally covers a period of about 4-weeks in duration, and is released two weeks prior to each FOMC meeting, which is also held eight times per year. While being deemed by some as a lagging report, the Beige Book has usually served as a helpful indicator to FOMC policy decisions on monetary policy.The Beige Book isn't considered to be a big market mover. It is a gauge on the strength of the economy and not a commentary on the views of Fed members. Occasionally it can move markets if the findings are a big surprise from analyst expectations.
Release Date: Two Wednesdays before every FOMC meet. 8 times a yr
Release Time: 19:15 GMT
Business Inventories and Sales
Business inventories and sales figures consist of data from other reports such as durable goods orders, factory orders, retail sales, and wholesale inventories and sales data. Inventories are an important component of the GDP report because they help distinguish which part of total output produced (GDP) remained unsold. As a result, this presents us with important clues on the future direction of the economy. Before computerization allowed companies to trim inventories and use minimal stock on hand, inventory build up was indicative of falling demand and potentially a recession. If inventories decline significantly over a three month period it is an indication that demand has picked up and that production will have to increase to restock.Release Date: Second Friday of each month
Release Time: 13:30 GMT
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C
Capacity Utilisation
Measures how much of the productive potential of the economy is being used. A level of 85% is a good balance of growth and inflation; anything above this level raises inflationary fears.Release Date: Around the 14th of each month
Release Time: 13:30 GMT
CBI Surveys
Britains largest organisation of business employers, aims at creating and sustaining favourable conditions for their optimal competition and prosperity. The CBI publishes monthly and quarterly surveys, on past, current and future assessments on the manufacturing and services sectors. The indexes reflect respondents views on various items such as, output, sales, prices, inventories, and export/import orders.Release Date: Around the 27th of each month
Release Time: 11:00 GMT
Chicago PMI
A survey of Chicago-based managers which covers prices, durable goods orders and inventories. It is closely-watched since it is announced before the National Association of Purchasing Managers' index (NAPM). The Chicago figure gives a good idea of what the national figure will be.Release Date: Around the end of each month
Release Time: 15:00 GMT
Construction Spending
Construction spending data comes out after most of the housing data has already been released; its influence is therefore diminished. The indicator sometimes shocks the market if it shows a sudden pick-up in the amount spent on new home construction.Release Date: Around the beginning of each month
Release Time: 15:00 GMT
Consumer Confidence Index (CCI)
The Consumer Confidence Index (CCI) is put out by The Conference Board. (There are others such as the Michigan Sentiment Index which is put out monthly by the University of Michigan). The Consumer Confidence Survey is based on a sample of 5,000 U.S. Households and is considered one of the most accurate indicators of confidence. It even goes as far as calculating the number of "help wanted" ads in newspapers to detect how tight the job market is.The idea behind consumer confidence is that when the economy warrants more jobs, increased wages, and lower interest rates, it increases our confidence and spending power. Should the index move above or below the moving average it is a good indication that consumer confidence is significant. Month to month changes are not considered to have as great an impact as the overall trend.
Confidence is looked at closely by the Federal Reserve when determining interest rates, which affect stock prices. Lowering interest rates make it easier to borrow which ultimately supports consumer spending and higher confidence - something the stock markets love to hear. Keep in mind that lowering interest rates is not an instantaneous confidence booster, it can take 6-8 months for rate cuts to work their way into the economy. On the other hand, if confidence is rising rapidly it could trigger higher inflation.
Release Date: Around the 25th of each month
Release Time: 15:00 GMT
Consumer Credit
Consumer Credit is an indicator of consumer spending and demand. It reflects the amount of credit Americans are using, month-on-month, through credit card purchases, personal loans, hire purchase orders or payment plans. A high consumer credit figure suggests the US consumer is not concerned to run up bills in order to finance his/her consumer demands. But the figure is often revised and is seasonally volatile it goes up before Christmas. It is therefore is given only cursory attention.Release Date: Around 7th of each month
Release Time: 20:00 GMT
Consumer Price Index (CPI)
The Consumer Price Index (CPI) is considered the most widely used measure of inflation and is regarded as an indicator of the effectiveness of government policy. The CPI is a basket of consumer goods (and services) tracked from month to month (excluding taxes). Items included reflect prices of food, clothing, shelter, fuels, transportation, health care and all other goods and services that people buy for day-to-day living. CPI figures are collected in 87 areas throughout the U.S. from over 22,000 retail and service establishments. Rent paid by individuals is also collected from 50,000 landlords and tenants.The CPI is one of the most followed economic indicators and considered to be a big market mover. A rising CPI indicates inflation, a large increase is something financial markets don't like to hear. Inflation is the rate at which the general price for goods and services is rising, and subsequently our purchasing power is falling. As inflation rises this means that every dollar you own will buy a less percentage of a good or service. The Federal Reserve typically battles rising inflation by increasing short term interest rates. Rising rates are frowned upon by corporations and investors because the cost of borrowing money increases.
Release Date: Second Friday of each month
Release Time: 13:30 GMT
Current Account
The most important part of international trade data. It is the broadest measure of sales and purchases of goods, services, interest payments and unilateral transfers. The entire merchandise trade balance is contained in the current account.Back to top
D
Durable Goods Orders
These include large ticket items such as capital goods (machinery, plant and equipment), transportation and defence orders. They are extremely important in that they anticipate changes in production and thus, signal turns in the economic cycle.But the large size of these items (aircrafts and civilian orders) means that they present equally large changes, which makes them extremely volatile. This also gives rise to sizeable revisions in the subsequent periods once more complete data becomes available one week later. Durable goods data are better used when omitting defence orders and transportation orders, while calculating a three-month moving average, and a year-to-year percent change.
Release Date: Around the 26th of each month
Release Time: 13:30 GMT
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E
Employment Cost Index (ECI)
The Employment Cost Index is a quarterly survey of employer payrolls in the final month of the quarter. The ECI tracks movement in the cost of labour which includes wages, fringe benefits, and bonuses for employees at all levels of involvement in the companies. Wages and salaries make up approximately 75% of the indexes value. The one benefit not included in the ECI is employee stock options, which actually don't cost employers anything to issue.This indicator isn't the most watched, but it is among a select group of indicators that have enough power to move the markets, especially during inflationary times. The idea behind the ECI is that as wage pressures increase so does inflation. This is mainly because compensation tends to increase before companies increase prices for consumers (inflation).
The ECI is particularly useful when it's compared to inflation and productivity growth rates. Ideally you would like to see wages increase at a similar rate as inflation and productivity. If employee costs are rising but productivity is not then it could spell trouble for companies.
Release Date: The last Thursday of Apr, Jul, Nov and Jan
Release Time: 13:30 GMT
European Central Bank (ECB)
The European Central Bank (ECB) and the national central banks together constitute the Eurosystem, the central banking system of the euro area. The main objective of the Eurosystem is to maintain price stability: safeguarding the value of the euro.Release Date: First Thursday of each month
Release Time: 12:45 GMT
Existing Home Sales
The number and value of old homes sold. Can give markets an insight into the strength of consumer confidence and spending power. Existing home sales also offer evidence of inflationary pressure if prices are rising rapidly.Release Date: Around the 25th of each month
Release Time: 15:00 GMT
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F
Factory Orders and Manufacturing Inventories
In many respects this report is a rehash of the durable goods release that became available a week earlier. However, the factory orders report merits review because it also contains data on orders and shipments of nondurable goods, manufacturing inventories, and the inventory/sales ratio. Order data is useful because it tells us something about the likely pace of production in the months ahead. They are extremely volatile and can fluctuate by three or four percent in any given month. They are subject to sizeable revisions and are very difficult to forecast.Release Date: Around the 4th of each month
Release Time: 15:00 GMT
Federal Open Market Committee (FOMC)
The body that sets the interest rate and credit policies of the Federal Reserve System.The FOMC is the most important monetary policymaking body of the Federal Reserve System. The current chairman is Alan Greenspan.
The FOMC is composed of the seven members of the Board of Governors and five Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves on a continuous basis, while the presidents of the other Reserve Banks serve one-year terms on a rotating basis.
Release Date: First Wednesday of the month
Release Time: 19:15 GMT
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G
Gross Domestic Product (GDP)
GDP is a gross measure of market activity. It represents the monetary value of all the goods and services produced by an economy over a specified period. This includes consumption, government purchases, investments, and the trade balance (exports minus imports). The GDP is perhaps the greatest indicator of the economic health of a country. It is usually measured on a yearly basis, but quarterly stats are also released. The Commerce Department releases an "advance report" on the last day of each quarter. Within a month it follows up with the "preliminary report" and then the "final report" is released another month later. The most recent GDP figures have a relatively high importance to the markets. GDP indicates the pace at which a country's economy is growing (or shrinking). If GDP growth fails to meet or beat the market expectations stocks can temporarily pay the price. Traditionally, the U.S. Economy's average growth rate has been between 2.5 - 3%. Economists believe that this range represents the sustainable long-run growth rate of output.
Release Date: Last day of the Quarter
Release Time: 15:30 GMT
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H
Help Wanted Index
An index published monthly by the Conference Board that shows the total number of help-wanted advertisements occurring monthly in 51 major newspapers from around the country.This is an indicator of strength in the labour markets. Large numbers of ads imply that the labour market is strong and wages will need to increase in order to attract more workers. In contrast, if the number of ads are few, the labour market is weak and wages will decrease as workers will be willing to accept lower wages for jobs.
Release Date: Last Thursday of each month
Release Time: 15:00
Housing Starts / Building Permits
This economic indicator tracks how many new single-family homes or buildings were constructed throughout the month. For the survey each house and each single apartment are counted as one housing start, (a building with 200 apartments would be counted as 200 housing starts). The figures include all private and publicly owned units, with the only exception being mobile homes which are not counted. Most of the housing start data is collected through applications and permits for building homes. The housing start data is offered in an unadjusted and a seasonally adjusted format.This indicator isn't a huge market mover, but it has been reported by U.S. Census that the housing industry represents over 25% of investment dollars and a 5% value of the overall economy. Housing starts are considered to be a leading indicator, meaning it detects trends in the economy looking forward.
Declining housing starts show a slowing economy, while increases in housing activity can pull an economy out of a downturn. However, a considerably stronger report is not good because it can be interpreted that growth is extremely strong and could lead to high inflation. The fact that housing is closely related to mortgage rates means that housing starts data has a strong effect on the bond market and predictions for interest rate movements. As interest rates rise it is expected that housing starts will decline.
Release Date: Around the middle of the following month.
Release Time: 15:30 GMT
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I
IFO
Germanys leading survey of business conditions. Published monthly by the Institute for Economic Research, one of the largest economic think tanks in Germany, the IFO Business Climate Index is a widely followed leading indicator of economic activity known for its track record in calling economic turns in German economic growth. The index surveys over 7,000 enterprises on their assessment of the current business situation and their resulting plans for the short-term. In addition to this aforementioned headline index, there is the Current Situation Index and Business Expectations Index.Release Date: Around the end of each month
Release Time: 13:00 GMT
Index of Industrial Production
This is an important measure of the nation's industrial output. It is expressed as a rate of change from the previous month, and gives markets a good idea of the strength of the US manufacturing sector. The index comprises data from the market and from industrial sectors. The market grouping consists of final products (consumer goods, business equipment, and construction supplies), intermediate products and materials. The industrial grouping covers manufacturing (divided into durable and non-durable goods), mining and utilities.Changes in industrial production are a significant indicator of manufacturing sector trends. However, from month to month the figures can be volatile. With this in mind it is better to follow either the three-month moving average of the monthly change or year-on-year changes.
Release Date: The second Friday of each month
Release Time: 14:15 GMT
Initial Claims (Jobless Claims)
The numbers are released each week by the US Department of Labour and measure the weekly change in state applications for unemployment benefits. The financial markets regard the report as a good indicator of changing trends in the labour market and in the economy as a whole.However, the figures do not always represent a true picture of economic trends. They are often distorted by short-term factors such as state and federal holidays. Therefore, a longer-term moving average of initial claims is a more reliable indicator.
Initial claims also give hints about the non-farm payroll. If initial claims are down consistently over a month, there is a good chance the non-farm payroll will come in high.
Release Date: Every Thursday
Release Time: 13:30 GMT
Institute for Supply Management (ISM)
This is leading survey on US manufacturing activity. The report is released on the first working day of the month, providing the first detailed look at the manufacturing sector before the release of the all-important employment report.Highly valued for its timeliness and breadth of information, the headline figure is a function of six major components: prices paid; new orders; supplier deliveries; production, inventories and employment. Note that the latter three components reflect supply forces, while the former three cover demand forces. Watching the relative trend of these two groups (demand and supply) sheds light on the balance between demand and supply forces, and hence, provides insight on the Federal Reserves policy decisions since they lend much importance to these balances. The Prices Paid component is widely watched because it assesses price pressures ahead in the sector. A figure of 50 or above indicates expansion in the sector, while a number below 50 suggest a contraction.
Release Date: First Thursday of the month
Release Time: 15:00 GMT
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L
Leading Indicator
The leading indicator piles together already-announced data for new orders, jobless claims, money supply, average workweek, building permits, stock prices and durable goods. Its predictability gives it a low grade.Release Date: Beginning of the month
Release Time: 13:30 GMT
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M
Michigan Consumer Sentiment
The Michigan consumer sentiment index is a survey of consumer confidence conducted by the University of Michigan at a national level. There are two reports a month: a preliminary released around the 10th of the month for that month, and a final released on the first of the next month for the prior month. The index is nothing more than a snapshot of whether consumers feel like spending their money or not.Release Date: The second Friday of each month
Release Time: 14:45 GMT
Monetary Policy Committee (MPC)
Interest rates are set by the Monetary Policy Committee.The MPC studies all the available economic data and looks at a range of domestic and international economic and monetary factors. There is a briefing meeting prior to the MPC where presentations are made to the MPC by the Bank's economists and its regional agents.
The Bank's Monetary Policy Committee (MPC) is made up of the Governor, the 2 Deputy Governors, the Bank's Chief Economist, the Executive Director for Market Operations and 4 external members appointed directly by the Chancellor.
Release Date: Wednesday / Thursday at the beginning of the month
Release Time: Thursday 12 Noon
Money Supply
The entire quantity of a country's bills, coins, loans, credit, and other liquid instruments in the economy.Money supply is divided into three categories, M1, M2, and M3, according to the type and size of account the instrument is kept in. This number is important to economists trying to understand how policies will affect interest rates and growth.
Release Date: Around the beginning of each month
Release Time: 09:30 GMT
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N
New Home Sales
Monthly data new home sales data are released for the nation as a whole and for four geographical areas the Northeast, the Midwest, the South, and the West. The report also contains information on home prices, and number of houses for sale. Housing is a crucial segment of the economy because it signals changes in consumer spending patterns that are indicative of economic activity. Volatility and revisions, however, are common in the report. The report is seasonally variable. A four-month moving average or a year-on-year measure is more useful.Release Date: Around the 26th of each month
Release Time: 15:00 GMT
Non-Farm Payroll (NFP)
Non-farm payroll (NFP) is a monthly survey of the number of new jobs created. It is a very good indicator of the unemployment rate. NFP is the market mover, the most closely-watched by all in the bond and foreign exchange markets.NFP is also seen as having a reasonable correlation with GDP growth. There is a rule of thumb that a rise of 200,000 a month equates to a rise of 3% in GDP.
Release Date: First Friday of each month
Release Time: 15:30 GMT
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P
Personal Consumption
Personal consumption is an indication of the amount Americans spend on goods and services in a given month. The number is pre-empted by retail sales which tend to give a more thorough view of similar expenditure.Release Date: Around the end of each month
Release Time: 13:30 GMT
Personal Income and Personal Consumption Expenditures (PCE)
Personal Spending, also known as PCE, represents the change in the market value of all goods and services purchased by individuals. It is the largest component of GDP. Personal income represents the change in compensation that individuals receive from all sources including: wages and salaries; proprietors income; income from rents; dividends and interest; and transfer payments (Social Security, unemployment, and welfare benefits). The release of these two figures gives you the savings rate, which is the difference between disposable income (personal income minus taxes) and consumption, divided by disposable income. The ever-declining savings rate has become a key indicator to watch as it signals consumer spending patterns.Release Date: Around the end of each month
Release Time: 13:30 GMT
Philadelphia Fed Index (Business Outlook Survey)
The Philadelphia Fed Index is a monthly survey of manufacturers located around the states of Pennsylvania, New Jersey and Delaware. Companies surveyed indicate the direction of change in their overall business activity and in the various measures of activity at their plants. They are asked questions regarding employment, working hours, new and unfilled orders, shipments inventories, delivery times, prices paid, and prices received. The survey has been conducted each month since May 1968. The index signals expansion when it is above zero and contraction when below. It takes the difference between the number of positive and negative responses: if 30% of manufacturers think prices will go up and 39% think they will go down, the prices paid indicator would be 9.The Philadelphia Fed Index is considered to be a good indicator of changes in everything from employment, general prices, and conditions within the manufacturing industry. Manufacturing is considered to be a precursor to future economic conditions and it lays the groundwork toward economic recovery. For example, in a poor economy if manufacturing starts to pick up there is an expectation that the economy will soon follow behind.
Release Date: Around the 17th of each month
Release Time: 15:00 GMT
Producer Price Index (PPI)
The Producer Price Index is not as widely used as the CPI, but it is still considered to be a good indicator of inflation. Formerly known as the "Wholesale Price Index", the PPI is a basket of various indexes covering a wide range of areas affecting domestic producers. The PPI includes industries such as goods manufacturing, fishing, agriculture, and other commodities. Each month approximately 100,000 prices are collected from 30,000 production and manufacturing firms.There are three primary areas that make up the PPI. These are industry-based, commodity-based, stage-of-processing goods.
The PPI is another important indicator which investors pay close attention to. It is not as strong as the CPI in detecting inflation, but because it includes goods being produced it is often a forecast of future CPI releases.
The PPI is also used extensively by company officials for determining future supply or sales contracts. For example, a sudden rise in the PPI could mean that future sales contracts will also rise.
Release Date: Second Thursday of the month
Release Time: 13:30 GMT
Productivity
An indication of output per employee. While productivity is helpful in the analysis of an economy, it is often misleading. This is because a reduction in personnel can, at times of recession for example, lead to an increase in productivity. Thus output per employee may seem encouraging while overall economic performance is declining.Purchasing Managers Index (PMI)
The Index is widely used by industrialised economies to assess business confidence. Germany, Japan and the UK use PMI surveys for both manufacturing and services industries. The numbers are arrived at through a series of questions regarding Business activity, New Business, Employment, Input Prices, Prices Charged and Business Expectations. In addition to the headline figures, the prices paid components is highly scrutinized by the markets for evaluating pricing power and inflationary risks. Also see National Association of Purchasing Managers (NAPM). A PMI index over 50 indicates that manufacturing is expanding while anything below 50 means that the industry is contracting.The PMI report is an extremely important indicator for the financial markets as it is the best indicator of factory production. The index is popular for detecting inflationary pressure as well as manufacturing economic activity, both of which investors pay close attention to. The PMI is not as strong as the CPI in detecting inflation, but because the data is released one day after the month it is very timely.
Should the PMI report an unexpected change, it is usually followed by a quick reaction in stocks. One especially key area of the report is growth in new orders, which predicts manufacturing activity in future months.
Release Date: The first business day of the month
Release Time: 15:00 GMT
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R
Retail Sales
Measures the percentage monthly change in total receipts of retail stores, and includes both durable and non-durable goods. It is the first real indication of the strength of consumer expenditure. The limits of the retail sales figure, however, lie in the fact that it focuses on goods while ignoring services and other items such as insurance and legal fees. In addition, the report is stated in nominal terms rather than real, thus, not accounting for inflation. The retail sales figure is also subject to sizeable revisions, even when excluding auto sales (core retail sales). Every month the data is released showing the percent change from the previous month data. A negative number indicates that sales decreased from the previous months sales.This indicator is a big market mover, especially for retail stocks. The data is very timely because retail sales data is released within 2 weeks of the previous month.
Release Date: Second Thursday of each month
Release Time: 13:30am GMT
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U
Unemployment
Unemployment is a key indicator. It has a lowly rating because there are previews to it that paint most of the picture before the actual figures are released. Most important of the previews are the initial claims figures, which report the numbers looking for unemployment benefit. All the same, unemployment can still contradict expectations and cause upsets.Release Date: Around the 7th of each month
Release Time: 15:30 GMT
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W
Wholesale Trade
The trade conducted between wholesalers and the retail sector. Not watched particularly closely by markets, but gives an idea of economic activity that may later filter through to the wider economy.Release Date: Around the 7th of each month
Release Time: 15:00 GMT
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Free FX Risk & Position Size Calculator
If there are two principles to trading that most traders ignore, it is risk management and proper position sizing. Over a course of many trades, even with a robust strategy, performance will suffer if proper position sizing is not implemented.
Now, with the assistance of Aspen Trading Group’s FX Risk / Position Size Calculator you can immediately determine the correct amount of forex lots to trade each time while also knowing your total risk exposure as a percentage of your portfolio.
Simply plug in your starting capital, amount you wish to risk per trade as a percentage of your capital and your stop loss price. Instantly the results will be displayed.
"Why do I need to adjust my position size, I normally trade the same amount each time?"
Your performance will vary significantly, for better or worse, if you do not risk a consistent amount on each trade. If a trade has a large stop loss and you trade the same size as you would if the stop loss was far less, the amount of risk you incur increases greatly. Let's look at an example.
A sampling of 100 trades from our FX Alert Service provides a great example. Trader A took all 100 trades and adjusted the size of each trade to risk roughly 1.5% of their account versus Trader B who traded 5 FX-mini lots throughout. Based on a starting equity of $20,000, look at the difference:
Total Returns:
Trader A 38.2%
Trader B 14.8%
Now, with the assistance of Aspen Trading Group’s FX Risk / Position Size Calculator you can immediately determine the correct amount of forex lots to trade each time while also knowing your total risk exposure as a percentage of your portfolio.
Simply plug in your starting capital, amount you wish to risk per trade as a percentage of your capital and your stop loss price. Instantly the results will be displayed.
"Why do I need to adjust my position size, I normally trade the same amount each time?"
Your performance will vary significantly, for better or worse, if you do not risk a consistent amount on each trade. If a trade has a large stop loss and you trade the same size as you would if the stop loss was far less, the amount of risk you incur increases greatly. Let's look at an example.
A sampling of 100 trades from our FX Alert Service provides a great example. Trader A took all 100 trades and adjusted the size of each trade to risk roughly 1.5% of their account versus Trader B who traded 5 FX-mini lots throughout. Based on a starting equity of $20,000, look at the difference:
Total Returns:
Trader A 38.2%
Trader B 14.8%
Forex Money Management
by Boris Schlossberg
Put two rookie traders in front of the screen, provide them with your best high-probability set-up, and for good measure, have each one take the opposite side of the trade. More than likely, both will wind up losing money. However, if you take two pros and have them trade in the opposite direction of each other, quite frequently both traders will wind up making money - despite the seeming contradiction of the premise. What's the difference? What is the most important factor separating the seasoned traders from the amateurs? The answer is money management.
Like dieting and working out, money management is something that most traders pay lip service to, but few practice in real life. The reason is simple: just like eating healthy and staying fit, money management can seem like a burdensome, unpleasant activity. It forces traders to constantly monitor their positions and to take necessary losses, and few people like to do that. However, as Figure 1 proves, loss-taking is crucial to long-term trading success.
Amount of Equity Lost Amount of Return Necessary to Restore to Original Equity Value
25% 33%
50% 100%
75% 400%
90% 1000%
Figure 1 - This table shows just how difficult it is to recover from a debilitating loss.
Note that a trader would have to earn 100% on his or her capital - a feat accomplished by less than 1% of traders worldwide - just to break even on an account with a 50% loss. At 75% drawdown, the trader must quadruple his or her account just to bring it back to its original equity - truly a Herculean task!
The Big One
Although most traders are familiar with the figures above, they are inevitably ignored. Trading books are littered with stories of traders losing one, two, even five years' worth of profits in a single trade gone terribly wrong. Typically, the runaway loss is a result of sloppy money management, with no hard stops and lots of average downs into the longs and average ups into the shorts. Above all, the runaway loss is due simply to a loss of discipline.
Most traders begin their trading career, whether consciously or subconsciously, visualizing "The Big One" - the one trade that will make them millions and allow them to retire young and live carefree for the rest of their lives. In FX, this fantasy is further reinforced by the folklore of the markets. Who can forget the time that George Soros "broke the Bank of England" by shorting the pound and walked away with a cool $1-billion profit in a single day? But the cold hard truth for most retail traders is that, instead of experiencing the "Big Win", most traders fall victim to just one "Big Loss" that can knock them out of the game forever.
Learning Tough Lessons
Traders can avoid this fate by controlling their risks through stop losses. In Jack Schwager's famous book "Market Wizards" (1989), day trader and trend follower Larry Hite offers this practical advice: "Never risk more than 1% of total equity on any trade. By only risking 1%, I am indifferent to any individual trade." This is a very good approach. A trader can be wrong 20 times in a row and still have 80% of his or her equity left.
The reality is that very few traders have the discipline to practice this method consistently. Not unlike a child who learns not to touch a hot stove only after being burned once or twice, most traders can only absorb the lessons of risk discipline through the harsh experience of monetary loss. This is the most important reason why traders should use only their speculative capital when first entering the forex market. When novices ask how much money they should begin trading with, one seasoned trader says: "Choose a number that will not materially impact your life if you were to lose it completely. Now subdivide that number by five because your first few attempts at trading will most likely end up in blow out." This too is very sage advice, and it is well worth following for anyone considering trading FX.
Money Management Styles
Generally speaking, there are two ways to practice successful money management. A trader can take many frequent small stops and try to harvest profits from the few large winning trades, or a trader can choose to go for many small squirrel-like gains and take infrequent but large stops in the hope the many small profits will outweigh the few large losses. The first method generates many minor instances of psychological pain, but it produces a few major moments of ecstasy. On the other hand, the second strategy offers many minor instances of joy, but at the expense of experiencing a few very nasty psychological hits. With this wide-stop approach, it is not unusual to lose a week or even a month's worth of profits in one or two trades. (For further reading, see Introduction To Types Of Trading: Swing Trades.)
To a large extent, the method you choose depends on your personality; it is part of the process of discovery for each trader. One of the great benefits of the FX market is that it can accommodate both styles equally, without any additional cost to the retail trader. Since FX is a spread-based market, the cost of each transaction is the same, regardless of the size of any given trader's position.
For example, in EUR/USD, most traders would encounter a 3 pip spread equal to the cost of 3/100th of 1% of the underlying position. This cost will be uniform, in percentage terms, whether the trader wants to deal in 100-unit lots or one million-unit lots of the currency. For example, if the trader wanted to use 10,000-unit lots, the spread would amount to $3, but for the same trade using only 100-unit lots, the spread would be a mere $0.03. Contrast that with the stock market where, for example, a commission on 100 shares or 1,000 shares of a $20 stock may be fixed at $40, making the effective cost of transaction 2% in the case of 100 shares, but only 0.2% in the case of 1,000 shares. This type of variability makes it very hard for smaller traders in the equity market to scale into positions, as commissions heavily skew costs against them. However, FX traders have the benefit of uniform pricing and can practice any style of money management they choose without concern about variable transaction costs.
Four Types of Stops
Once you are ready to trade with a serious approach to money management and the proper amount of capital is allocated to your account, there are four types of stops you may consider.
1. Equity Stop
This is the simplest of all stops. The trader risks only a predetermined amount of his or her account on a single trade. A common metric is to risk 2% of the account on any given trade. On a hypothetical $10,000 trading account, a trader could risk $200, or about 200 points, on one mini lot (10,000 units) of EUR/USD, or only 20 points on a standard 100,000-unit lot. Aggressive traders may consider using 5% equity stops, but note that this amount is generally considered to be the upper limit of prudent money management because 10 consecutive wrong trades would draw down the account by 50%.
One strong criticism of the equity stop is that it places an arbitrary exit point on a trader's position. The trade is liquidated not as a result of a logical response to the price action of the marketplace, but rather to satisfy the trader's internal risk controls.
2. Chart Stop
Technical analysis can generate thousands of possible stops, driven by the price action of the charts or by various technical indicator signals. Technically oriented traders like to combine these exit points with standard equity stop rules to formulate charts stops. A classic example of a chart stop is the swing high/low point. In Figure 2 a trader with our hypothetical $10,000 account using the chart stop could sell one mini lot risking 150 points, or about 1.5% of the account.
Figure 2
3. Volatility Stop
A more sophisticated version of the chart stop uses volatility instead of price action to set risk parameters. The idea is that in a high volatility environment, when prices traverse wide ranges, the trader needs to adapt to the present conditions and allow the position more room for risk to avoid being stopped out by intra-market noise. The opposite holds true for a low volatility environment, in which risk parameters would need to be compressed.
One easy way to measure volatility is through the use of Bollinger bands, which employ standard deviation to measure variance in price. Figures 3 and 4 show a high volatility and a low volatility stop with Bollinger bands. In Figure 3 the volatility stop also allows the trader to use a scale-in approach to achieve a better "blended" price and a faster breakeven point. Note that the total risk exposure of the position should not exceed 2% of the account; therefore, it is critical that the trader use smaller lots to properly size his or her cumulative risk in the trade.
Figure 3
Figure 4
4. Margin Stop
This is perhaps the most unorthodox of all money management strategies, but it can be an effective method in FX, if used judiciously. Unlike exchange-based markets, FX markets operate 24 hours a day. Therefore, FX dealers can liquidate their customer positions almost as soon as they trigger a margin call. For this reason, FX customers are rarely in danger of generating a negative balance in their account, since computers automatically close out all positions.
This money management strategy requires the trader to subdivide his or her capital into 10 equal parts. In our original $10,000 example, the trader would open the account with an FX dealer but only wire $1,000 instead of $10,000, leaving the other $9,000 in his or her bank account. Most FX dealers offer 100:1 leverage, so a $1,000 deposit would allow the trader to control one standard 100,000-unit lot. However, even a 1 point move against the trader would trigger a margin call (since $1,000 is the minimum that the dealer requires). So, depending on the trader's risk tolerance, he or she may choose to trade a 50,000-unit lot position, which allows him or her room for almost 100 points (on a 50,000 lot the dealer requires $500 margin, so $1,000 – 100-point loss* 50,000 lot = $500). Regardless of how much leverage the trader assumed, this controlled parsing of his or her speculative capital would prevent the trader from blowing up his or her account in just one trade and would allow him or her to take many swings at a potentially profitable set-up without the worry or care of setting manual stops. For those traders who like to practice the "have a bunch, bet a bunch" style, this approach may be quite interesting.
Conclusion
As you can see, money management in FX is as flexible and as varied as the market itself. The only universal rule is that all traders in this market must practice some form of it in order to succeed.
By Boris Schlossberg, Senior Currency Strategist, FXCM
Forex Basics
The following is an introduction to some basic terms, definitions and concepts used in forex trading. It is designed to be read in chronological order, starting with the most simplest terms and moving through to some more advanced terms used in the forex market, or you can click on any individual term if you want an explanation of a specific term.
The simultaneous transaction of one currency for another.
Foreign Exchange Market
The Foreign exchange market is a large, growing and liquid financial market that operates 24 hours a day. It is not a market in the traditional sense because there is no central trading location or “exchange". Most of the trading is conducted by telephone or through electronic trading networks. The primary market for currencies is the “interbank market” where banks, insurance companies, large corporations and other large financial institutions manage the risks associated with fluctuations in currency rates.
Spot Market
The market for buying and selling currencies at the current market rate.
Rollover
A spot transaction is generally due for settlement within two business days (the value date). The cost of rolling over a transaction is based on the interest rate differential between the two currencies in a transaction. If you are long (bought) the currency with a higher rate of interest you will earn interest. If you are short (sold) the currency with a higher rate of interest you will pay interest. Most brokers will automatically roll over your open positions allowing you to hold your position indefinitely.
The value of one currency expressed in terms of another. For example, if EUR/USD is 1.3200, 1 Euro is worth US$1.3200.
Currency Pair
The two currencies that make up an exchange rate. When one is bought, the other is sold, and vice versa.
Base Currency
The first currency in the pair. Also the currency your account is denominated in.
Counter Currency
The second currency in the pair. Also known as the terms currency.
ISO Currency Codes
USD = US Dollar
EUR = Euro
JPY = Japanese Yen
GBP = British Pound
CHF = Swiss Franc
CAD = Canadian Dollar
AUD = Australian Dollar
NZD = New Zealand Dollar
For a full list, see ISO Currency Codes
Currency Pair Terminology
EUR/USD = "Euro"
USD/JPY = "Dollar Yen"
GBP/USD = "Cable" or "Sterling"
USD/CHF = "Swissy"
USD/CAD = "Dollar Canada" (CAD referred to as the "Loonie")
AUD/USD = "Aussie Dollar"
NZD/USD = "Kiwi"
FCM
Futures Commission Merchant. An individual or organisation licensed by the U.S. Commodities Futures Trading Commission (CFTC) to deal in futures products and accept monies from clients to trade them.
Dealing Desk
A dealing desk provides pricing, liquidity and execution of trades.
Market Maker
A market maker provides pricing and liquidity for a particular currency pair and stands ready to buy or sell that currency at the quoted price. A market maker takes the opposite side of your trade and has the option of either holding that position or partially or fully offsetting it with other market participants, managing their aggregate exposure to their clients. If a market maker chooses to keep the trader's position without offsetting it in the market, the trader's profit is the market maker's loss and vice versa, leading to a possible conflict of interest between the trader and his market maker. A market maker earns their commission from the spread between the bid and offer price.
An acronym for 'No Dealing Desk'. A no-dealing desk broker does not have a dealing desk but instead uses external liquidity providers to provide pricing and liquidity for its clients. The liquidity providers send in competing bids and offers into the platform, resulting in the best bid and offer being displayed to the client. Some no-dealing desk brokers may display the market depth which is the amount of liquidity available at each price. A greater number of liquidity providers providing pricing to the no-dealing desk broker leads to tighter spreads. A no-dealing desk broker may increase the spread to earn its commission.
ECN is an acronym for Electronic Communications Network. A Forex ECN broker does not have a dealing desk but instead provides a marketplace where multiple market makers, banks and traders can enter in competing bids and offers into the platform and have their trades filled by multiple liquidity providers in an anonymous trading environment. The trades are done in the name of your ECN broker, thereby providing you with complete anonymity. A trader might have their buy order filled by liquidity provider "A", and close the same order against liquidity provider "B", or have their trade matched internally by the bid or offer of another trader. The best bid and offer is displayed to the trader along with the market depth which is the combined volume available at each price. A greater number of marketplace participants providing pricing to the ECN broker leads to tighter spreads. ECN's typically charge a small fee for matching trades between their clients and liquidity providers.
One of the participants in a transaction.
Sell Quote / Bid Price
The sell quote is displayed on the left and is the price at which you can sell the base currency. It is also referred to as the market maker's bid price. For example, if the EUR/USD quotes 1.3200/03, you can sell 1 Euro at the bid price of US$1.3200.
Buy Quote / Offer Price
The buy quote is displayed on the right and is the price at which you can buy the base currency. It is also referred to as the market maker's ask or offer price. For example, if the EUR/USD quotes 1.3200/03, you can buy 1 Euro at the offer price of US$1.3203.
Spread
The difference between the sell quote and the buy quote or the bid and offer price. For example, if EUR/USD quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread.
Pip
The smallest price increment a currency can make. Also known as points. For example, 1 pip = 0.0001 for EUR/USD, or 0.01 for USD/JPY.
Pip Value
The value of a pip. Pip value can be either fixed or variable depending on the currency pair. e.g. The pip value for EUR/USD is always $10 for standard lots, $1 for mini-lots and $0.10 for micro lots.
The standard unit size of a transaction. Typically, one standard lot is equal to 100,000 units of the base currency, 10,000 units if it's a mini, or 1,000 units if it's a micro. Some dealers offer the ability to trade in any unit size, down to as little as 1 unit.
Standard Account
Trading with standard lot sizes, generally 100,000 units of the base currency. e.g. The pip value is $10 for EUR/USD.
Mini Account
Trading with mini lot sizes, generally 10,000 units of the base currency. e.g. The pip value is $1 for EUR/USD.
Micro Account
Trading with micro lot sizes, generally 1,000 units of the base currency. e.g. The pip value is $0.10 for EUR/USD.
Margin
The deposit required to open or maintain a position. Margin can be either "free" or "used". Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1. If a trader's account falls below the minimum amount required to maintain an open position, he will receive a "margin call" requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade.
Leverage
Leverage is the ability to gear your account into a position greater than your total account margin. For instance, if a trader has $1,000 of margin in his account and he opens a $100,000 position, he leverages his account by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of margin in his account, his leverage is 200 times, or 200:1. Increasing your leverage magnifies both gains and losses.
To calculate the leverage used, divide the total value of your open positions by the total margin balance in your account. For example, if you have $10,000 of margin in your account and you open one standard lot of USD/JPY (100,000 units of the base currency) for $100,000, your leverage ratio is 10:1 ($100,000 / $10,000). If you open one standard lot of EUR/USD for $150,000 (100,000 x EURUSD 1.5000) your leverage ratio is 15:1 ($150,000 / $10,000).
An order which is executed by dealer intervention.
Automatic Execution
The order is executed automatically without dealer intervention or involvement.
Slippage
The difference between the order price and the executed price, measured in pips. Slippage often occurs in fast moving and volatile markets, or where there is manual execution of trades.
Drawdown
The decline in account balance from peak to valley, measured until a new high is reached, usually reported in percentage terms.
Support
Support is a technical price level where buyers outweigh sellers, causing prices to bounce off a temporary price floor.
Resistance
Resistance is a technical price level where sellers outweigh buyers, causing prices to bounce off a temporary price ceiling.
An order to buy or sell at the current market price.
Limit Order
An order to buy or sell at a pre-specified price level.
Stop-Loss Order
An order to restrict losses at a pre-specified price level.
Limit Entry Order
An order to buy below the market or sell above the market at a pre-specified level, believing that the price will reverse direction from that point.
Stop-Entry Order
An order to buy above the market or sell below the market at a pre-specified level, believing that the price will continue in the same direction.
OCO Order
One Cancels Other. An order whereby if one is executed, the other is cancelled.
GTC Order
Good Till Cancelled. An order stays in the market until it is either filled or cancelled.
A position in which the trader attempts to profit from an increase in price. i.e. Buy low, sell high.
Short Position
A position in which the trader attempts to profit from a decrease in price. i.e. Sell high, buy low.
A style of trading that involves analysing price charts for technical patterns of behaviour.
A style of trading that involves analysing the macroeconomic factors of an economy underpinning the value of a currency and placing trades that support the trader's long or short-term outlook.
Trend Trading
A style of trading that attempts to profit from riding short, medium or long term trends in price.
A style of trading that attempts to profit from buying and selling currencies between a lower level of support and an upper level of resistance. The upper level of resistance and the lower level of support defines the range. The range forms a price channel where the price can be seen to oscillate between the two levels of support and resistance.
A style of trading whereby a trader attempts to profit from fundamental news announcements on a country's economy that may affect the value of a currency, usually seeking short term profit immediately after the announcement is released.
Scalping
A style of trading that involves frequent trading seeking small gains over a very short period of time. Trades can last from seconds to minutes.
Day Trading
A style of trading that involves multiple trades on an intra-day basis. Trades can last from minutes to hours.
A style of trading that involves seeking to profit from short to medium term swings in trend. Trades can last from hours to days.
Carry Trading
A style of trading whereby the trader attempts to profit from holding a currency with a higher rate of interest and selling a currency with a lower rate of interest, profiting from the daily interest rate differential of the position.
Position Trading
A style of trading that involves taking a longer term position that reflects a longer term outlook. Trades can last from weeks to months.
Discretionary Trading
A style of trading that uses human judgement and decision making in every trade.
A style of trading that involves neither human decision making nor involvement, but uses a pre-programmed strategy based on technical or fundamental analysis to automatically execute trades via an automated software programme.
As you expected, the Euro strengthens against the U.S. dollar and you take your profit at 1.3278, closing out the trade. As each pip is worth US$10, your total profit for this trade is $500, for a total return of 38%.
Required Disclaimer: This example is for illustration only. All trades are unique and past results are not necessarily indicative of future performance.
Introduction
Foreign ExchangeThe simultaneous transaction of one currency for another.
Foreign Exchange Market
The Foreign exchange market is a large, growing and liquid financial market that operates 24 hours a day. It is not a market in the traditional sense because there is no central trading location or “exchange". Most of the trading is conducted by telephone or through electronic trading networks. The primary market for currencies is the “interbank market” where banks, insurance companies, large corporations and other large financial institutions manage the risks associated with fluctuations in currency rates.
Spot Market
The market for buying and selling currencies at the current market rate.
Rollover
A spot transaction is generally due for settlement within two business days (the value date). The cost of rolling over a transaction is based on the interest rate differential between the two currencies in a transaction. If you are long (bought) the currency with a higher rate of interest you will earn interest. If you are short (sold) the currency with a higher rate of interest you will pay interest. Most brokers will automatically roll over your open positions allowing you to hold your position indefinitely.
- How to calculate rollover interest
- Rollovers in Forex
The value of one currency expressed in terms of another. For example, if EUR/USD is 1.3200, 1 Euro is worth US$1.3200.
Currency Pair
The two currencies that make up an exchange rate. When one is bought, the other is sold, and vice versa.
Base Currency
The first currency in the pair. Also the currency your account is denominated in.
Counter Currency
The second currency in the pair. Also known as the terms currency.
ISO Currency Codes
USD = US Dollar
EUR = Euro
JPY = Japanese Yen
GBP = British Pound
CHF = Swiss Franc
CAD = Canadian Dollar
AUD = Australian Dollar
NZD = New Zealand Dollar
For a full list, see ISO Currency Codes
Currency Pair Terminology
EUR/USD = "Euro"
USD/JPY = "Dollar Yen"
GBP/USD = "Cable" or "Sterling"
USD/CHF = "Swissy"
USD/CAD = "Dollar Canada" (CAD referred to as the "Loonie")
AUD/USD = "Aussie Dollar"
NZD/USD = "Kiwi"
FCM
Futures Commission Merchant. An individual or organisation licensed by the U.S. Commodities Futures Trading Commission (CFTC) to deal in futures products and accept monies from clients to trade them.
Dealing Desk
A dealing desk provides pricing, liquidity and execution of trades.
Market Maker
A market maker provides pricing and liquidity for a particular currency pair and stands ready to buy or sell that currency at the quoted price. A market maker takes the opposite side of your trade and has the option of either holding that position or partially or fully offsetting it with other market participants, managing their aggregate exposure to their clients. If a market maker chooses to keep the trader's position without offsetting it in the market, the trader's profit is the market maker's loss and vice versa, leading to a possible conflict of interest between the trader and his market maker. A market maker earns their commission from the spread between the bid and offer price.
- Example of Market Makers
An acronym for 'No Dealing Desk'. A no-dealing desk broker does not have a dealing desk but instead uses external liquidity providers to provide pricing and liquidity for its clients. The liquidity providers send in competing bids and offers into the platform, resulting in the best bid and offer being displayed to the client. Some no-dealing desk brokers may display the market depth which is the amount of liquidity available at each price. A greater number of liquidity providers providing pricing to the no-dealing desk broker leads to tighter spreads. A no-dealing desk broker may increase the spread to earn its commission.
- Example of No Dealing Desk Brokers
ECN is an acronym for Electronic Communications Network. A Forex ECN broker does not have a dealing desk but instead provides a marketplace where multiple market makers, banks and traders can enter in competing bids and offers into the platform and have their trades filled by multiple liquidity providers in an anonymous trading environment. The trades are done in the name of your ECN broker, thereby providing you with complete anonymity. A trader might have their buy order filled by liquidity provider "A", and close the same order against liquidity provider "B", or have their trade matched internally by the bid or offer of another trader. The best bid and offer is displayed to the trader along with the market depth which is the combined volume available at each price. A greater number of marketplace participants providing pricing to the ECN broker leads to tighter spreads. ECN's typically charge a small fee for matching trades between their clients and liquidity providers.
- Example of ECN Brokers
One of the participants in a transaction.
Sell Quote / Bid Price
The sell quote is displayed on the left and is the price at which you can sell the base currency. It is also referred to as the market maker's bid price. For example, if the EUR/USD quotes 1.3200/03, you can sell 1 Euro at the bid price of US$1.3200.
Buy Quote / Offer Price
The buy quote is displayed on the right and is the price at which you can buy the base currency. It is also referred to as the market maker's ask or offer price. For example, if the EUR/USD quotes 1.3200/03, you can buy 1 Euro at the offer price of US$1.3203.
Spread
The difference between the sell quote and the buy quote or the bid and offer price. For example, if EUR/USD quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread.
Pip
The smallest price increment a currency can make. Also known as points. For example, 1 pip = 0.0001 for EUR/USD, or 0.01 for USD/JPY.
Pip Value
The value of a pip. Pip value can be either fixed or variable depending on the currency pair. e.g. The pip value for EUR/USD is always $10 for standard lots, $1 for mini-lots and $0.10 for micro lots.
- How to Calculate Pip Values
- Pip Value Calculator
The standard unit size of a transaction. Typically, one standard lot is equal to 100,000 units of the base currency, 10,000 units if it's a mini, or 1,000 units if it's a micro. Some dealers offer the ability to trade in any unit size, down to as little as 1 unit.
Standard Account
Trading with standard lot sizes, generally 100,000 units of the base currency. e.g. The pip value is $10 for EUR/USD.
Mini Account
Trading with mini lot sizes, generally 10,000 units of the base currency. e.g. The pip value is $1 for EUR/USD.
Micro Account
Trading with micro lot sizes, generally 1,000 units of the base currency. e.g. The pip value is $0.10 for EUR/USD.
Margin
The deposit required to open or maintain a position. Margin can be either "free" or "used". Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1. If a trader's account falls below the minimum amount required to maintain an open position, he will receive a "margin call" requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade.
Leverage
Leverage is the ability to gear your account into a position greater than your total account margin. For instance, if a trader has $1,000 of margin in his account and he opens a $100,000 position, he leverages his account by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of margin in his account, his leverage is 200 times, or 200:1. Increasing your leverage magnifies both gains and losses.
To calculate the leverage used, divide the total value of your open positions by the total margin balance in your account. For example, if you have $10,000 of margin in your account and you open one standard lot of USD/JPY (100,000 units of the base currency) for $100,000, your leverage ratio is 10:1 ($100,000 / $10,000). If you open one standard lot of EUR/USD for $150,000 (100,000 x EURUSD 1.5000) your leverage ratio is 15:1 ($150,000 / $10,000).
- Understanding leverage Part I
- Understanding leverage Part II
- Calculate Leverage
An order which is executed by dealer intervention.
Automatic Execution
The order is executed automatically without dealer intervention or involvement.
Slippage
The difference between the order price and the executed price, measured in pips. Slippage often occurs in fast moving and volatile markets, or where there is manual execution of trades.
Drawdown
The decline in account balance from peak to valley, measured until a new high is reached, usually reported in percentage terms.
Support
Support is a technical price level where buyers outweigh sellers, causing prices to bounce off a temporary price floor.
Resistance
Resistance is a technical price level where sellers outweigh buyers, causing prices to bounce off a temporary price ceiling.
Common Order Types
Market OrderAn order to buy or sell at the current market price.
Limit Order
An order to buy or sell at a pre-specified price level.
Stop-Loss Order
An order to restrict losses at a pre-specified price level.
Limit Entry Order
An order to buy below the market or sell above the market at a pre-specified level, believing that the price will reverse direction from that point.
Stop-Entry Order
An order to buy above the market or sell below the market at a pre-specified level, believing that the price will continue in the same direction.
OCO Order
One Cancels Other. An order whereby if one is executed, the other is cancelled.
GTC Order
Good Till Cancelled. An order stays in the market until it is either filled or cancelled.
Common Trade Types
Long PositionA position in which the trader attempts to profit from an increase in price. i.e. Buy low, sell high.
Short Position
A position in which the trader attempts to profit from a decrease in price. i.e. Sell high, buy low.
Common Trading Styles
Technical AnalysisA style of trading that involves analysing price charts for technical patterns of behaviour.
- Technical Analysis Books
A style of trading that involves analysing the macroeconomic factors of an economy underpinning the value of a currency and placing trades that support the trader's long or short-term outlook.
Trend Trading
A style of trading that attempts to profit from riding short, medium or long term trends in price.
- Sniper Forex Trend Trading System
- Forex Trend System
A style of trading that attempts to profit from buying and selling currencies between a lower level of support and an upper level of resistance. The upper level of resistance and the lower level of support defines the range. The range forms a price channel where the price can be seen to oscillate between the two levels of support and resistance.
- Article: Identifying Trending & Range Bound Currencies
A style of trading whereby a trader attempts to profit from fundamental news announcements on a country's economy that may affect the value of a currency, usually seeking short term profit immediately after the announcement is released.
Scalping
A style of trading that involves frequent trading seeking small gains over a very short period of time. Trades can last from seconds to minutes.
Day Trading
A style of trading that involves multiple trades on an intra-day basis. Trades can last from minutes to hours.
- Forex Day Trading Systems
A style of trading that involves seeking to profit from short to medium term swings in trend. Trades can last from hours to days.
Carry Trading
A style of trading whereby the trader attempts to profit from holding a currency with a higher rate of interest and selling a currency with a lower rate of interest, profiting from the daily interest rate differential of the position.
Position Trading
A style of trading that involves taking a longer term position that reflects a longer term outlook. Trades can last from weeks to months.
Discretionary Trading
A style of trading that uses human judgement and decision making in every trade.
- Managed Discretionary Accounts
A style of trading that involves neither human decision making nor involvement, but uses a pre-programmed strategy based on technical or fundamental analysis to automatically execute trades via an automated software programme.
- Automated Trading Systems
- Managed Automated Accounts
Example Trade
Assume you have a trading account at a broker that requires a 1% margin deposit for every trade. The current quote for EUR/USD is 1.3225/28 and you want to place a market order to buy 1 standard lot of 100,000 Euros at 1.3228, for a total value of US$132,280 (100,000 * $1.3228). The broker requires you to deposit 1% of the total, or $1322.80 to open the trade. At the same time you place a take-profit order at 1.3278, 50 pips above your order price. In taking this trade you expect the Euro to strengthen against the U.S. dollar.As you expected, the Euro strengthens against the U.S. dollar and you take your profit at 1.3278, closing out the trade. As each pip is worth US$10, your total profit for this trade is $500, for a total return of 38%.
Required Disclaimer: This example is for illustration only. All trades are unique and past results are not necessarily indicative of future performance.
Forex Money Management Calculator
The following form will help you to determine the best size of your position. The system adjusts the size for the pair you trade, your equity, the entry and exit prices and, of course, the maximum risk per trade.
Depending on your account (equity, currency of the account) the pair you trade and the risk you accept on one trade, the programme will calculate the exact position sizing you have to use for your trade. Many brokers don't allow the possibility of trading with variable lot sizes so that's the reason why we've added the number of lots you have to trade in the table. The risk and leverage are updated for each case.
Courtesy of Mataf.net
Depending on your account (equity, currency of the account) the pair you trade and the risk you accept on one trade, the programme will calculate the exact position sizing you have to use for your trade. Many brokers don't allow the possibility of trading with variable lot sizes so that's the reason why we've added the number of lots you have to trade in the table. The risk and leverage are updated for each case.
Courtesy of Mataf.net
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