Knowledge as one says is the key to success, which is true when it comes to Forex Markets. Admiral Markets acknowledge the importance for traders to be equipe with proper skill before venturing into Forex trading, that is why we conduct courses and offer it to our clients absolutely free*. Below is some of the basic trading strategy one may apply when trading Forex, for more details about our courses, please visit this page.
The Forex Market Today
The Foreign Exchange market has existed since the 1970s, when the fixed exchange rates were substituted by the floating exchange rates enabling thousands of individual investors and companies to profit by the change in the exchange rates. The Foreign Exchange market is usually referred to as the Forex market, or simply Forex.
Forex is probably the most liquid financial market in the world. The average daily turnover in the Foreign Exchange market is estimated at $2 trillion. High liquidity means that every moment every person is willing to buy some currency, there is a person willing to sell that same currency. Sometimes, but very seldom, a gap between prices is possible (see Figure 2A). It shows a price range where no actual trading occurs, making the price jump in the necessary direction. Price gaps seldom occur and are considered an exception. More often there are thousands of traders willing to buy or sell the market every second.
The Foreign Exchange market operates 24 hours a day except weekends. Depending on the time zone, currency trading takes place between the largest world financial centers: London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sidney. It means that when the financial institutions of London are closed, currency trading continues in New York; and when the financial institutions of New York are closed, currency trading continues in Tokyo and so on. Usually, if no force majeure takes place, the Forex market opens up early in the morning on Monday and closes on Friday late at night. The market is highly volatile at 2 a.m. to 3 a.m. EST (7 a.m. – 8 a.m. GMT) during the European trading session. At 8:30 a.m. EST (1:30 p.m. GMT) the North American trading session starts. The market is less volatile during the Asian trading session which is active mostly around 8 p.m. EST (1 a.m. GMT).
The Forex Exchange market is a worldwide, decentralized, over-the-counter financial market. It is much easier imagined as a system of the world financial centers connected with each other. The transactions are conducted between brokers, dealers and traders with the help of computer terminals and electronic trading platforms. Thanks to this, the Forex market becomes easily accessible and very popular among people willing to make active investments and manage their capital by themselves.
This is the reason why people’s interest in Forex rises every day. But every Forex beginner should be aware of and realize all the potential risks involved in trading Forex.
In present day, the main market participants are central, commercial and investment banks, professional traders and investors. The largest market participants are City Group, Inc., JP Morgan Chase & Co., Goldman Sachs Group, Inc., Morgan Stanley, Merrill Lynch, UBS AG, Bank of America, HSBC, Bank of Tokyo-Mitsubishi and many others. In practice, they conduct the bulk of the transactions and are considered to be market makers, because they are able to influence the price action of currencies.
Chapter 1
TERMS AND NOTIONS
CURRENCY, CURRENCY PAIRS
National currency is the national monetary unit of a country or a group of countries; e.g. the euro in Western Europe, the U.S. dollar in the USA, the Japanese yen in Japan and so on.
The exchange rates between two currencies specify how much one currency is worth in terms of the other. The term currency pair is frequently used in the Foreign Exchange market. There are two different types of the exchange rates; they are spot exchange rate and forward exchange rate.
The spot exchange rate (SPOT) is the current exchange rate set out at the moment of transaction with currency delivery within one or two business days from the trade date. The settlement date is usually referred to as the value date.
The value date may be:
-within the trade date, i.e. Today (Tod);
-on the next day from the trade date, i.e. Tomorrow (Tom);
-on the second day from the trade date, i.e. Spot.
Usually the transactions in the Forex market are conducted in spot prices. All the transactions with value dates within two business days are also referred to as conversion cash operations.
The forward exchange rate (FORWARD) shows what value the currency will have in a period of time. The standard periods are 1, 3, 6 and 12 months.
The forward exchange rate is given by:
Forward = Spot + (Spot) хInterest rate хNumber of days
360100
Trading volumes are of high importance in trading the Forex market. The larger the trading volume of a currency is; the more difficult it is for a trader or a group of traders to manipulate the exchange rate of a currency. Even in cases with the most popular currencies (the euro and the U.S. dollar) it is almost impossible to manipulate the exchange rate with the exception of the intervention by central banks. This is one of the reasons why most traders prefer to trade currencies. The second reason is that the larger the trading volume of a currency, the better different types of analysis work when applied to it. After the euro and the U.S. dollar, which share 70% of the Forex market volume, the most popular trading instruments are the Japanese yen (11%), the British pound (8%), the Swiss frank (5%) and the last 6% falls to the share of other currencies.
The most liquid currencies
Другие – Other currencies
TRADE ON MARGIN
Individual Forex trading has become very popular during the last 10 years. The development of financial services and trade on margin has contributed to the growing Forex popularity. Under these circumstances, every person willing to trade the Forex market is able to trade Forex having some guaranteed amount of money in his or her account. In reality, if a person is willing to trade the Forex market, he or she has to have 100,000 units of some currency in his or her account. Very often it is an overwhelming sum of money for most individual traders. However, thanks to the leverage provided by brokers, traders are able to execute operations with currencies having far less money in their accounts. What is leverage and how is it provided? As a rule, a broker provides leverage for his or her clients enabling individual traders to gain access to the Forex market. If a broker provides ratio of 1:100 leverage (or 1%), it means that a trader is able to make deals having an amount of money 100 times less than is necessary to conduct a real transaction. For example, if a trader opens a position using $1,000 of his or her account balance it means that in reality he or she can conduct a $100,000 transaction.
PIP
PIP is another basic term in Forex trading. It stands for Percentage In Point and is essentially the smallest change in the exchange rate. For example, if the exchange rate of the U.S. dollar against the Swiss frank USD/CHF is 1.2212 and the price rises to 1.2213, it means that the exchange rate has changed by one PIP, i.e. 0.0001. The result of a deal, i.e. profit or loss, is determined by the number of Pips the price has passed since you have had your position opened. Together, the absolute result of your trade depends on the amount of money involved to open a position.
TREND
Trend is the direction of the market. There are three types of trend: uptrend, downtrend and ranging market or flat. The last trend type is when the price change is insignificant and tends to balance in a narrow range.
Prices move upwards in an uptrend and downwards in a downtrend. Sometimes instead of these terms people say that the market is “bullish” when the trend is up, or that the market is “bearish” when the trend is down. In practice, professional traders use the terms bullish and bearish often. These terms have historic origins. At the beginning of the first century AD, people organized bull and bear fights for entertainment. People began to notice the habits and characteristics that the bulls and bears had when attacking their opponents. The bull attacks with his head down and horns up thrusting the opponent, i.e. he makes a bottom-up movement. The bear swipes down trying to knock his opponent down, i.e. he makes his movement top-down.
The bullish trend is considered to describe the prices moving up and the bearish trend describes the prices moving down. These terms are widely used today. Basically, the market participants are divided into two groups depending on their expectations and the direction of the transactions they conduct:
Bulls are those who expect the prices to go up, which is why they are buying the market.
Bears are those who expect the prices to go down, which is why they are selling the market.
SPREAD
Spread is the difference between the price the market maker is willing to pay for a currency and the price the market maker is willing to accept at a certain period of time. The spread is the difference between the bid and the ask prices of a currency. For example, if the bid price of USD/CHF is 1.2212 and the ask price of USD/CHF is 1.2215 at 10:30 a.m., then the spread equals to three PIPs. It is necessary to take spread into consideration while developing a trading strategy as different currencies have different spreads.
SHORT AND LONG POSITIONS
Now, we will discuss terms that are about short and long positions. The short position is used to describe selling a financial instrument, which may not be someone’s property. The long position is used to describe buying a financial instrument. Here comes the question: How can I sell something that does not belong to anyone? Well, the scheme is as follows: a trader borrows some financial instrument from a broker, and then sells it using the leverage provided by a broker. After the price moves down, the trader buys it back; then the trader returns the amount of money he or she borrowed to his or her broker and takes his or her profit. To make it clear let us give you an example of when a trader trades with no leverage and no spread. For instance, a trader decides to open a short position in Gold. Gold prices at that moment are $680 U.S. dollars per ounce. The trader wants to sell one ounce of gold and asks his or her broker to lend him or her one ounce of gold for a certain guaranteed amount of money. Then the trader sells one ounce of gold for $680. Now the trader owes the broker one ounce of gold. Let us suppose that the gold price has decreased by $20 in a certain period of time, and now the price is $660. If the trader wants to take his or her profit, he or she buys one ounce of gold for $660 and returns it to a broker, taking a $20 profit. The broker returns the trader’s guaranteed amount of money to the trader’s account. And, of course, a trader may open short positions in many other financial instruments, such as Forex currency pairs, Contracts for Difference (CFDs), Futures, etc.
RATES
The terms direct exchange rate, indirect exchange rate, and cross-rate are often used in trading Forex.
The direct quotation is where the cost of one unit of foreign currency is given in units of local currency. For example, EUR/BGN is a direct quotation. In the Forex market the direct quotation is meant to be the cost of one currency given in the U.S. dollar. For example, EUR/USD, CHF/USD, JPY/USD are direct exchange rates. The indirect quotation is where the U.S. dollar is given in units of foreign currency, for example, USD/EUR, USD/CHF.
The cross-rate is where the cost of one unit of foreign currency is given in units of another foreign currency. For example, EUR/CHF, GBP/JPY, EUR/JPY.
SWAP
SWAP is another basic term in the Forex market. It represents the difference between the interest rates of different countries. For example, the Bank of Japan’s interest rate is 0.5%, whereas the Australian interest rate is 6.25%. This means that it is much more profitable to deposit money with an Australian bank rather than with a Japanese one. The difference between the interest rates is of importance in the Forex market and is expressed in terms of SWAP. When opening a new trade position, you sell one currency and buy another one. Let us get back to the national currencies of Australia and Japan, and give you an example with the Australian dollar and the Japanese yen (AUD/JPY). When we open a long position in AUD/JPY, the SWAP is positive and we take profit, when we open a short position in AUD/JPY, the swap is negative and we have a small loss. The reason for this is when you open a long position in AUD/JPY you buy the Australian dollar, and when you open a short position in AUD/JPY you buy the Japanese yen.
In practice, there are two types of SWAP depending on the direction of the position you open. If you open a long position then the SWAP is long; if you open a short position then the SWAP is short.
SWAP, or Rollover, or Overnight means you conclude two opposite transactions with different value dates, when one position is closed and another one is opened at the same time. The SWAP value and its direction are determined at the moment of the transaction. The aim of the operation is to prolong the opened positions.
When an individual investor trading Forex on margin leaves one open position overnight, his or her account is charged with SWAP at 0:00 GMT. The swap size depends on the interest rates of the countries which currencies you buy or sell. The interest rates are set by central banks. Usually, when you open a long position in the currency with higher interest rates the SWAP is positive, and when you open a short position in the same currency the swap is negative.
Продажа 100,000 USD заCHF – Sell 100,000 USD for CHF
For example, when you open a long position in USD/CHF with 1 lot (100,000 units of basic currency) at the exchange rate of 1.2100, it means that you buy 100,000 USD and sell 121,000 CHF. In reality, you do not have that money in cash and your broker has to make an interbank loan at some interest rate. At the same time, the interest rate on the currency you opened your long position in is added to your account balance. The meaning of a positive SWAP is to take credit at a lower interest rate and deposit money at a higher interest rate. But you have to keep in mind that a positive SWAP cannot be the only reason to make an investment decision.
CHARTS
Charts display changes in price movements of financial instruments. In practice, it is the most common way to visualize and analyze the movements of the exchange rates. Every element of technical analysis we examine below is based on these charts.
There are three types of charts depending on the way the price is represented in them: line charts, bar charts and Japanese candlestick charts. The charts themselves are no reason to open a position in the market; they should be analyzed and used in combination with confirming signals of technical indicators.
Line Chart
A line chart is the first type of chart we will look at (Figure1). It is a type of chart created by connecting the closing price values of a chosen time frame with a line. The time frame may be 1 minute, 15 minutes, 1 hour, 4 hours, daily, weekly, monthly and so on. The line chart may also be drawn using the average or opening price values.
Figure 1. Line chart
Цена – Price
Время – Time
Bar Chart
A bar chart is represented by bars, which display the change in price movement during a period of time. For example, if the time frame is 1 hour, then one bar represents price movement within that hour. If the time frame is 4 hours, one bar represents price movement within 4 hours (Figure 2A). The distance between the closing price of one bar and the opening price of the second bar is called a gap. Gaps are primarily used for stock markets, as the stock market does not operate 24 hours a day. Some deals may be agreed upon after the trading session is over, thus it causes the market to open with a gap on the next day. (Figure 2A).
Figure 2A
The bullish bar is formed when prices tend to increase, and the opening price is lower than the closing price. If the opening price is higher than the closing price then the bar is bearish.
Figure 2B
Japanese Candlesticks
Japanese candlesticks are the oldest and the most popular method of charting prices for financial markets. It was developed by Japanese rice trader Homma Munehisa in the 16th century. He noticed that it was possible to forecast future price movements by analyzing the price movements in the past. Homma noticed that candlestick patterns tend to repeat, so he analyzed them and became a very successful trader. Today, Japanese candlesticks are the most popular method of analyzing the market. Candlesticks are very similar to bar charts, because they point the direction of the trend. As a rule, the real body of a bullish candle is white, and the real body of a bearish candle is black (Figure 2C). The upper shadow is the distance between the closing price and the high of the period for a bullish candle between the opening price and the high of the period for a bearish candle. The lower shadow is the distance between the opening price and the low of the period for a bullish candle between the closing price and the low of the period for a bearish candle. It is necessary to keep in mind that candlesticks can also form price gaps.
Figure 2C
Chapter 2
JAPANESE CANDLESTICKS THEORY
A Japanese candlestick chart is the most popular type of chart among Forex traders. The reason for this is that Japanese candlesticks provide full, clear and visualized information on price dynamics. Thanks to their multifunction, candlesticks are widely used in financial analysis. This chapter sheds light on basic types of candlesticks and candlestick patterns.
CANDLESTICK TYPES
бычьясвеча – bullish candle
медвежьясвеча – bearish candle
волчок – spinning top
молот – hammer
висельник– hanging man
разные виды свечей доджи – dojicandles
FIBONACCI NUMBERS
Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers:
These numbers possess an interesting number of interrelations. Any number of the sequence is approximately 0.618 times the following number and approximately 1.618 times the preceding number, and higher numbers are more accurate when it conforms to this ratio. Any number of the sequence is 0.382 times the number after the following number and 2.618 times the number before the preceding number. Any number of the sequence is 0.236 times the two numbers after the following number and 4.236 times the two numbers before the preceding number.
The price respects the ratios mentioned above. How can you measure and apply Fibonacci levels?
Figure 62 Potential reversal levels
Расширение – retracement
Коррекция – correction
Базоваяволна – basic wave
Very often traders use the method to measure and forecast the length of the price movement by the length of the wave against the prior descending or ascending movement, which is also referred to as Fibonacci Inner Levels. The price wave is the price movement from top to bottom or from bottom to top (this term is used by Charles Dow and Elliot, see Chapter 8. Wave Analysis). When a descending wave is ending and another ascending movement begins, we take the length of this wave as a unit to project Fibonacci levels (Figure 62). These levels are both price objectives of the following ascending movement and natural support and resistance levels.
Figure 63. The price respects natural support and resistance levels very good.
In the example in Figure 63, AB wave is a measure unit to project the following BC wave. BC correction wave reaches 0.618 AB wavelength. Then we use BC wave as a measure unit to project point D. The length of CD wave is 1.618 BC wave. We use BC wave to project point F, which is 2.618 BC wave. DE wave corrects by 0.382 CD wave and at the same time points E and B lie at the same price level. It corresponds to the rule that resistance becomes support once broken. Then we use DE wave as a measure unit to project EF wave, which is 2.618 BC wavelength and 2.618 DE wavelength. When levels formed by several Fibo retracements coincide at one price level, it is more likely that this level will become a reversal level.Fibonacci levels, if applied correctly, attract the market prices, and at the same time, they behave as reversal or consolidation levels.
It is important to bear in mind that when the price comes close to a price target, it may deviate from it by 4 to 5 pips. If the price movement is 1000 pips, then 40 to 50 pips deviation from the price target is a very good result in attaining the price objective.
FIBONACCI RETRACEMENT
The following method is used to project the length of both corrective (against the direction of the major trend) and impulse (in the direction of the major trend) waves.
Figure 64 illustrates an example of Fibo retracement applied to EUR/JPY currency pair. The significant rise of the price from April 19 to May 3, which is marked by a thick line on the chart, produces the price objective for the following downward price movement. When the price moves down, it consolidates at 0.382 level of the previous wave, pulls back and then moves downwards to 0.618 level. Then the price reverses and resumes its ascending movement. This is typical of corrections.
The projected levels play the roles of support and resistance levels temporarily and are used by traders to close their positions to take profit. Once a level is broken the price will probably reach the following level. The descending wave on a daily chart of EUR/USD in Figure 65 gives the basis to project the following upward price objectives. As the price moves upwards, it tends to consolidate at levels 0.382; 0.618; 0.764; 1.618 and 2 of Fibonacci retracement. Once a level is broken, the price moves to the following level.
Using a Zig-Zag Indicator, one of the Customer’s Indicators offered by MetaTrader4 is one of the methods to place Fibonacci retracements on the chart. Zig-Zag indicates every significant price movement disregarding the market noise.
Figure 66 Zig-Zag Indicator helps place Fibonacci retracements to project the price targets. (EUR/USD, H1) MetaTrader – Admiral Markets
Another Indicators, which helps place Fibo levels, is Zigzag Fibo Beta (Fibonacci retracements are placed automatically with the help of the last Zigzag built).
Indicator Zigzag Fibo Beta places Fibo levels with the help of the last descending wave formed on a 4 hour chart of USD/CHF in Figure 67. As the price rises, it consolidates at 38.2% Fibo level.
