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The off-exchange forex market is a large, growing and liquid financial market that operates 24 hours a day, 5 days a week. 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.

The true interbank market is only available to institutions that trade in large quantities and have a very high net worth.

In recent years, a secondary OTC market has developed that permits retail investors to participate in forex transactions. While this secondary market does not provide the same prices as the interbank market, it does have many of the same characteristics.

Forex transactions are quoted in pairs because you are buying one currency while selling another.The first currency is the base currency and the second currency is the quote currency.

The price, or rate, that is quoted is the amount of the second currency required to purchase one unit of the first currency. Currency pairs are often quoted as bid-ask spreads. The first part of the quote is the amount of the quote currency you will receive in exchange for one unit of the base currency (the bid price) and the second part of the quote is the amount of the quote currency you must spend for one unit of the base currency (the ask or offer price).

In other words, a EUR/USD spread of 1.2170/1.2178 means that you can sell one Euro for $1.2170 and buy one Euro for $1.2178.

A dealer may not quote the full exchange rate for both sides of the spread. For example, the EUR/USD spread discussed above could be quoted as 1.2170/78. The customer should understand that the first three numbers are the same for both sides of the spread.

How do I close out a trade?

Retail forex transactions are normally closed out by entering into an equal but opposite transaction with the dealer. For example ,if you bought Euros with U.S. dollars you would close out the trade by selling Euros for U.S. dollars.

Most retail forex transactions are governed according to a settlement date when the currencies are to be delivered. If in case you want to keep your position open beyond the settlement date, it is important that you roll the position over to the next cycle. Some dealers roll open positions over automatically, while other dealers may require you to request the rollover. On most open positions, interest is earned on the long currency.

Forex system happens to be the greatest global trade. It taps into some movements for businessmen to gain well. One accepted Forex business agenda utilized rather gainfully in the business is called Channel Breakout.

Forex Trading Channels – Channels consist of paths made on a schedule to trace the array where exchange had been transacted in a time span. They can be simply constructed. Observe the schedule in a time span and draw lines linking the comparatively tall spot business expenses, and down under linking a comparative low spot business expenses. This will give you a picture of the business array existent during a time span like, six months.

Channel Breakout – Once the value of exchange goes up the peak network line, there is a rising network getaway. Also, once the value goes down below the lowest network spot, you get a downward network getaway. Network getaways happen upwards and downwards. With enough Forex input with scientific scrutiny, everyone may utilize the process for getting a gainful exchange business agenda.

You have to build the channels very carefully. Every meeting of lines doesn’t indicate a proper getaway. If there is any fallacy in the line construction, what you observe is business out of the array, which just leads you back inside. Therefore, before anything else, gain enough knowledge on Forex. Gainful Control of Forex channels – When you figure out the working of networks, gains will happen. Construct the business with enough pauses. Then, in case of an incorrect getaway sign, you will get tolerable losses or if luck favors you, a very low profit.

But if you are on the correct side of a proper network getaway, the tiny lack you received will be moved away and you get a good big satisfactory gain.

Any proper Forex business shareholder worth his name capitalizes on channel breakouts. In case you want to cash in the exchange markets, take out a certain amount of time for a Forex education to build this agenda and various technological scrutiny processes.

That will build up the exchange agendas, which would yield gainful consequences. If you don’t give some time to completely figure out the stakes and yields contained in a Forex business agenda, you may not get the desirable consequences. So you see, your gain just depends on you.

In the forex (FX) market, rollover is the process of extending the settlement date of an open position. In most currency trades, a trader is required to take delivery of the currency two days after the transaction date. However, by rolling over the position – simultaneously closing the existing position at the daily close rate and re-entering at the new opening rate the next trading day – the trader artificially extends the settlement period by one day.

Rollover is the interest paid or earned for holding a currency spot position overnight. Each currency has an overnight interbank interest rate associated with it, and because forex is traded in pairs, every trade involves not only 2 different currencies but also two different interest rates. However, unlike what many traders think, foreign exchange rolls are not based on central bank rates. Instead, forex rolls are constructed using forward points which are mostly based on overnight interest rates at which banks borrow unsecured funds from other banks.

Often referred to as tomorrow next, rollover is useful in FX because many traders have no intention of taking delivery of the currency they buy – rather, they want to profit from changes in the exchange rates. At the close of every trading day, a trader who took a long position in a high yielding currency relative to the currency that he or she borrowed will receive an amount of interest in his or her account. Conversely, a trader will need to pay interest if the currency he or she borrowed has a higher interest rate relative to the currency that he or she purchased.

Where should one invest?

Even though, making carry trades has been less appealing over the last few months, the currency market is still one of the best places to invest. After all, the forex market is still the most liquid financial market in the world with an average daily volume of US$ 4 trillion, according by the Bank for International Settlement. This is more than three times the total amount of the stocks and futures markets combined. Moreover, with a no-dealing-desk forex broker, every trade is executed with one the world’s premier banks which compete to provide you with the best bid and ask prices. This competition between banks reduces the potential for market manipulation by price providers.

Globally, operations in the foreign exchange market started in a major way after the breakdown of

the Bretton Woods system in 1971, which also marked the beginning of floating exchange rate regimes in several countries. Over the years, the foreign exchange market has emerged as the largest market in the world. The decade of the 1990s witnessed a perceptible policy shift in many emerging markets towards reorientation of their financial markets in terms of new products and instruments, development of institutional and market infrastructure and realignment of regulatory structure consistent with the liberalised operational framework. The changing contours were mirrored in a rapid expansion of foreign exchange market in terms of participants, transaction volumes, decline in transaction costs and more efficient mechanisms of risk transfer.

The origin of the foreign exchange market in India could be traced to the year 1978 when banks

in India were permitted to undertake intra-day trade in foreign exchange. However, it was in the 1990s

that the Indian foreign exchange market witnessed far reaching changes along with the shifts in the

currency regime in India. The exchange rate of the rupee, that was pegged earlier was floated partially in March 1992 and fully in March 1993 following the recommendations of the Report of the High Level Committee on Balance of Payments (Chairman: Dr.C.Rangarajan). The unification of the exchange rate was instrumental in developing a market-determined exchange rate of the rupee and an important step in the progress towards current account convertibility, which was achieved in August 1994.

A further impetus to the development of the foreign exchange market in India was provided with the setting up of an Expert Group on Foreign Exchange Markets in India (Chairman: Shri O.P. Sodhani), which submitted its report in June 1995.The Group made several recommendations for deepening and widening of the Indian foreign exchange market. Consequently, beginning from January 1996, wide-ranging reforms have been undertaken in the Indian foreign exchange market.

After almost a decade, an Internal Technical Group on the Foreign Exchange Market (2005) was constituted to undertake a comprehensive review of the measures initiated by the Reserve Bank and identify areas for further liberalisation or relaxation of restrictions in a medium-term framework.

The momentous developments over the past few years are reflected in the enhanced risk-bearing capacity of banks along with rising foreign exchange trading volumes and finer margins. The foreign exchange market has acquired depth. The conditions in the foreign exchange market have also generally remained orderly. While it is not possible for any country to remain completely unaffected by developments in international markets, India was able to keep the spillover effect of the Asian crisis to a minimum through constant monitoring and timely action, including recourse to strong monetary measures, when necessary, to prevent emergence of self fulfilling speculative activities.

Money management is a critical point that shows difference between winners and losers. It was proved that if 100 traders start trading using a system with 60% winning odds, only 5 traders will be in profit at the end of the year. In spite of the 60% winning odds 95% of traders will lose because of their poor money management. Money management is the most significant part of any trading system. Most of traders don’t understand how important it is.

It’s important to understand the concept of money management and understand the difference between it and trading decisions. Money management represents the amount of money you are going to put on one trade and the risk your going to accept for this trade.

There are different money management strategies. They all aim at preserving your balance from high risk exposure.

First of all, you should understand the following term Core equity Core equity = Starting balance – Amount in open positions.

If you have a balance of 10,000$ and you enter a trade with 1,000$ then your core equity is 9,000$. If you enter another 1,000$ trade, your core equity will be 8,000$

It’s important to understand what’s meant by core equity since your money management will depend on this equity.

We will explain here one model of money management that has proved high annual return and limited risk. The standard account that we will be discussing is 100,000$ account with 20:1 leverage . Anyway, you can adapt this strategy to fit smaller or bigger trading accounts.

It’s very important to understand these 2 strategies.

The size of your trade should be adjusted so that you risk 5$/pip. With 20:1 leverage, your trade size will be 50,000$

If the trade is stopped, you will lose 1,000$ which is 1% of your balance.

This trade will require 2,500$ = 2.5% of your balance.

This is just an example. Your trading balance and leverage provided by your broker may differ from this formula. The most important is to stick to the 1% risk rule. Never risk too much in one trade. It’s a fatal mistake when a trader lose 2 or 3 trades in a row, then he will be confident that his next trade will be winning and he may add more money to this trade. This is how you can blow up your account in a short time! A disciplined trader should never let his emotions and greed control his decisions.

Options have an expiry date, beyond which they cannot be exercised. The premium consists of the intrinsic value and the time value (e.g., the more in the money it is, and the more distant expiry, the more valuable). Another important element in option pricing is volatility. The higher the implied volatility (and therefore probability of the option ending in-the-money (ITM), the higher the premium will be. The topic of option pricing is very complex, and it was only after Black-Scholes-Merton (BSM) created their model that option pricing gained objectivity (if not accuracy- there are many unrealistic assumptions in their model).

The BSM model uses 5 main variables which they named from the Greek alphabet- three of which are very

important:

Delta- how the option value changes as the underlying

Gamma- the first derivative, or velocity, of Delta

Theta- how fast the option loses value with time,

Vega- what effect a change in the underlying volatility affects the option value,

Rho- interest rate effects) is less important to traders, having only a second degree effect on option value.

Options and Forex- a perfect marriage

The usually high volatility of Forex lends itself very well to options. Once an option is in the money (ITM), the

value moves nearly 1:1 (excepting the time value) with the spot. Our downside risk is limited to the premium

already spent (if we avoid being net short options). No further drawdown to your account is possible. No matter

what the spot does, we can sleep at night.

Another advantage is that the need for stops is moot- if the spot moves away from the strike, the option value

drops. However, as long as there is still time value, if the spot recovers, so does the value of the option. This is a

key advantage of options- short term price action does not imperil our equity.

1) Choosing the Strike Price

We can buy ITM, ATM or OTM options. Generally, if the option is ITM or close to it, you’ll pay for excess

delta- but a higher probability of finishing ITM. We must integrate multiple factors for this decision. First, is the volatility high enough? Second, are there underlying fundamental changes that will drive it to some level (say to Purchasing Price Parity), and Thirdly, mean reversion.

2) Choosing the Expiry date

Obviously, the more distant the expiry, the more probability of profit (but you will pay for the excess theta).

To maximize your profitability (or minimize the loss if the option expires worthless), at a minimum, we

should calculate and analyze our estimate of the future volatility of the underlying, to determine if there is

a good chance for the spot to move far enough to make the option ITM.

Why Forex?

Accessibility :It is no wonder that the Forex market has the trading volume of 3 trillion a day all anyone needs to take part in the action is a computer with an internet connection.

24 Hour Market: The Forex market is open 24 hours a day, so that you can be right there trading whenever you hear a financial scoop. No need to bite your fingernails waiting for the opening bell.

Narrow Focus : Unlike the stock market, a smaller market with tens of thousands of stocks to choose from, the Forex market revolves around more or less eight major currencies. A narrow choice means no rooms for confusion.

Liquidity : The foreign exchange market is the largest financial market in the world with a daily turnover of just over $3 trillion! Now apart from being a really cool statistic, the sheer massive scope of the Forex market is also one of its biggest advantages. The enormous volume of daily trades makes it the most liquid market in the world, which basically means that under normal market conditions you can buy and sell currency as you please.

Profitability: It doesn’t take a financial genius to figure out that the biggest attraction of any market, or any financial venture for that matter, is the opportunity of profit. In the Forex market, profitability is expressed in a number of ways. First of all, just to set the record straight, you don’t have to be a millionaire to trade Forex. Unlike most financial markets, the Forex market allows you to start trading with relatively low initial capital.

Cashing in on Price Movements : Trading Forex is exciting business. The market is always on the move, and every tiny shift in currency rates can mean profits and losses of hundreds and even thousands of dollars!

In general, the eight most traded currencies on the Forex market are:

U.S. Dollar,Euro, British Pound, Japanese Yen, Canadian Dollar, Swiss Franc, New Zealand Dollar, Australian Dollar.

Forex trading is always done in pairs, since any trade involves the simultaneous buying of a currency and selling of another currency. The trading revolves around 18 main currency pairs. These pairs are:

USD/CAD EUR/JPY

EUR/USD EUR/CHF

USD/CHF EUR/GBP

GBP/USD AUD/CAD

NZD/USD GBP/CHF

AUD/USD GBP/JPY

USD/JPY CHF/JPY

EUR/CAD AUD/JPY

EUR/AUD AUD/NZD

When buying or selling a currency pair, each pair has its own Bid/Ask rate, for example:

Pair Bid Ask

EUR/USD 1.5420 1.5422

BASIC FOREX TRADING GUIDE 6

This means you could either:

Buy the pair at the Ask rate

Which means:

Buy 1EUR / Sell $1.5422

Sell the pair at the Bid rate

Which means:

Sell 1 EUR / Buy $1.5420

OK, but where is the opportunity for profit?

The rates of currency pair are constantly changing. One profitable way is to buy a pair, and sell it at a higher rate and another way is to sell the pair and buy at a lower rate.