What is Forex?

FOREX - the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.
Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.

In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.

Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.
Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study.

Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.
This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).
Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.

Five essential aspects of foreign currency market

· Forex Fundamental Analysis
· Forex Technical Analysis
· Money Management
· Forex Trading Psychology
· Forex Brokerage
Understanding and mastering these sides of trading are crucial to organize your Forex trading experience.

Forex Fundamental Analysis

Fundamental analysis is the process of market analysis which is done regarding only "real" events and macroeconomic data which is related to the traded currencies. Fundamental analysis is used not only in Forex but can be a part of any financial planning or forecasting. Concepts that are part of Forex fundamental analysis: overnight interest rates, central banks meetings and decisions, any macroeconomic news, global industrial, economical, political and weather news. Fundamental analysis is the most natural way of making Forex market forecasts. In theory, it alone should work perfectly, but in practice it is often used in pair with technical analysis. Recommended e-books on Forex fundamental analysis:
· Reminiscences of a Stock Operator
· What Moves the Currency Market?

Forex Technical Analysis

Technical analysis is the process of market analysis that relies only on market data numbers - quotes, charts, simple and complex indicators, volume of supply and demand, past market data, etc. The main idea behind Forex technical analysis is the postulate of functional dependence of the future market technical data on the past market technical data. As well as with fundamental analysis, technical analysis is believed to be self-sufficient and you can use only it to successfully trade Forex. In practice, both analysis methods are used. Recommended e-books on Forex fundamental analysis are:
· The Law Of Charts
· Candlesticks For Support And Resistance
· Trend Determination

Money Management in Forex

Even if you master every possible method of market analysis and will make very accurate predictions for future Forex market behavior, you won't make any money without a proper money management strategy. Money management in Forex (as well as in other financial markets) is a complex set of rules which you develop to fit your own trading style and amount of money you have for trading. Money management play very important role in getting profits out of Forex; do not underestimate it. To get more information on money management you can read these books:
· Risk Control and Money Management
· Money Management (A chapter from The Mathematics of Gambling)

Forex Trading Psychology

While learning a lot about market analysis and money management is an obvious and necessary step to be a successful Forex traders, you also need to master your emotions to keep your trading performance under strict control of mind and intuition. Controlling your emotions in Forex trading is often a balancing between greed and cautiousness. Almost any known psychology practices and techniques can work for Forex traders to help them keep to their trading strategies rather to their spontaneous emotions. Problems you'll have to deal while being a professional Forex trader:
· Your greed
· Overtrading
· Lack of discipline
· Lack of confidence
· Blind following others' forecasts
These are very professional books on psychology written specially for financial traders:
· Calming The Mind So That Body Can Perform
· Emotion Free Trading
· The Miracle of Discipline

Forex Brokerage

Every Forex trader like any other professional needs tools to trade. One of these tools, which is vital to be in market, is a Forex broker and specifically for Internet - on-line Forex broker - a company which will provide real-time market information to trader and bring his orders to Forex market. While choosing a right Forex broker things to look for are the following:
· Being a professional company you can trust
· Provide you with real-time quotes
· Execute your orders fast and accurately
· Don't take a lot of commissions
· Support the withdraw/deposit methods that you can use
For beginning Forex traders I recommend these four brokerage companies that are probably the best Forex brokers to start with:
· FXOpen — one of the most popular and progressive brokers with MetaTrader platform and comfortable trading conditions for all kind of traders.
· InstaForex — a reputable MetaTrader 4 brokers, allows Islamic Forex trading accounts, while you can deposit and withdraw money via WebMoney.
· FXcast — good because you can start trading Forex with as little as 10$, use MetaTrader 4 platform and the dozoen of various deposit and withdraw methods, including WebMoney, e-Bullion and wire transfer.
· LiteForex — broker that supports MetaTrader 4 Forex trading platform and doesn't require a lot of money to start with.

Forex Glossary

Ask (Offer) — price of the offer, the price you buy for.
Aussie — a Forex slang name for the Australian dollar.
Bank Rate — the percentage rate at which central bank of a country lends money to the country's commercial banks.
Bid — price of the demand, the price you sell for.
Broker — the market participating body which serves as the middleman between retail traders and larger commercial institutions.
Cable — a Forex traders slang word GBP/USD currency pair.
Carry Trade — in Forex, holding a position with a positive overnight interest return in hope of gaining profits, without closing the position, just for the central banks interest rates difference.
CFD — a Contract for Difference — special trading instrument that allows financial speculation on stocks, commodities and other instruments without actually buying.
Commission — broker commissions for operation handling.
CPI — consumer price index the statistical measure of inflation based upon changes of prices of a specified set of goods.
EA (Expert Advisor) — an automated script which is used by the trading platform software to manage positions and orders automatically without (or with little) manual control.
ECN Broker — a type of Forex brokerage firm that provide its clients direct access to other Forex market participants. ECN brokers don't discourage scalping, don't trade against the client, don't charge spread (low spread is defined by current market prices) but charge commissions for every order.
ECB (European Central Bank) — the main regulatory body of the European Union financial system.
Fed (Federal Reserve) — the main regulatory body of the United States of America financial system, which division — FOMC (Federal Open Market Committee) — regulates, among other things, federal interest rates.
Fibonacci Retracements — the levels with a high probability of trend break or bounce, calculated as the 23.6%, 32.8%, 50% and 61.8% of the trend range.
Flat (Square) — neutral state when all your positions are closed.
Fundamental Analysis — the analysis based only on news, economic indicators and global events.
GDP (Gross Domestic Product) — is a measure of the national income and output for the country's economy; it's one of the most important Forex indicators.
GTC (Good Till Cancelled) — order to buy or sell of a currency with a fixed price or worse. The order is alive (good) until execution or cancellation.
Hedging — maintaining a market position which secures the existing open positions in the opposite direction.
Jobber — a slang word for a trader which is aimed toward fast but small and short-term profit from an intra-day trading. Jobber rarely leaves open positions overnight.
Kiwi — a Forex slang name for the New Zealand currency — New Zealand dollar.
Leading Indicators — a composite index (year 1992 = 100%) of ten most important macroeconomic indicators that predicts future (6-9 months) economic activity.
Limit Order — order for a broker to buy the lot for fixed or lesser price or sell the lot for fixed or better price. Such price is called limit price.
Liquidity — the measure of markets which describes relationship between the trading volume and the price change.
Long — the position which is in a Buy direction. In Forex, the primary currency when bought is long and another is short.
Loss — the loss from closing long position at lower rate than opening or short position with higher rate than opening, or if the profit from a position closing was lower than broker commission on it.
Lot — definite amount of units or amount of money accepted for operations handling (usually it is a multiple of 100).
Margin — money, the investor needs to keep at broker account to execute trades. It supplies the possible losses which may occur in margin trading.
Margin Account — account which is used to hold investor's deposited money for FOREX trading.
Margin Call — demand of a broker to deposit more margin money to the margin account when the amount in it falls below certain minimum.
Market Order — order to buy or sell a lot for a current market price.
Market Price — the current price for which the currency is traded for on the market.
Momentum — the measure of the currency's ability to move in the given direction.
Moving Average (MA) — one of the most basic technical indicators. It shows the average rate calculated over a series of time periods. Exponential Moving Average (EMA), Weighted Moving Average (WMA) etc. are just the ways of weighing the rates and the periods.
Offer (Ask) — price of the offer, the price you buy for.
Open Position (Trade) — position on buying (long) or selling (short) for a currency pair.
Order — order for a broker to buy or sell the currency with a certain rate.
Pivot Point — the primary support/resistance point calculated basing on the previous trend's High, Low and Close prices.
Pip (Point) — the last digit in the rate (e.g. for EUR/USD 1 point = 0.0001).
Profit (Gain) — positive amount of money gained for closing the position.
Principal Value — the initial amount of money of the invested.
Realized Profit/Loss — gain/loss for already closed positions.
Resistance — price level for which the intensive selling can lead to price increasing (up-trend).
Scalping — a style of trading notable by many positions that are opened for extremely small and short-term profits.
Settled (Closed) Position — closed positions for which all needed transactions has been made.
Slippage — execution of order for a price different than expected (ordered), main reasons for slippage are — "fast" market, low liquidity and low broker's ability to execute orders.
Spread — difference between ask and bid prices for a currency pair.
Standard Lot — 100,000 units of the base currency of the currency pair, which you are buying or selling.
Stop-Limit Order — order to sell or buy a lot when the market reaches certain price. Usually is a combination of stop-order and limit-order.
Stop-Loss Order — order to sell or buy a lot for a certain price or worse. It is used to avoid extra losses when market moves in the opposite direction.
Support — price level for which intensive buying can lead to the price decreasing (down-trend).
Swap — overnight payment for holding your position. Since you are not physically receiving the currency you buy, your broker should pay you the interest rate difference between the two currencies of the pair. It can be negative or positive.
Technical Analysis — the analysis based only on the technical market data (quotes) with the help of various technical indicators.
Trend — direction of market which has been established with influence of different factors.
Unrealized (Floating) Profit/Loss — a profit/loss for your non-closed positions.
Useable Margin — amount of money in the account that can be used for trading.
Used Margin — amount of money in the account already used to hold open positions open.
Volatility — a statistical measure of the number of price changes for a given currency pair in a given period of time.

EUR/USD trend: sell.
GBP/USD trend: sell.
USD/JPY trend: hold.
EUR/JPY trend: sell.

Dollar Continues to Gain as GDP Falls in 4th Quarter

EUR/USD continued to fall today for the fourth straight day as the advance GDP report for the fourth quarter showed a considerable decline of the economic output in U.S. The currency pair is currently trading near 1.2795.
GDP (advance) in the Q4 of 2008 decreased at an annual rate of 3.8%. The decline followed 0.5% contraction in the third quarter, but was significantly below the estimated 5.4% drop.
Chicago PMI declined from 35.1 to 33.3 in January, while a drop only to 34.9 was expected by the market participants.
Michigan Sentiment Index rose above the previous month’s value of 60.1 (which was revised down from 61.9) in January and was reported at 61.2. The average forecast for this index was at 61.9 for January.

EUR/USD Falls Steadily as Economic Conditions Worsen in U.S.

EUR/USD posted a rather deep decline today after showing some weak drops during the previous two days. The  U. S. macroeconomic reports from the employment, industrial and housing sectors were all negative today. EUR/USD is now trading near 1.2976 after opening at 1.3150.
Durable goods orders decreased by 2.6%, while the consensus forecast for the decline was at 2%. More than that, the last month decline was revised more than twice from 1.5% to 3.7%.
Initial jobless claims grew from 585k (revised down from 589k) to 588k last week. The market participants expected them to decline to about 575k.
The new home sales declined to the annual rate of 331k in U.S. in December. They fell from 388k reported for November (revised down from 407k) and are below the 400k estimate.

EUR/USD Tumbles after FOMC Meeting

EUR/USD showed some really promising growth earlier today. The optimistic mood at the financial markets was based on the FOMC meeting’s expectations and the expectations that the «bad bank» plan will be approved soon. The Federal Reserve meeting showed that the committee is still sees the U.S. economic conditions as deteriorating. EUR/USD is currently down to 1.3125 — down from 1.3225 level. where it traded right before the FOMC statement release.
U.S. commercial crude oil inventories advanced by 6.2 million barrels last week. Considering 1.2 million barrels growth during the previous week, the oil inventories now show that the supply is significantly greater than the demand for this energy resource.
Federal Open Market Committee at its scheduled meeting, which ended today, decided to leave the interest rate unchanged in the range between 0% and 0.25%. The released statement says that the economy declined further since their last meeting in December and that they will need to expand the purchases of the troubled assets and the long-term Treasury securities as well:
The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

TeleTRADE — Russian Forex and CFD Broker

TeleTRADE is a very old Forex broker company. It’s quite popular in the ex-USSR territories due to the large amount of the off-line offices and the free trading seminars they are offering from time to time. The company was created back in 1994, but the on-line services were presented in 2001. Actually, the company’s age is probably its only advantage. The trading is done via MetaTrader 4 platform. Apart from Forex, CFD and gold trading is also available. The trading account can be opened with $2,000 and there is no mini-trading available — the minimum position size is 1 lot. TeleTRADE offers probably the highest spreads in the industry — 5 pips on EUR/USD. I don’t know why would anyone even bother trading with such a high spread. Another disadvantage of this broker is the numerous accounts of traders complaining about their brokerage ethics and services (including training).

EUR/USD Posts Biggest Daily Gain This Year

Today EUR/USD rose at a fastest pace since December 17. As the fundamental data reports were very positive in the United States, traders thought that it might be a good chance to bet against the dollar in the favor of the more risky and high-yielding currencies. EUR/USD rose from 1.2916 to 1.3141 as of now.
Existing home sales rose by 6.5% from the annual rate of 4.45 million to 4.74 million in December. The market analysts expected a decline to 4.4 million. That can bring a much needed positive wave into the realty market — the one that damaged most by the ongoing financial crisis.
Leading indicators of the U.S. economy advanced by 0.3% in December after falling by 0.4% in November. According to the forecasts it was expected to decline by 0.3% in December. Although this indicator is quite weak in its influence on the financial markets it can signal the beginning of the economic revival in the United States.

CGTIM — Another Jordanian MT4 Forex Broker

CGTIM (or Commercial Group for Trading in International Markets) is a MetaTrader 4 Forex broker based in Jordan. As the other Jordanian brokers it offers Muslim-friendly trading accounts — with no overnight interest or swaps. Trading with this broker can be started with $1,000 for mini-Forex accounts. The deposit/withdrawal methods are limited to wire transfer, check and credit cards. Apart from Forex it offers CFD and some futures and indexes to trade on. Although, it’s presented on-line only since 2004, it already looks like it’s dying from an age — the website works with problems and opening a demo account via MT4 platform alone isn’t possible. In addition, the spreads offered by CGTIM look ridiculous nowadays — 4 pips on EUR/USD currency pair is simply too much. In my opinion, this broker can only be useful to the Islamic traders — and even not all of them, but those who live in Jordan and can confirm the legitimacy of CGTIM and quickly solve any problems with this broker. Because I don’t know for what someone would pay 4 pips per trade

AL Trade Forex Broker Description

What I like about the unregulated Forex brokers (registered in the offshore zones) is that they aim on the non-U.S. and non-Canada traders, offering multilingual websites and user support service. AL Trade is one of such brokers. Like many of the similar on-line brokerage companies it provides MetaTrader 4 platform and the ability to deposit and withdraw funds via WebMoney. Although, I’ve found this broker quite recently it’s active on-line since 2004. As with many other MT4 Forex brokers it allows mini-trading (0.1 lots) and has a reasonable spread (2 pips on EUR/USD, for example). To open a trading account with AL Trade you’ll need at least $200 (for mini-trading) or $1,500 (for standard trading); the leverage ranges from 1:25 to 1:200. This broker is also good for CFD traders as it supports not only U.S. stock markets but also some European stocks.

The Worse U.S. Economy Gets the Deeper EUR/USD Goes

Contrary to the common sense the EUR/USD declines when more bad news comes out from the U.S. — the world’s largest economy. Probably, the traders believe that if things are so bad in America, other countries will also get plundered by the recession. EUR/USD traded with almost no significant change during the first half of the trading session today, but now it’s down to near 1.2937 — more than 100 pips below its opening level.
Building permits were down to 549k in December — from 615k in November — significantly below the expected rate of 610k. Housing starts decreased to 550k in December from 651k in November, while the forecast value was at 605k.
Initial jobless claims increased to 589k last week — from 527k reported for a previous week. The market participants used 540k estimate before the report.
Crude oil inventories unexpectedly rose by 6.1 million barrels last week. Such a strong growth allows them to remain above the upper limit of the average range for this time of year.