Forex Trading

Welcome to the forex trading section. Forex trading is not easy however provides significant potential for profit, as more and more people are discovering. In this section, I want to provide information to help you decide whether forex trading is for you and then to assist you with trading forex.

With the exception of this introductory page, all of the content within this Forex section has been kindly provided by Grace Cheng. Grace lives in Singapore and is a private active full-time trader in forex and options. Her website is www.gracecheng.com

The foreign exchange market facilitates the conversion of one national currency into another and is the world’s largest financial market.

The most transactions in foreign exchange markets involve the United States Dollar (or USD), and is the currency by which most others are quoted. When a currency exchange is quoted, it must include the two currencies in the transaction.

In quoting, there are standard abbreviations which designate the currency, for example:

United States Dollar	USD
Australian Dollar	AUD
UK Pound Sterling	GBP
Euro	EUR
Japanese Yen	JPY
Swiss Franc	CHF

For example, AUD/USD 0.7000 – this means that you require 0.7 USD for every Australian dollar. Another way at looking at the quote is to replace the ‘slash’ (/) with ‘1 equals’. In the above example, 1 AUD equals 0.7 USD.

There are significant advantages of trading forex over other financial products. However, trading forex carries significant risk – you will need to investigate whether trading forex is for you.

Within the forex market, there are day traders who trade solely based on intraday technical signals, and disregard fundamental aspects completely, and there are those who take the larger picture into consideration when deciding their intraday trades.

This contrasts to swing traders who adopt a combined approach of longer-term analysis of technicals and fundamentals when trying to determine good entry opportunities. So, day trade or swing trade - what is the difference in trading forex?

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Interestingly, each currency pair has its own personality, and you may need to adapt your trading strategies to tailor to each of the different currency pairs.

Interestingly, not all countries have floated their currency which means in some cases, the exchange rate is set by the government. Sometimes, it may be difficult to conduct an exchange with these currencies (find a willing counterparty) in large amounts.

On 1 January 1999, the EUR was introduced and began trading in a cashless form as a single currency for 12 European countries. These are Austria, Belgium, Finland, France, Germany, Greece, Italy, Luxembourg, The Netherlands, Portugal, Ireland and Spain.

On 1 January 2002, notes and coins were introduced for the Euro and on 1 July 2002, the Euro became the only currency for those countries.

The foreign exchange market is made up of three different parts. They are the professional market, the wholesale market and the retail market. The professional market is further broken down into three parts, namely spot, forward and options/derivatives.

The spot market is where two currencies are traded at a price agreed to now. The forward market allows dealers to buy one currency and sell another currency on a particular day and to do the opposite on another day in the future. This is known as an FX swap. The options/derivatives market allows dealers to profit by trading volatility.

The major participants in the foreign exchange market are banks, large corporations, brokers and central banks. Banks are usually market makers whereby they quote two way prices allowing others to either buy or sell at the bid/ask prices. Corporations will trade in the foreign exchange market because they will have foreign currency exposure due to importing and/or exporting activities.

Ultimately, just like the value of shares, the two things that affect the value of a currency are supply and demand. However, there are many fundamental influences on supply and demand for a particular currency.

One of the most significant influences is known as interest rate differential. This occurs when a comparison is made between the interest rates in two countries, and often if there is a significant difference, the country with the higher interest rate will attract foreign investment. The foreign investment will have to buy local currency (eg. AUD), in order to invest in Australia, and this will therefore increase demand for the currency.

Another influence is the import and export of goods. When companies import goods, they need to sell their local currency and buy the foreign currency, therefore increasing the supply for the local currency. Conversely, when companies export goods, they will receive foreign currency in payment which they will convert into their local currency by buying their currency and therefore increasing demand for it.

Do you need FX data?

The TXL Data service provides an end of day data service for 41 currency pairs as well as their "flips", or inverses, for a total of 82 items, held in MetaStock compatible format. The service is available for less than $12 USD per month and a 3 week fully functional trial is available.

The data is updated at 6:00 pm New York time. This corresponds to 8:00 a.m. Australian Eastern Standard Time and 10:00 a.m. Australian Daylight Saving Time.

The close is derived from prices prevailing at 5:00 p.m. New York time which, by convention, marks the end of the forex day. The following trading day's open price is determined by the first trade that occurs after 5:00 p.m New York time.