SANDEEP RANA

Get it Fast

2011-09-14T12:15:00.000+05:30

New Hyundai i30

2011-09-09T10:16:00.000+05:30

New Hyundai i30

South Korean auto major Hyundai Motor Company Wednesday revealed the first picture of its new generation i30 hatchback, ahead of its unveiling at the Frankfurt Motor Show next week.

in a statement, Hyundai said it expected the new generation i30 to build on the success of the original model and also the company's first model to be launched with the prefix 'i'.
According to Hyundai, the original i30 was designed and engineered in Europe and rolled out of its factory in the Czech Republic in 2007.

After its July 2007 launch, the i30 went on to increase its sales in Europe every year, attracting 115,000 buyers in 2010 -- the highest-ever annual sales figure for an individual Hyundai model in Europe -- and achieving total sales of more than 350,000 units up to mid-2011.

New Hyundai i30

The model has been designed and engineered at the Hyundai Motor Europe Technical Centre in Russelsheim, Germany.
Thomas Burkle, chief designer at Hyundai Motor Europe Technical Centre, said: 'The new generation i30 is recognisable thanks to the Hyundai family face with its signature hexagonal-shaped front grille and the jewel-like design of the headlamps, together with distinctive daytime running lights.'
While the company's two models, i10 and i20, are rolled out of its indian plant near here for the global market, company officials said the i30 is being manufactured in Europe.

New Hyundai i30

Thomas Burkle, chief designer at Hyundai Motor Europe Technical Centre, said: 'The new generation i30 is recognisable thanks to the Hyundai family face with its signature hexagonal-shaped front grille and the jewel-like design of the headlamps, together with distinctive daytime running lights.'

While the company's two models, i10 and i20, are rolled out of its indian plant near here for the global market, company officials said the i30 is being manufactured in Europe.

The model has been designed and engineered at the Hyundai Motor Europe Technical Centre in Russelsheim, Germany.

While the company's two models, i10 and i20, are rolled out of its indian plant near here for the global market, company officials said the i30 is being manufactured in Europe.

Fractions of the quote rate

2011-09-03T15:20:00.000+05:30

Commander in Pips: Ok, son, let’s continue with math. But before, I want to ask you – what do you know about the minimum fraction of a rate quote on FOREX?

Pipruit: Well, every quote that we’ve discussed previously has 4 decimal places. So, I suppose that it’s 0.0001.

Commander in Pips: Well, in general, you’re right – 0.0001 is a most common minimum fraction of rate and it is called a “pip”. Can you tell me, what move has happen in terms of pips if EUR/USD rate has increased from 1.3325 to 1.3383?

Pipruit: Let’s see – (1.3383-1.3325) =0.0058 or 58 pips (0.0058/0.0001) increase.

Commander in Pips: Ok. Sometimes 100 pips calls as “Figure”, but this term is not widespread enough. Anyway if you see it somewhere in application to quote discussion, then you will know what it means.

Pipruit: But Commander, how we could deal with USD/JPY quoting? This quote has only 2 digits after the dot, for example 90.38?

Commander in Pips: Good question, son. The point is that JPY quotes as 1 USD per 100 Yen, and not per 1 Yen. That’s why its quote has only two decimal places. So, you can see also that other pairs that have JPY as a quote currency also only have 2 decimal places. So, the most common quoting system assumes using 4 decimals or 2 decimals, as in case with JPY.

But also we should note here that during recent times the rivalry amongst FX brokers has increased significantly. This, in turn, leads to tighter Bid/Ask spreads – we’ve already talked about this. But more and more brokers have also turned to 5 decimal place quoting and 3 decimal place quoting. In other words they add an additional digit to the quote. In this case you can see, for example, a GBP/USD quote as 1.54687 and GBP/JPY as, say, 130.781. It means that these FX brokers quote fractional pips that some brokers call a “Pipette”.

Now tell me, if the AUD/USD rate will change from 0.99383 to 0.99388, how much will the change be in pipettes?

Pipruit: 0.99388-0.99383 = 0.00 005 or 0.00 005/0.00 001 = 5 pipettes.

Commander in Pips: And how much pipettes in single pip?

Pipruit: 10, I suppose.anner here

Commander in Pips: Correct! Now let’s go further. Have you ever thought about pip value? For example, is there some difference between 1 pip rate change of EUR/USD pair, or, for example, USD/CHF pair?

Pipruit: Hm, I can’t say definitely, but I have some feelings that it isn’t quite the same. I can’t explain it yet, just have a sense. Besides, the term “pip value” is too vague. For example, I can ask “In what currency?

Commander in Pips: You are absolutely right. The number of pips is only a half of the job. So let’s check it on an actual example:

Algorithm for pip value calculation

1. You should determine in what currency would like to estimate the pip value.

2. If currency that you’ve chosen for estimation of pip value coincides with quote currency (that comes after the slash”/”) in any pair, then the pip value will be always 0.0001 or 0.01 for JPY!

For example, the pip value in USD for such pairs as AUD/USD, EUR/USD, GBP/USD, NZD/USD “ANY”/USD will be always 0.0001 or 10$ per each standard lot of 100 000 currency units (100 000* 0.0001).

So the same is for JPY. If your chosen currency is JPY, then the pip value for USD/JPY, EUR/JPY, GBP/JPY “ANY”/JPY always will be 0.01!

3. If currency that you’ve chosen for estimation of pip value coincides with Base currency (that stands before slash”/”) in any pair, then the pip value will be always = pip/exchange rate.

Assume that you would like to calculate pip value in USD/CHF pair and current rate is 1.0782.

Calculate the pip value in USD: pip/exchange rate or 0.0001/1.0782 = 0.000 092. What does it mean in general? It means that 1 pip value in CHF = 10 CHF per 100 000 units of base currency, or 9.20 USD.

Pipruit: All right! I think I’ve got it!

Commander in Pips: Fine, now it is your turn to calculate. Here is the task for you:

TASK #1

Estimate the pip value in GBP if EUR/CHF rate is 1.5315 for 10 000 units of base currency (0.1 standard lot). Also take into consideration that the EUR/GBP rate is 0.8415.

Pipruit: Ok, let’s see… Wait a minute GBP neither Base nor Quote currency for EUR/CHF. What should I do then?

Commander in Pips: May be you should think about the second condition – The EUR/GBP rate is 0.8415. What is that for?

Pipruit: Hm…

Commander in Pips: Ok, I’ll give you a small clue - if we have EUR/USD rate and USD/CHF, how we can calculate EUR/CHF rate?

Pipruit: Oh, that’s not so hard: EUR/USD* USD/CHF = EUR/CHF

Commander in Pips: And if we have EUR/USD and EUR/JPY, how we can calculate USD/JPY?

Pipruit: I suppose (EUR/USD)/(EUR/JPY)…. No, in this case we will get JPY/USD and we need USD/JPY. It should be done vice versa – (EUR/JPY)/ (EUR/USD) = USD/JPY.

Commander in Pips: That’s it. Now try to solve the task…

Pipruit: Ok... from the first EUR/CHF rate, we can estimate the pip value in EUR, it will be 0.0001/1.5315 = 0.000065 or 0.65 EUR per 0.1 lot of base currency. Oh, and now we just can convert EUR to GBP at the exchange rate. As it appears, it’s quite simple: 0.000065*0.8415 = 0.000 055 or 0.55 GBP. The answer is 1 pip value in EUR/CHF equals to 0.55 GBP if all other conditions hold (rates, lot size).

But Sir, if the pip value depends on the rate, does it mean that it will be different at different rates?
increases. It’s fair, because rate becomes higher, so the pip value also becomes higher. To explain that – let’s get to the last task for today:

Estimate the pip value for USD/CHF in terms of USD, if rate is 0.9500; 1.0000 ; 1.0500.

Pipruit: Well, it’s an easy task:

- for 0.95 pip value equals 0.0001/0.9500 = 0.000 105;

- for 1.00 pip value equals 0.0001/1.0000 = 0.0001;

- for 1.0500 pip value equals 0.0001/1.0500 = 0.000 095.

Oh, it looks like I understand! When rate is 0.95 and below the parity (1.00), it means that CHF is more expensive than USD, USD in turn – cheaper. Sense, CHF pip value is greater in terms of USD. At parity they are equal. When rate is above the parity, say 1.0500, It means that each dollar costs 1.05 Swiss Francs and the pip value in dollar is smaller, because dollar itself is more expensive than the Swiss franc. Sounds too confusing and messy.

Commander in Pips: You’ve said everything correctly, but I would like to organize it in a more simple way, if you don’t mind.

Pipruit:Sure, go ahead.

Commander in Pips: Pip value in terms of Base currency will become greater the exchange rate gets lower. Consequently, pip value will become lower as the exchange rate becomes higher.

Pipruit: Cool!

But, Sir, Will I have to do all these calculations every time when I enter or exit the trade on FOREX?

Commander in Pips: No. I can say even more. You will never have to do this manually. Ha-ha-ha… Because modern trading terminals do this automatically and in a fraction of a second.

Pipruit: What the deuce…

Commander in Pips: Your disappointments are in vain, because you need to know how to do it anyway. This skill is irreplaceable, and you may need it in different tasks. For example, if you will build your own trading systems and experts.

Pipruit: Well, thanks then.

Intermediate Checkpoint

2011-09-03T12:44:00.000+05:30

Commander in Pips: Ok, son, I think that now is the time when I will ask some questions and you will have to answer.

Pipruit: Well, Sir maybe we should study a bit more. I’m not sure that I’m ready to take a test yet.

Commander in Pips: Don’t worry, pal. This will just be shallow checkpoint that is based on a previous chapter – a single chapter. If you’ve listened carefully, you will not have any problem at all.

Pipruit: If you are saying it like that… I have nothing more than just to believe you. But I have to warn you, that I’ve skipped all the classes at McConnell-Brue’s Economics Course, so I’m absolutely flat with it.

Commander in Pips: We will touch only simplest things currently. Detailed investigation of Fundamental analysis we will do later.

Pipruit: Ok, let’s try it then.

Commander in Pips: Put your thinking cap on and get ready.

Task #1

Let’s assume that you’ve investigated the economies of the US and the EU and come to the conclusion that the US economy will be stronger in nearest future compared to the EU economy. For simplicity we also assume that economy growth coincides with currency value growth. What kind of trade should you take with EUR/USD pair?

Pipruit: Let’s see. We’ve estimated that EUR is a base currency in EUR/USD pair. It means that whatever I will do (Buy or Sell) I will do this with the EUR, because the base currency determines the trade. According to your conditions, logically, I should wish to Buy USD, because, as you’ve said, the US economy will outperform the economy, so the USD will rise relatively to the EUR. But I can’t buy USD directly, because we trade the EUR/USD pair and I can buy or sell only EUR for USD. Hence, I have to sell EUR for USD…

If the USD value will increase relative to the EUR, then the EUR/USD ratio will decline – consequently, I should Sell EUR/USD.

Commander in Pips: Brilliant!

Now let me rephrase a bit previous task. Say, you expect that EU economy will be weaker relative to the US economy. What should you do in this case?

Pipruit: Ok, then EU economy will underperform compared to the US economy; hence the EUR will perform weaker relative to the USD… Wait a minute – this is the same condition, but from another point of view. It’s much easier to analyze, because conditions are based on Base currency. EUR/USD will decline – the answer is the same - I should Sell EUR/USD.

Commander in Pips: Right again. I just want to show you, that reducing of conditions to base currency makes analysis easier, than from perspective of quote currency. But this is important only in the beginning of your FOREX training. Soon, you will be able to do this off the top of your head.

Pipruit: I think I’ve got it, even after such easy example. Indeed, if you expect that some currency will outperform, hence the counter currency will underperform. And it’s very simple to decide what to do with the particular pair.

Commander in Pips: Ok, if you’re so smart boy, here is another task for you:

Task #2

Let’s imagine that the Bank of Japan (BoJ) investigates the possibility for currency intervention, because the USD/JPY rate is too low. And this is unwelcome situation for domestic producers.

- What does long-term gradual reducing of the USD/JPY rate means in terms of Japanese Yen?

- What should BoJ undertake during possible intervention to partially negate the USD/JPY rate decreasing?

- What sort of position should you open due to all these circumstances to get profit from the intervention?

Pipruit: Wow, wow, Commander! Maybe I’m a smart guy, as you’ve said, but I’m definitely not a tough guy, at least not yet in terms of FOREX.

Commander in Pips: This task is simpler than you think. Just read conditions carefully…

Pipruit: Ok, as you wish, Your Highness. Let’s see…

1. “Bank of Japan (BoJ) investigates the possibility for currency intervention, because the USD/JPY rate is too low” – obviously, due to this condition, BoJ intends to raise the USD/JPY rate with a possible intervention.

2. “What does long-term gradual reducing of the USD/JPY rate means in terms of Japanese Yen?” Well, as with previous task with EUR, it means that either USD underperforms the JPY or the JPY outperforms the USD – anyway, the JPY performs better compared to the USD and the “yen to dollar” rate rises.

3. “What should BoJ undertake during possible intervention to partially negate the USD/JPY rate decreasing?” Hm, I suppose that to negate a decreasing, or stop it for some time, it should initiate timely increasing of the USD/JPY rate. It means that somehow it should weaken the JPY relative to the USD. In this case, the JPY rate will decrease compared to the USD, hence the USD/JPY ratio will increase. Let’s see – in this pair the USD is the base currency, so USD determines the direction of the rate and any transaction, and it should rise…Ok, I think I’ve got it – the BoJ should buy significant amounts of USD for JPY (other words Sell JPY).

4. “What sort of position should you open due all these circumstances?” – Well, now it looks simple. I should Buy USD/JPY.

Commander in Pips: See, it’s not so awful when you break it down. Remember, fear hath a hundred eyes!

Your banner here

Pipruit: Yeah, you’re absolutely right. So, may be you have some additional tasks?

Commander in Pips: Oh, you’d like that ha? You’ll definitely get more, let’s just remind you of some items about margin trading before that and then we will continue with riddles…

Some talk about the leverage

As you understand – the currency trades in lots, just like an M&M’s candies – you can’t buy just single piece, only 1 pack or more. So the same is with currencies – you can trade pairs in lots. What is a standard lot by the way?

Pipruit: 100 000 units of base currency.

Commander in Pips: That’s right. Also, as we already know there are micro lots – 1 000 units and mini lots – 10 000 units exist. Furthermore, some brokers let trade to their customers with any lot that they want. If you love your grandma and her favorite year was 1958 then you even can trade with 1958 units – no problem. But when the number of units (i.e. lot size) is too small, then the results of trading are negligible and they are not worth that hard work that you will have to do to earn them. As you understand hard work absolutely does not depend on the lot size. It will be the same amount of work to analyze the marker and then to place a trade for 1 unit of currency or for 100 000 units.

Also we’ve already talked about leverage that could be provided by FX broker that allows you to trade with much smaller amount of cash. This type of transaction is called margin trading. Let’s see if you remember anything on this topic that we’ve talked about before… Here is the next riddle:

Task #3

Let’s assume that your FX broker allows to trade not less than with one mini lot (10 000 units) and provide their clients with 1:50 leverage (2% margin). How much cash in USD do you have to deposit in your trading account to open a trade of 1 mini lot, say, on the GBP/USD, if the rate is 1.6200? How much will it be in terms of GBP?

Pipruit: It looks simple – 1.62*10 000/50 = $324. In terms of GBP it will be – 324/1.62 = 200 GBP

Commander in Pips: That’s right. See – you can control a position of $16 200 with just under $350. This is a positive side to margin trading. Just remember that margin trading also has a negative side. We’ll get back to that later.

Here is the last task for today…

Task #4

Assume that tomorrow will be the FOMC meeting and you anticipate the Fed Fund rate increasing more than is expected by the market, or that some commentaries from Chairman that will be supportive for the USD. Whatever the case, you expect the USD grow compared to other currencies. Here are the questions:

1. What position should you take in USD/CHF pair?

2. How much cash should you have on deposit in USD terms if the current USD/CHF ratio is 1.13 in order to trade 0.1 of standard lot with 1:20 leverage (or 5% margin that is the same)?

3. What will the result be on your account, if the USD/CHF rate will increase by 0.01? What should it to do by the way, to behave in line with your expectations?

Pipruit: Commander you’re becoming more harsh just before my very eyes…

Commander in Pips: Come on, you can do it! This riddle has some moments that demand brain work, not just knowledge…

Pipruit: You’ve becalmed me much with this statement, Sir...

1. “What position should you take in USD/CHF pair?” This is the easiest question. I expect an increasing of value of USD that is a Base currency. It means that it determines the direction of ratio – USD outperforms - USD/CHF rises, USD underperforms – USD/CHF falls, hence I should buy USD/CHF.

2. “How much cash should you have on deposit in USD terms if the current USD/CHF ratio is 1.13 in order to trade 0.1 of standard lot with 1:20 leverage (or 5% margin that is the same)?” I see a trick question here – USD is the base currency in this pair, so I do not need to know ratio to calculate the deposit in terms of base currency. All that I have to know in this case is a leverage ratio and lot size, because in any trade the amount of base currency that is involved in the transaction is equal to lot size, i.e. the number of units and does not depend on any ratio. The ratio, in turn, shows the amount of quote currency for 1 unit of base currency and it’s absolutely necessary to know, if you have asked me to calculate deposit in terms of CHF. So my answer is 0.1*100 000/20 = 500 USD. In terms of CHF – 1.13*0.1*100 000/20 = 565 CHF.

3. “What will the result be on your account, if the USD/CHF rate will increase by 0.01? What should it to do by the way, to behave in line with your expectations?” Let me answer on the second question first. Obviously USD/CHF should show growth – we’ve talked about it in the first question already. It’s not so simple with the calculations – I will try to do them in table sheet:

Trade consequence	USD/CHF rate	USD	CHF
1. Place (lock) margin (deposit) 500 USD		500 locked
2. BUY 0.1 lot USD/CHF (Buy 10 000 USD for 11 300 CHF).	1.13	+10 000	-11 300
3. Rate change to 1.14	1.14	-	-
4. Close position – SELL 0.1 Lot USD/CHF (Sell 10 000 USD for 11 400 CHF)	1.14	- 10 000	+ 11 400
5. Returning (unlocking) margin of 500 USD		500 unlocked
Total	+0.01	0	+ 100 CHF

Pipruit: But, Commander, what should I do with these 100 Swiss francs? I do not need them. I need bucks…

Commander in Pips: Here is the trap in this task. You’ve done well. Tell me, if USD/CHF rate 1.14 at moment of closing your initial position, how many USD you will get for 100 CHF?

Pipruit: 100CHF/1.14=$87.72

Commander in Pips: Fine, precisely this amount of USD will be added to your available account balance when close your trade. The point is that your FX broker will convert profit or loss into the currency that your initial deposit was using. And this will be done simultaneously and at the same rate with the position closing. It means that when you just click “Sell” USD/CHF button at 1.14 in our example, you get profit 100 CHF and broker converts that into USD, if your initial trading deposit in USD. If it was created in EUR – broker coverts it to EUR, etc. The same thing if you will get, 100 JPY profit, for example. They also will be converted in the currency of your initial deposit. Later I’ll give you another example.

Pipruit: Cool! This is much comfortable than accumulate profits on in different amounts of different currencies.

Commander in Pips: Exactly. And this was done particularly for this purpose. Now, take a look at table below. This is typical information about trades that has not been closed yet, i.e. open trades. What can you tell me about it?

Pipruit: Let’s see. I think that “Order” and “Time” are number of order and time of opening the trade, “Type” – Buy or Sell, its obvious. “Size” – is a number of lots, unfortunately I do not see, what is the lot value, but, probably 1 lot is 100 000 units of base currency, so current position is for 10 000 units. First “Price” is 1.29469 – looks like this is initial price that trader had bought at, “S/L” and “T/P” – I do not know what they are… Ok, then, second “Price” – this is current price 1.29771, because, as you’ve said, trade has not been closed yet. “Commiss”…? Oh, I think this is “Commissions” and they are equal to zero. Then “Swap” and “Profit”. Profit is obvious thing, by the way – (1.29771-1.29469)* 10 000 = $30.20, so I was right about lot size!

“Margin” on the second row shows 25.89$. Hm… Interesting, what the leverage value is…I will calculate it, if you don’t mind - let’s, see position value is 0.1*100 000*1.29469 = $12 946.9. So leverage is $12 946.90/$25.89 = 500! That’s huge! 500:1!

But what does swap mean? Don’t you want to tell me that this is SWAP trade, Commander? Also, take a look – total profit is different from final profit precisely at the value of the swap – $0.07.

Commander in Pips: This is not the SWAP trade. You’ve done well, especially with noticing that total profit is different from position profit for swap value. So, here is what “Swap” means:

Swap or Rollover value.

Here we will talk not about Swap trades and Swap markets, but about swap value that is applicable to spot FOREX. Don’t confuse these two absolutely different terms!

Sometimes, this swap also called as Rollover value. Swap can appear only when you rollover your position, that you’ve previously opened through trading day close time. That’s why it is called Rollover. For example, suppose that your FX broker uses 00:00 time as a daily closing time (or 5:00 PM EST that is common). If, for example you have opened a position during today’s trading session and decided not to close it and hold at least till the next day – in other words rolling it over to the next day through close time. Now your position has not been closed before 00:00 time. In this case you will get a Swap value that could be negative or positive. The value of the swap (as a rule, but not always) will depend from overnight interest rates on currencies that you have traded as a pair. Let’s look at our table with EUR/USD. This swap depends on EUR rate and USD rate.

Pipruit: But why does swap appears at all?

Commander in Pips: Swap appears, because the major part of participants in the forex market do not intend to take a real delivery of foreign currency. When, for example, you Buy 10 000 EUR/USD at 1.35 – you do not have 13 500 USD to deliver. So, it turns out that your counterparty on this trade has to credit you with this amount of USD until you will close your trade, and you have to pay interest due to this credit. But the counterparty, in turn, does not have 10 000 EUR, or even if he/she does, he/she does not intend to deliver it also. This turns out that now you lend him with 10 000 EUR and he/she, in turn, has to pay interest due to this credit. As you understand, interest rates on USD and on EUR are different, and amount of EUR and USD is different also (10 000 EUR vs. 13 500USD), and it leads to the fact that those who have to pay more will have a negative swap, and the counterparty will have the same positive swap. But the general rule here as follows:

If you Buy (i.e. Lend to counterparty) currency with higher interest rate and Sell (i.e. borrow from counterparty) currency with lower interest rate, then the interest rate differential will be positive and you will get positive swap.

And vice versa –If you Buy (i.e. Lend to counterparty) currency with lower interest rate and Sell (i.e. borrow from counterparty) currency with higher interest rate, then the interest rate differential will be negative and you will get negative swap.

Pipruit: And what kind of interest rates usually used in swap calculation?

Commander in Pips: Hah, this is the most tricky moment son. Well, most part of brokers use overnight Central Banks rates. For USD this is Fed Fund rate, for EUR – ECB overnight rate, etc. In other words, the rate was set by a National Central Bank. Also the broker could be using such rates as overnight LIBOR, EURIBOR and some others. Here are some benchmark interest rates – set by National Central Banks (As of January 2011):

Country	Interest Rate
United States	0.25%
Euro zone	1.00%
United Kingdom	0.50%
Japan	0.10%
Canada	1.00%
Australia	4.75%
New Zealand	3.00%
Switzerland	0.25%

But, some FX Brokers, especially those who offer to trade on micro accounts can apply fixed swap value for position rollover. And it could not depend on whether it Long or Short, and whether it EUR/JPY or AUD/GBP… Just fixed swap value – usually it will be negative for any rollover of any position and, in fact, this is a hidden commission for position rollover. Other brokers tilt the balance. If positive swap on one lot of a pair is $0.10, then negative swap could be $0.15 or much more.

Pipruit: What then should I do?

Commander in Pips: The answer is simple – you should investigate a Brokers swap procedure with careful scrutiny. Ask them about rollover procedure, interest rates that are used for swap calculation etc. The second way - is just do not rollover your positions, close them during the current trading session. But don’t be afraid too much. In fact, the value of swap is usually very small relatively to profit/loss on your position. If you do not intend to hold it 10 years of course.

Later we will return to this topic, because you can use the rate differential in your favor.

Where does the money come from in FOREX?

2011-09-03T12:42:00.000+05:30

Commander in Pips: Ok, son, now we are shifting to the trading process directly.

Pipruit: Finally, Sir. I really can’t hold myself back anymore and want to make my first trade now.

Commander in Pips: Well, there is still a long way to that moment, son. I’m not saying that “we start to make trades”. I’ve just said that we now turn to trading process education.

Pipruit: Oh, again this long time of expectation an explanation. But I hope that the trading process discussion is more interesting than the previous topics all together…

Commander in Pips: You’re absolutely right with that. Besides, all things that we are starting to discuss have absolutely practical importance.

Pipruit: Cool, let’s getting started with it!

Commander in Pips: Very well.

As we’ve already discussed, FOREX is a market where you exchange one currency for another. In other words, you buy one currency for another one (i.e. selling the other currency). In this sense, the trading process is absolutely the same as on the other markets – stocks, bonds, real estate. When you buy something, you pay money and expect that this asset will increase in price. So as on FOREX – buying a particular currency, you expect that it will increase in value compared to other currency that you’ve sold, i.e. paid for the currency that you’ve bought. We’ve already touched on this topic lightly in Part 1 Chapter 2 and 3. Now let’s see how a common transaction looks on FOREX:

Typical transaction:

1. Assume that current GBP/USD rate is 1.5500. And you intends to Buy 10 000 GBP. The question is: how much USD you have to pay for 10 000 GBP?

Pipruit: Well, it’s an easy riddle: 10 000*1.5500 = 15 500 USD.

Commander in Pips: Absolutely right, by the way – 10 000 units of currency – is that a standard lot or not?

Pipruit: As I remember from previous lessons, a standard lot is 100 000 units, so 10 000 is 0.1 lot. That’s sometimes called a mini-lot, right?

Commander in Pips: Correct.

2. Now, assume that after some days have passed, the GBP/USD rate has changed to 1.60. And you wish to exchange 10 000 GBP, that you’ve received during initial transaction, back into US Dollars. The question is: how many USD will you get from this reverse transaction?

Pipruit: I suppose it would come to 10 000*1.60 = $16 000...

Wait a minute! – There is a profit right here! It looks like – we’ve paid $15 500 on the initial transaction buying 10 000 GBP and got back $16 000 on the reverse transaction for the same 10 000 pounds – our profit is 500 bucks!

Commander in Pips: That’s right – here is how the market works and where your profit is coming from. In fact you’ve calculated all the necessary transactions by yourself. It’s not so difficult, right?

Pipruit: Not at all. But, Commander, what will happen if he Cable rate will decline instead of increasing – to 1.50 for example…

Commander in Pips: I suppose that you can answer on this question by yourself. Just calculate how many USD you will get from the reverse transaction in this case…

Pipruit: Ok, let’s see… 10 000*1.50 = $15 000. But we will lose $500 in this case! What should we do now, that’s awful!

Commander in Pips: In fact it’s not so awful, because we will spend a lot of time in later chapters learning about risk management and an appropriate trading plan that will allow you to control losses and escape wrong trades. But now you must understand that FOREX is not the game at all. If you’re air-headed and lack discipline – you’re dead fiscally…

Pipruit: I will try to learn hard to understand all things perfectly and do not lose money. By the way, where does this 500 bucks disappear to?

Commander in Pips: Well, the money does not disappear. It becomes a profit of your counterparty in this trade. Money does not disappear anywhere and does not appear from nowhere. It is always on the market, and just changes hands. That’s all.

Pipruit: Ok, I remember that. Besides, we’ve discussed this lightly in Introduction to FPA Forex Military School.

Commander in Pips: Ok then. Now we can say that any exchange rate just shows the price of one currency in terms of paying for it in another currency. It is simply the ratio of value of one currency to another.

Pipruit: Why in different pairs does US dollar change from being first turn or move into second place. For example, EUR/USD compares to USD/JPY. What is the reason for this?

Commander in Pips: Well, the placement of USD in pair was historically based. There is no hidden pattern in it. I just can tell you that in the currency futures market pairs such as JPY/USD, CHF/USD exist, compared to USD/JPY and USD/CHF that we have on FOREX.

The second part of your question is much more important. And here is the rule: the primary placed currency that stands before the slash (/) calls “Base Currency”, the secondary, placed after the slash, one calls “currency payable, quote currency or counter currency”. Both currencies have different functions.

Important note:
According to ISO 4217 international three-letter code of the currencies involved. It means that each currency pair constitutes as an individual trading product and is traditionally noted XXXYYY or XXX/YYY, where XXX and YYY. The first currency (XXX) is the base currency that is quoted relative to the second currency (YYY), called the counter currency (or quote currency). Historically, the base currency was the stronger currency at the creation of the pair. However, when the EUR was created, the European Central Bank mandated that it always be the base currency in any pairing.

Now let’s tight together such notions as “lot size”, “unit of currency”, “Base currency” and “Quote currency.

1. Base currency calls in such way, because it’s the basis for any transaction. When you Buy or Sell, it means that you buy or sell the Base currency. Also, the fluctuation of the exchange rate directly shows the appreciation (rate increasing) or depreciation (rate decreasing) value of the base currency relative the quote currency.

2. Exchange rate always shows the number of units of the Quote currency per unit of Base currency and lot size in turn shows the number of units of Base currency:

- If you would like to Buy, the rate shows how much units of the quote (second placed) currency you should to pay for 1 unit of the Base currency.

- If you would like to Sell, rate, in turn, shows how much units of quote currency you’ll get for 1 Unit of the Base currency.

3. You should “Buy” the pair if you think that the base currency will appreciate compared to the quote currency. If you believe that it will depreciate, rather, then you would “Sell” it.

Now let’s discuss such terms as:

LONG and SHORT positions

When you’ve already come to decision about what you would like to do – Buy or Sell, just remember some terms that will help you understand what other traders are saying.

If you intend to “Buy” (other words buy base currency and sell quote currency), it means that you count on the rising value of base currency and would like to sell it back later at a higher price. Traders call this as “Going LONG” or “taking LONG positions”. Other words BUY=LONG.

If you intend to Sell, rather (sell base currency and buy quote currency), you count on decreasing of the value of basis currency, then you can buy it back at a lower price. This kind of action is called “Going SHORT” or “taking SHORT positions”. Other words SELL=SHORT.

Pipruit: Sir, I do not quite understand where the profit on a Short position comes from. It’s clear on Long positions – buy, wait until the price has risen, then sell at higher price and profit in your pocket. With short positions it’s not so clear.

Commander in Pips: Ok, I’ll show you this on the chart…

Pipruit: Wait a minute, it looks like I’m understanding it now. When my initial trade is “Sell”, in anticipation of a decrease in the exchange rate it is called a “Short”. I make money on the falling of the exchange rate. With “Long”, it is much simpler - it’s just a common trade Buy cheaper and Sell “at or better”.

Commander in Pips: You’re absolutely right – in a “Short” trade you make money on a decreasing of the rate, in a “Long” trade – on its increasing.

Pipruit: Commander, also I’ve heard something about Bull and Bear markets and trades. Can you explain that?

Commander in Pips: Oh yes, don’t worry too much about it. A growing market (prices rising) is often named as a “Bull market”, a falling one as a “Bear market”. So, very often, opening “Long” positions can also be called opening “Bullish” positions. A “Short” one is named as “Bearish position”.

And the last small topic for today –

How to read the quote board?

Ok, look at the picture below. This is a very typical quote board of a typical FX broker – what can you tell me about the data that it shows?

Pipruit: Let’s see. Well, I see quotes for different pairs. Bid price and Ask price. Looks like we’ve discussed them earlier, but I forget all the details. These prices are different. I assume that the color stripe shows dynamic of the pair through the trading day – green line means appreciation of the rate, i.e. base currency, red line – depreciation, yellow means flat or near flat price action.

In table below the quote board I see different windows.

- “Lots (1 Lot=10K)” means that 1 Lot equals 10 000 units of base currency (not 100 000, as usual);

- Some windows I do not understand – Limit price, Stop price, Route, Type, GTC, Part and others.

- But I see easy way to open trade – “Buy USD/DKK” button, and look – “Short USD/DKK” button. That is what we’ve just discussed!

Commander in Pips: Excellent! You’ve done well! For now, don’t pay attention to the buttons that you’ve said “don’t understand them” - Limit price, Stop price, Route, Type, GTC, Part and others. We will talk about them in later chapters. And now just tell me, how do you understand the double quoting?

EXAMPLE OF A BROKER’S QUOTE BOARD

Pipruit: It seems simple. The first price is that I buy at, the second one - which I sell at. It’s obvious…

Commander in Pips: You are wrong. It’s vice versa. You have to keep in mind that these quotes belong to broker. So, Bid price is the price at which broker wants to Buy Base Currency for quote currency. The Ask price – is price at which broker wants to Sell the Base Currency. It’s very easy to remember.

Bid – this is like on auction. The participants call the bids for some goods. The better bid will win. So, Bid price is a quote, that broker gives you for base currency. This is the price that broker wishes to buy at, other words that he agrees to pay for base currency.

Ask (or Offer price) – Broker asks you to pay this price or offer you to pay. This price is that he agrees to sell at.

Just remember, that quote board belongs to broker, hence, these quotes are the prices at which BROKER Buy or Sell, not you. What does it mean for you?

Pipruit: Let’s see. If Bid is a price that broker agrees to pay per unit of base currency – this will be the rate that I will have to Sell at.

The same as Ask price is a price that broker Asks me to pay for 1 unit of base currency. So this will be the price that I will have to Buy at.

Commander in Pips: As you can see, the quoting system is quite simple. Just click the button and you can easily buy or sell any currency.

When should we trade?

2011-09-03T12:39:00.000+05:30

Pipruit: So, as I suspect, we finally, have known all necessary stuff about trading time. May be we should turn to trading directly?

Commander in Pips: Hold your horses, son…

Pipruit: More studying? Noooo!!!

Commander in Pips: Just one final step remains – what about suitability for trading of a particular trading days?

Pipruit: Well, are they might be different?

Commander in Pips: Of course!

Pipruit: In this case, I think, I should be patient for a little while longer…

Commander in Pips: Wise decision, son. So, in terms of week days, some are more suitable for trading that others. The Forex market does not different much from stock market, for example. Popular wisdom tells us that at the beginning of the week, the most part of pubic traders enter the market due to analysis that they have made during the week end. Professionals rather trade during the whole week, and closely look at initial splashes of activity that arose from public analysis and decisions. Then the market starts to show its real power. Even more, in stock market, this happens during the day also, because stock market has an open and close of its daily trading session. The public enters the market in the morning, based on analysis that it has done previously, and then turns to daily jobs, while professionals control real daily trends. That’s why open intraday gaps on stock market will close later in the day.

The same situation is similar on Forex, but it is more typical for price action during the week instead of during the day, because Forex is 24/5 market.

Pipruit: And what should I do then? Do not trade until will see the “power of professionals”? Is it dangerous to trade until that becomes visible?

Commander in Pips: Of cause not – trade your own trading plan that is based on your analysis. But keep an eye on price action during the whole week, even if you have a job somewhere else and trade on a weekly basis. You should understand that professionals very often trade against the public and you should recognize such types of traps, just to not to get caught in one. So for that purpose we’re here. Today we will take a look at weekly activity.

Ok, here is what I’m talking about – just look in the table:

Pair	Sunday	Monday	Tuesday	Wednesday	Thurdsay	Friday
EUR/USD	67	112	143	133	148	146
GBP/USD	74	152	175	156	168	180
USD/JPY	45	63	87	94	123	101
AUD/USD	57	81	115	98	117	113
NZD/USD	26	85	94	84	99	96
USD/CAD	44	96	113	109	123	126
USD/CHF	53	87	122	105	104	114
EUR/JPY	22	135	181	162	228	202
GBP/JPY	105	163	219	178	273	238
EUR/GBP	35	72	79	80	76	90
EUR/CHF	36	56	61	69	91	75

Pipruit: Well, it’s absolutely clear, why there is so shallow trading range on Sunday, but, wow, so significant difference in activity between Monday and the middle of the week.

Commander in Pips: That’s right. Also take a note that Friday’s price action is also greater that on Monday and even then on some other days of the week. So as on stock market, when professionals are active till the end of the day, as Forex professionals active till the end of the week. At the same time, we’ve already talked that trading session on Friday gradually fades out from New York’s lunch time until 17:00-18:00 EST and the market could turn to anemic conditions after 12:00-13:00 EST on Friday.

Pipruit: So what should I do then? For me each session looks attractive – Tokyo, as you’ve said could provides us with range trading opportunities or breakouts, London and NY with nice movements and huge liquidity. How can I get advantages all of them?

Commander in Pips: When you will graduate from our school, you will understand that trading is based on a strict and detailed trading plan that demands fulfillment of some conditions in the market. So trading is an anticipation of execution of these conditions. Until that time you should sit on your hands and wait for when these conditions will be achieved by the market. What do all these complex talks mean? They mean that you should be ready to push the trigger when it really needs to be pushed. But you must have sufficient attention, patience and a clear mind to trade well.

Pipruit: But how I will accomplish that, if, in fact, I will not have any rest at all?

Commander in Pips: Professionals like to be a counterparty of individual traders, who do not rest enough. Because they make more mistakes and this makes it an easy task to take their money. Would you like to join them giving your money away? I think not. So, the rest/trading schedule should be the part of your trading plan. Understand that life is short, manifold, amazing and wonderful. Do not limit it just by trading. Devote time to your close ones, and spend your time wisely. There are a lot of fascinating things in this World beyond the trading… And the markets will still be there tomorrow. Do not ruin and limit your lifetime by spending every moment just following the markets.

In other words, just remember – Rest is a must if you want to see you’ll see how fresh and sharp your analysis will be. Otherwise your blurred view of the market will not be able recognize even obvious money laying on its surface.

Reasonable times for trading:

- Crossing of different trading sessions is particularly suitable for trading, especially London and New York trading time overlapping;

- The European trading session itself, because it holds about 30-35% of overall daily transaction;

- Additional attention should be paid Europe and US morning time, because of macro data and news releases.

- The middle of the week shows greater activity than the beginning of the week, because professionals start gradually to pick up trading steam.

Unreasonable – better to stay flat:

- Weekend and Holidays – have you nothing better to do? Rest is must.

- On Friday in general, or at least in the second part of NY day (after 12:00 EST). First, because activity starts to fade during this period. Second, because market can turn to choppy price action and reverse previous trends. This could happen due to couple of reasons – massive close of positions before the weekend, and/or profit taking.

- During important macro data releases or Central banks minutes/statements – the market really can go mad and turn to Doom and Gloom in this period so, that you even can hear screams “Let me out!” if you just open your window during this time. Seriously speaking this is the time of whipsaw action and you could be stopped out (fixing a loss) if even you are right and market after some chop will continue move in your favor.

Pipruit: Well, this is really goldmine of insight. I even couldn’t assume that this information will be so important. Thanks, Commander.

It’s double time – trading sessions overlapping

2011-09-03T12:37:00.002+05:30

Commander in Pips: Maybe you have noted already, we’ve talked about the fact that liquidity increases during crosses of different trading sessions. So, I offer to talk about this. There are two major overlaps here – “Tokyo-London” and “London-New York”. As you will see, the reason for that is not only the liquidity growth.

Pipruit: And what about “New York-Tokyo, so to say, closes the loop?

Commander in Pips: Hm, if you take a look at our trading sessions diagram in the first part of this chapter, then you’ll see that the New York session barely crosses with Tokyo. Even if it does, this overlapping has an absolutely insignificant effect.

So, let’s start from the Tokyo-London crossing.

Tokyo-London

- This is a minor crossing of trading sessions in sense of significance. One of the reasons for that is the tight period of crossing of these trading sessions. Usually overlapping lasts for just 2 hours in summer time and only 1 hour in winter. We should understand also that this time is also extremely approximate. Would you start an active business decision, say, in 17:00-18:00 (Japan) or in 8:00 in the morning (London). Generally not. So, that is happening on the market. When the Asian region has almost finished its trading day, Europe is only ready to begin it.

- That’s why you don’t see much activity during this period. Liquidity is not also not very impressive. From the other side, this time is quite suitable for developing a trading plan for the London and New York trading sessions.

- This crossing is quite another tune, because the overlapping lasts approximately 5 hours, i.e. half a day. In fact activity starts to decrease around the NY lunch time. With more than 50% overall daily transactions you see that market is strongly activated. The big whales of FOREX start to toss and turn their billions, wires are burning off and all this stuff comes to life. This is the most active and busy time of a trading day, because it involves two major financial centers in the world.

- Important news and macro data from US and Canada flow into markets in the beginning of New York’s trading day. Also market could be shaken by late news from Europe.

- If some important data has shaken the market during the London session, or if a strong trend has been established, we can see that it could continue during the New York session. It happens, because US traders investigate what has happened earlier in the day, and they take this data into account and also often join to current tendencies and trends.

- When the London session comes to an end, European players could start to close their positions. US traders, in turn, remain in the game. This combination can lead to choppy price action closer to New York’s lunch time.

New York trading session

2011-09-03T12:36:00.000+05:30

Pipruit: When does the New York trading session start?

Commander in Pips: Just after the British lunch…I’m kidding, but in general it starts to pick up steam roughly at this time – 12:00-13:00 GMT, and gradually fades out to 21:00-22:00 GMT. In terms of America’s time scale – this is just a simple day time – 8:00-17:00 EDT/EST

The New York trading session takes second place in overall day trading volume with about 17-18% of overall turnover. The major point of the NY session is that 80-85% of all transactions involve the US Dollar. So this is a solid reason to pay particular attention to major pairs with USD during this session.

As with Europe and Asia, “New York session” does not mean that only New York itself trades during this time. As London and Tokyo, New York is a financial centre of the US and entire financial world keeps an eye on it.

Pair	New York session
EUR/USD	93
GBP/USD	104
USD/JPY	62
AUD/USD	84
NZD/USD	68
USD/CAD	93
USD/CHF	81
EUR/JPY	109
GBP/JPY	137
AUDJPY	106
EUR/GBP	41
EUR/CHF	85

From the table you can see that almost any pair could be traded during this period, because this trading session, especially when it overlaps with London’s one provides tons of liquidity. The huge monsters of the FOREX market are the US Banks that start to toss and turn their billions among themselves and with European whales (such as UBS or Deutsche Bank) in the morning.

Because of the fact that the USD takes part in 80-85% of all transactions, US news and macro data releases will be extremely significant for the market movement in the period of the New York session. Depending on whether data appears better than expected or worse than expected, it could lead to sloppy & choppy price action, causing the dollar to jump up and down.

What else should we know about the New York trading session?

1. Due to overlapping with London session, the morning liquidity is higher than the evening one. Because the European trading day comes to an end, liquidity gradually decreases during the second half of the trading day of the NY session.

2. Most information of important macro data and news releases happen in the morning of the New York session. As we’ve noted already, the US dollar takes part in 80-85% of all transactions, so these macro events could seriously shake the market.

3. Friday evening is usually a very calm period – because both Japan’s session and the European one is already closed for weekend.

4. This in turn, could lead to some reverse moves on the market on Friday’s evening, because US traders can turn to taking profits or just closing positions to avoid unwelcome risk exposure due to possible news over the weekend.

BIG BEN time – London trading session

2011-09-03T12:35:00.000+05:30

Commander in Pips: When the Asian market participants little by little finish their trades and prepare to sleep – their European counterparts are taking the next leg of the FOREX relay and starting their business day. This usually happens from 7:00-8:00 GMT in the morning. The London session gradually fades to 16:00-17:00 GMT. As with the “Tokyo” session, the “London” session includes not only UK trading activity, but overall European trading. There are some economic centers in Europe besides the London (Amsterdam and Frankfurt, for example), but it happens that historically, London has become the trading and economic center of Europe.

As we already know, the London session takes first place among others in terms of trading volume. According to the Bank for International Settlements (BIS), trading in London accounted for 36.7% of the total, making London by far the most important global center for foreign exchange trading. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price.

Pair	London session
EUR/USD	110
GBP/USD	130
USD/JPY	68
AUD/USD	81
NZD/USD	74
USD/CAD	95
USD/CHF	103
EUR/JPY	131
GBP/JPY	149
AUDJPY	102
EUR/GBP	67
EUR/CHF	112

As statistics shows, almost any pair is suitable for trading during this period, because the European trading session has really huge liquidity. Still, we can make some notes here:

- Since the major news events and macro data released during this time generally touch European currencies (EUR, CHF, GBP), trading the major pairs (EUR/USD, GBP/USD, USD/CHF, USD/JPY) looks logical. Besides, these pairs have the tightest bid/ask spread amongst the others.

- Second, the London trading session overlaps with Tokyo a bit, so Yen crosses could be strongly volatile, especially at the beginning of London trading time. Such pairs as GBP/JPY, EUR/JPY could be really active, although the bid/ask spread will be greater.

- European crosses (EUR/CHF, GBP/CHF) also show nice activity during this period.

What else should we know about the London trading session?

1. Although we’ve noted that the London trading session crosses with Tokyo in the morning, it also crosses with New York’s one in the evening. That’s very important.

2. Due to this double crossing and huge liquidity of London trading time itself, there is no wonder that the major part of daily transactions take place precisely during the European session. This, in turn, leads to highest liquidity and the tightest spreads in the overall day.

3. But not all trading choices are so unclouded. The largest number of participants and transactions leads to greater volatility and larger moves on the market. This is a double-edged sword – it provides more great opportunities for trading as well as increased risk.

4. Very often, most trends begin during European session, but then a trend’s development could be different. Trends could reverse at the end of London session, if European participants decide to take profits or it can continue through New York’s trading time.

5. As a rule the London session has temporary decreasing in activity in the middle of the day. Many traders leave the office to have a lunch before the start of New York’s trading time.

Japan trading session

2011-09-03T12:34:00.000+05:30

Commander in Pips: When we talk about the “Japan” trading session, it does not mean that there are only Japanese trading forex during this time. This session is sometimes called the “Japan Session” or “Tokyo Session” instead of the "Asian Session" because, as we’ve already estimated, the Yen is the third most traded currency, and, as we’ve talked about in the previous chapter – Tokyo is the third largest trading center in the world.

Statistic tells that about 1/5 of all daily transactions happen during Japan’s trading session. Also the Yen takes part in 16-17% of all forex transactions. Sometimes this trading session also called the “Asian Session” for two reasons. First, Tokyo and Japan is an economic center of Asia. Second, not only Japan trades during this time period. A huge volume of transactions comes from Singapore, Malaysia, Hong Kong, China and Australia – the Sidney trading session mostly overlaps with Tokyo’s one.

The major reason, why we talk about each trading session separately and in detail is the fact that different pairs trade differently during each session. Let’s take a look at trading ranges of different pairs during the Asian session:

Pair	Asian session
EUR/USD	75
GBP/USD	90
USD/JPY	55
AUD/USD	80
NZD/USD	63
USD/CAD	54
USD/CHF	66
EUR/JPY	107
GBP/JPY	122
AUDJPY	94
EUR/GBP	80
EUR/CHF	82

As you can see from the table, such pairs that include the AUD, NZD or JPY are the most actively traded. Here is why:

- During Asian trading session news from Australia, New Zealand and Japan are released. If your trading plan includes possibility of making trades on news releases, this could be the best time to trade those currencies. Besides, when a new day has begun, Japanese companies start to make business and more and more yen pass from one hand to another;

- Now China is one of the biggest economies in the world and it has great influence on Tokyo’s trading session. China is one of the world’s largest consumers of resources and goods – so, Japan and Australia heavily depend on Chinese demand, and when some China economy macro data releases – it can lead to large volatility in AUD and JPY pairs.

All these facts lead us to the conclusion that during the Asian session it is better to trade pairs that include the JPY, AUD and NZD currencies. And statistics confirm this assumption (look in the table again).

What else should we know about the Japan trading session?

1. The session approximately starts at 23:00 on Greenwich and gradually fades to 8:00 in the morning of the next day. This is equal to 19:00-04:00 EDT in summer and 18:00-03:00 EST in winter.

2. As we’ve said, the Tokyo trading session is not limited by Japan itself. TA solid part of overall transactions comes from Singapore, Malaysia, Hong Kong, Australia and China.

3. As you know Japan’s economy is hugely based on Export rather than on Import, Hong Kong, in turn is primarily a financial centre - that’s why the major participants of these trading hours are commercial and Central banks, and different exporters. Due to these reasons it’s become clear why a lot of transactions take place during this time, especially if we will take into consideration the rapidly growing economy of China.

4. As a rule, liquidity in this session thinner than during the London or New York sessions. This, in turn, very often leads to consolidation in the market – when the market stays in some fairly narrow trading range. But this has positive sides also. First – currencies trading in a range makes it possible to trade breakouts when the Tokyo session will gradually shift to te London trading session and activity starts to increase. Second – range-bound prices make it possible to trade intraday with reasonable risk.

5. Strong moves in Asia Pacific pairs are more probable than in non-Asian Pacific ones. Now I am talk about AUD, JPY and NZD.

6. Usually the most active part of the trading session is in the morning, when major parts of different financial and macro data released. But this is typical for any trading session.

7. Some of you, who may be deals with stocks, knows, that stock traders in the US always look at the EU trading sessions, for example on European DAX Stock Index. The same is true in FOREX. The Tokyo session is the earliest one, so European traders as well as Americans watch its results to create or adjust possible strategies till the end of the trading day.

8. For the Asia region in turn, the New York trading session precedes Tokyo’s session. And if there was a strong move during New York time, the market very often turns to consolidation, (i.e. stays in some range) during Asia time.

Pipruit: Oh, finally I’ve heard such words as “trading range”, “consolidation” and something else like that. I’m just starting to feel the spirit of trading.

Commander in Pips: I’m glad that you’ve got some partial relief. But now it’s to time to strain again and come back to education.

Pipruit: Aarrgh...

Trading sessions

2011-09-03T12:32:00.002+05:30

Pipruit:Sir, can we finally turn to some real FOREX stuff? I’ve tired already with this “around” talks, concerning, futures/spot, banks, market makers, trading diagrams, history and other things. Although I have to say that some of these things are exceptionally important and some are interesting, but still I wish to turn to FOREX trading directly…

Commander in Pips:Yes, I think the time has come for this purpose. And we will start with the timing of FOREX. In other words, when can we trade it, and what is the difference is between different trading times.

Pipruit:Huh, you think that it’s funny, do you? Even I already know that FOREX is a 24 hour market. What the difference does it make what time of day I decide to trade it?

Commander in Pips:Oh really? You will be surprised, but FOREX has its own time structure. This means that it could move up, it could move down, but there is also a time when it could just go almost nowhere. What time do you prefer to trade?

Pipruit:Well, I prefer to see some movement, of course, better upward. But downward is not bad also.

Commander in Pips:And how do you intend to recognize the right times for market movement?

Pipruit:Well, I don’t know…

Commander in Pips:That’s why it will be the next lesson. Ok, let go through it…

Before shifting to investigating the most acceptable time for your trading, let’s take a look at the entire FOREX trading day. Market participants mark out four different parts of it. These parts are called “trading sessions”. These are: the Sydney session, the Tokyo session, the London session and the New York session. Although there are 4 trading sessions, it does not mean that each one continues for 6 hours. These sessions are crossed among themselves, or we might say, the sessions overlap each other. Furthermore, you know that during the winter time most countries have to adjust clocks for winter time, so as in other countries. That leads to some shifting in times of different trading sessions so the degree of overlapping could be different, depending on time of the year. So, let’s take a look at the timing of different trading sessions:

Summer (Northern Hemisphere)

Time Zone	EDT	GMT
Sydney Open Sydney Close	6:00 PM 3:00 AM	10:00 PM 7:00 AM
Tokyo Open Tokyo Close	7:00 PM 4:00 AM	11:00 PM 8:00 AM
London Open London Close	3:00 AM 12:00 PM	7:00 AM 4:00 PM
New York Open New York Close	8:00 AM 5:00 PM	12:00 PM 9:00 PM


Sydney Open Sydney Close	4:00 PM 1:00 AM	9:00 PM 6:00 AM
Tokyo Open Tokyo Close	6:00 PM 3:00 AM	11:00 PM 8:00 AM
London Open London Close	3:00 AM 12:00 PM	8:00 AM 5:00 PM
New York Open New York Close	8:00 AM 5:00 PM	1:00 PM 10:00 PM

In fact, this division into different trading sessions is mostly relative. What does it mean, for example, the end of Tokyo session - all Japanese are going to bed? Of course not! This time just approximately indicates the reduction of trading activity in a particular region.

Second item – The Tokyo trading session is very similar to the Sydney one. In fact, this trading session also includes the trading times of such large participants as Hong Kong, Singapore, China, Malaysia and others. These markets are showing gradual growth in trading volumes and becoming more and more important.

Third important item - There is different winter time adjustment in the Southern and Northern hemispheres. You can see that North (New York) adjusts time for 1 hour back and South (Sidney) for 2 hours forward. This happens because seasons are opposite in different hemispheres.

Here is the same information, but in picture. The overlaps of cross-continental trading sessions (except Sydney + Tokyo) are marked on time scale:

According to Bank for International Settlements, trading in London accounted for 36.7% of the total, making London by far the most important global center for foreign exchange trading. In second and third places respectively, trading in New York City accounted for 17.9%, and Tokyo accounted for 6.2%. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price.

The roughest period in the market is during crossing of different trading sessions. During this time, more and more participants enter the market and trading volume increases significantly. Mostly important is the overlap of London and New York City sessions, because, as we’ve estimated, it’s more than 50% of overall daily trading volume.

Now let’s take a look at volatility – the average price range in pips during different trading sessions. Pip is equal to 0.0001 of the exchange rate:

Pair	London	New York	Tokyo
EUR/USD	103	86	70
GBP/USD	131	103	97
USD/JPY	68	60	50
AUD/USD	87	84	80
NZD/USD	79	73	67
USD/CAD	94	88	55
USD/CHF	104	85	63

Here we can see that the price movement value is also greater with those sessions that have greater trading volume. The European trading session is the most active as in terms of trading volume as well as in terms of price movement.

Look in the rearview mirror

2011-09-03T12:29:00.000+05:30

Pipruit: And how did it happen that the dollar became the dominant currency in the world?

Commander in Pips: In general there were a couple of major turning points – the Bretton Woods System and the Marshall Plan after the WWII.

Bretton Woods System

Closer to the end of WWII has appeared a necessity to develop new rules of international commercial and financial relations among world’s major industrial states. For that purpose 730 delegates from 44 Allied nations gathered in Bretton Wood (USA) for the United Nations Monetary and Financial Conference in 1944. The major result of this conference was a decision that all countries should maintain a fixed rate for their own domestic currency in terms of gold within a 1% deviation (plus or minus). Also this conference established the International Monetary Fund (IMF) and the International Bank of Reconstruction and Development (IBRD). If, for example, the rate of some national currency skewed more than 1% to one side or the other from the fixed rate, that country should use their own gold reserves to reestablish equilibrium. If some country did not have a sufficient amount of gold reserves – it could call for IMF credits. That was the major purpose of the IMF – to provide credits to reestablish the normal currency rate in terms of gold, in other words, liquidate the current account deficit.

But the major problem began appeared after WWII, when the totally destroyed European economy couldn’t maintain any fixed rates for European currencies to gold. Because the major portion of gold reserves has been spent for military purposes, national currencies of Europe had totally collapsed compared to the USD due to absolute destruction of some nations’ economies. European capitalism suffered from a huge dollar shortage. The IMF couldn’t help in these circumstances, because according to the Bretton Woods Articles of Agreement, the IMF could make loans only for current account deficits and not for capital and reconstruction purposes. But Europe desperately needed long-term investments for rebuilding its totally destroyed economy after WWII. IBRD also couldn’t help, because had only a $570 million contribution from the USA. According to IBRD policy, it could provide loans only when its repayment was assured. This was impossible with most European countries after the war. In turn, the United States was running a huge balance of trade surpluses, and the USA’s reserves were immense and growing. It was necessary to reverse this flow. Dollars had to leave the United States and become available for international use. In other words, the United States would have to reverse the natural economic processes and run a balance of outbound payments. All these circumstances led to the Marshall Plan…

Secretary of State George K. Marshall Plan, aka European Recovery Program (ERP)

This plan was announced by its author in June 5th 1947 in Harvard University. In general, the Marshall Plan (officially the European Recovery Program, ERP) was the primary program, 1947–51, of the US for rebuilding and creating a stronger economic foundation for the countries of Europe. The total amount of funds that were involved in this program was about $13 Billion. Great Britain, France, Italy, Germany and Netherlands received the major part of this help.

What was the reason for this plan? As we’ve said, after WWII, the European economy was effectively destroyed; nearly all of the gold reserves of European countries had been spent on different military purchases. In one word, European nations had not even one single strong currency to reestablish international trade, and no machines, plants and factories to restart domestic industrial production. Last, but not least, it had no money to buy all any of these items from other countries.

This situation also was absolutely unwelcome for US and Canada, because they had demand only from domestic markets and couldn’t sell their goods internationally. These were the reasons the ERP had come to life.

According to the ERP, the US provided $13 billion during 4 years that could be spent by European countries for purchasing different US made goods, machines and equipment – all that was necessary to develop each nation’s own industrial production. As a result Europe has received the necessary equipment and the US gained an additional international market where it could offer its own goods. This stimulated the US national economic growth and simultaneously promoted more international trade without any additional limitations. European countries that were involved received the funds were called The Organization for European Economic Cooperation.

But money used for the ERP program was not just a gift to different European countries - it should be repaid. American suppliers sold their goods for USD that had been credited against the ERP funds which was provided to a particular country. Then, this country had to repay this credit, but in its national currency. This amount in local currency was transferred into a counterpart fund. This fund could be used for further different investment programs by ERP countries.

As a result, the Europe economy grew 35% during the ERP time. The international transactions and trade had become simpler and had fewer limitations than before WWII. Europe has raised their own economy and the US has received new international markets in which to sell their own goods. This also stimulated the US national economy.

Bretton Woods, then, created a system of triangular trade: the United States would use the convertible financial system to trade at a tremendous profit with developing nations, expanding industry and acquiring raw materials. It would use this surplus to send dollars to Europe, which would then be used to rebuild their economies, and make the United States the market for their products. This would allow the other industrialized nations to purchase products from the Third World, which reinforced the American role as the guarantor of stability. When this triangle became destabilized, Bretton Woods entered a period of crisis that ultimately led to its collapse.

But for us, the major conclusion is that the US Dollar became and still is the dominate currency in international trading. Think about it – all funds used in the ERP were provided in US Dollars. European countries bought US goods for US Dollars. The USD started to dominate in the world economy already in 1940s-50s. Besides, the US had the largest gold reserves. There were just no real rivals to it.

Bretton Wood System crisis

After WWII the US held about $26 Billion of gold reserves out of total reserves about $40 Billion - it’s over 60% of the overall world’s reserves! As world trade increased rapidly, the size of gold base increased just a few percent.

The design of the Bretton Woods System was that nations could only enforce gold convertibility on the anchor currency—the United States’ dollar. Gold convertibility enforcement was not required, but instead, allowed. Nations could forgo converting dollars to gold, and instead hold dollars. Rather than full convertibility, it provided a fixed price for sales between central banks. However, there was still an open gold market. For the Bretton Woods system to remain workable, it would either have to alter the peg of the dollar to gold, or it would have to maintain the free market price for gold near the official price of $35 per ounce. The greater the gap between free market gold prices and central bank gold prices, the greater the temptation to deal with internal economic issues by buying gold at the Bretton Woods price and selling it on the open market.

When Bretton Woods had started to work, there were 3.1 times less dollars deposited in foreign banks than the value of US gold reserves. In the 1970s there were 6.1 times greater dollars in turnover than US gold reserves.

Here is appearing the so-called Triffin’s paradox: according to the Bretton Woods system, the amount of the world reserve currency should be equal to the gold reserves of the issuing country (USA). If there are more USD issued than US gold reserves allow, then there will be a problem with potential exchanges of reserve currency into gold, and the Bretton Woods system is designed for free, unlimited exchange between US Dollars and gold. From the other side, fast growth of international trade demands more currency be available to serve all trading transactions and the international trading growth was much faster than the growth of gold reserves. In the endm this became a reason for cancelling the gold standard and the fixed US dollar rate to gold of $35 per 1 Troy Oz. And here is how it has happened…

After some time in the 60s the German and Japanese economics rose significantly and their gold reserves became even greater than those of the USA. They had gained monetary interdependence by the return to convertibility of Western European currencies in 1958 and the Japanese yen in 1964. This led to a vast expansion of international financial transactions. In fact, Germany and Japan had each become great economic powers.

In the meantime, the US had problems due to the Cold War and the Vietnam War that caused growing inflation and an increasing trade deficit. Due to these reasons there was growing dissatisfaction with the privileged role of the U.S. dollar as the international currency. In an increasingly interdependent world, U.S. policy greatly influenced economic conditions in Europe and Japan. In addition, as long as other countries were willing to hold dollars, the USA could carry out massive foreign expenditures for its own political purposes—military activities and foreign aid—without the threat of balance-of-payments constraints.

In the late 1960s, the dollar was overvalued with its current trading position, while the Deutsche Mark and the yen were undervalued. Naturally, the Germans and the Japanese had no desire to revalue and thereby make their exports more expensive, whereas the U.S. sought to maintain its international credibility by avoiding devaluation. Meanwhile, the pressure on government reserves was intensified by the new international currency markets, with their vast pools of speculative capital moving around in search of quick profits.

By the early 1970s, as the Vietnam War accelerated inflation, the United States as a whole began running a trade deficit. The crucial turning point was 1970, which saw U.S. gold coverage deteriorate from 55% down to 22%. This, in the view of neoclassical economists, represented the point where holders of the dollar lost faith in the ability of the US to cut its budget and trade deficits.

In 1971 more and more dollars were being printed in Washington to be pumped overseas to pay for government expenditures on military and social programs. In the first six months of 1971, assets of $22 billion fled the US.

Furthermore, then France exchanged their dollars to the physical gold with the US. Germany and Japan epressed their wish to do the same as US Gold reserves fell to $11.1 Billion. In response, on August 15, 1971, Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window", making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the Nixon Shock. The Bretton Woods system and dollar-gold standard has failed.

Bretton Woods II

Some refer to the current currency exchange system as Bretton Woods II. The major reason for this is the fact that we still have a single dominant currency in the world, the US Dollar, and other nations on the periphery threatening to destabilize that position. In the 1960s, the periphery was Europe and Japan. This old periphery has since graduated, and the new periphery is Asia and Emerging markets.

Participants

2011-09-03T12:28:00.000+05:30

Pipruit: Greetings, commander, I’ve heard that in recent time the share of bank’s transaction on FOREX becomes lower than even 10 years ago, and you’ve said that FOREX in general an interbank market. So, who are the major participants in FOREX trading?

Commander in Pips: You’ve asked the right question, son. Indeed the part of pure banking transactions jas become lower. So let’s talk about the different participants on the market and their role in FOREX.

According to a study by the of Bank for International Settlement, in early 90’s banks were responsible for 90% of FOREX transactions. That meant that in 9 out of 10 trades, the FX desk of some bank was on one side of the transaction. By 1998 this number gradually reduced to approximately 82%. In 2004 this number was lightly below 65% and current estimate tells us that banks barely account for about half of transactions, about 53%. Now we are talking about the spot FOREX. On other market segments, such as swaps for example, the share done by bank could reach as much as 90%.

So, as we’ve discovered, the biggest participants in the FX market are banks. What banks? According to a survey by Euromoney FX, the top 10 currency traders are:

In fact, you can see that Large Banks determine the trading conditions on FOREX. Because FOREX is an Interbank market. Due to huge trading volume among themselves, these banks, that I’ve mentioned in the table have very tight spreads – 0.00005-0.0001 or even no spread at all. In fact we trade FOREX with spread that is based on their estimation. It means that if they will widen this spread for some reason, then, we also will see wider spreads on our computers. Every large bank could have billions USD of daily turnover on behalf of customers and for the bank’s own account.

Another type of large participants are Commercial companies and multi-national corporations. Their task on FX market is usually twofold. First, they make foreign exchanges to pay for goods or services or to pay employees in different countries. Second, they need to hedge their currency risks, if for example, the revenue of a company is earned in another currency, outside the region of domiciliation, i.e. so-called export companies. Excellent examples of such companies are almost the whole Japanese economy. What is a currency risk? For example, Toyota Motors sells cars in US for US Dollars, and during the year the Yen becomes more expensive compared to US Dollar (the yen’s rate becomes higher). It means that when they will convert revenues that they’ve received from US sales in USD into Yen – the revenue will be lower, because the rate of yen becomes higher and Toyota will receive less Yen for each US Dollar of revenues. At the same time, many expenditures stay the same, because Toyota pays Japanese employees in yen. It leads to lower net profits for the company in yen. That is a currency rate risk.

But it’s worth saying here, that companies trade much smaller amounts of currency compare to banks and speculators. At the same time trade flows could have a significant short term impact on currency rates, such as when large multi-national corporations close or open positions that are unexpected by other market participants.

Central banks, such as the ECB, Bank of Japan or Fed Reserve, can also actively take part in the FOREX market for their own purposes. It could be, for example, international government payments, foreign reserves transactions or other processes. The major event that strongly influences the FX market is changing the interest rate by some national bank. They do this to try to control inflation and to stimulate economic growth. By doing this, central banks can affect the national currency valuation. Due to having official or non-official target rates for their currencies, Central banks can intervene as directly as verbally, if their assessment of national currency rate to other ones seems too high or too low. Usually such kind of interventions or its announcement can lead to a strong move in the market, but only in a very short term period. As we’ve said earlier even Central Banks can’t struggle with combined resources of other participants in the long term.

Hedge funds control billions of dollars and could borrow even more. As we already know, 70-90% of transactions on FX market have a speculative nature. So since 1996, hedge funds are the greatest part of these transactions after banks. They even can struggle with Central Banks intervention at predetermined circumstances.

Investment management firms, such as pension funds, mutual funds and endowments, who usually manage large accounts on behalf of their clients, use the FX market to facilitate transactions in foreign securities. For example, if some mutual fund that is domiciled in US intends to purchase stocks of some Japanese company, it needs to convert a sufficient amount of USD into JPY to accomplish this purchase. During recent times, such investment management firms started to hire FX specialists that control their currency exposure depending on expectations of future currencies rates change. For example, some fund has 10% in cash and anticipates EUR/USD rate growth in nearest time, so they could exchange USD cash into EUR to get some appreciation of their value assets in USD.

Retail foreign exchange brokers are the companies, who mostly deal with individuals, private investors or small commercial companies. They are, in fact, rivals to banks who provide the same services. Sometimes FX retail brokers are confused with market makers, but they are not the same. An FX broker acts on the FX market as an agent of a customer by seeking the best price in the market for a retail order and dealing on behalf of this customer. They charge a fee/commission in addition to the price obtained in the market.

Market makers are quite different companies, although there is not much different with FX brokers at first look. They typically act as principal in the transaction versus the retail customer, and quote a price they are willing to deal at—the customer has the choice whether or not to trade at that price. They do not usually charge any additional fee except for the bid/ask spread that we’ve discussed already in previous chapter. Although this spread may be as small as 0.0002-0.0005, a market maker still can get a significant profit due to large amount of transactions with their customers. In fact, roughly speaking, market makers break their own one big trade with large bank on the one side, into many small trades with small customers (individuals) from another side. And without this type of transaction, it would be very difficult to for most individuals to trade FOREX.

In assessing the suitability of an FX trading service, the customer should clearly understand the difference of whether the service provider is acting as principal (Market maker) or agent (Broker). When the service provider acts as agent, the customer is generally assured of a known cost above the best inter-dealer FX rate. When the service provider acts as principal, no commission is paid, but the price offered may not be the best available in the market—since the service provider is taking the other side of the transaction, a conflict of interest may occur.

Currently, FX Market Makers usually have wider spreads, especially in the retail segment of FX business that primarily deals with individuals.

Non-bank foreign exchange companies take a small part of overall FOREX market. In fact, they offer currency exchange and payments to individuals or small companies. They are almost akin to FX brokers but do not offer speculative trading – only money transfer/payments in conjunction with currency exchange procedure. In fact they are involved in real delivery transactions, although with small volumes.

Money transfer/remittance companies are almost the same to Non-bank foreign exchange companies, but they offer primarily money transfer, and may charge more for currency exchange, if they offer it at all. One of the best known money transfer companies is Western Union. The annual value of remittances is about $370-400 billion.

ECN (Electronic Communications Network) – we’ve talked about this type of participant already, so I’ll just give the short reminder here. This is a type of electronic system that facilitates trading of financial products. In fact, ECN is some kind of electronic server that matches contra-side orders of participants/subscribers (i.e. a sell-order is "contra-side" to a buy-order with the same price and share count) for execution. The ECN will post unmatched orders on the system for other subscribers to view. Generally, the buyer and seller are anonymous, with the trade execution reports listing the ECN as the party. In fact, this is small private exchange that has a bit different and separate regulation rules by law.

To trade with an ECN, one must be a subscriber or have an account with a broker that provides direct access to trading with particular ECN. The most well-known ECN is NASDAQ. An example of a FOREX ECN platform is Currenex.

The structure of the FOREX market

2011-09-03T12:26:00.000+05:30

Pipruit: Well, it looks like I’m starting to understand some things, but one thing is still confusing me. Where is the center of FOREX, the major transaction point, control center or something? Who regulates and coordinates all this stuff? For example, I know that on stock market, the stock exchange is a central point, because all transactions are processed by the exchange itself and in line with strict exchange rules. Does FOREX have something like that?

Commander in Pips: You will be surprise with this, but my answer is “No”. FOREX is a over-the-counter market without any central regulator or processing center. It looks more like the global internet. All FOREX transactions are electronic and the market works in 24/5.5 mode. All FOREX participants are linked to each other.

Pipruit: Does it mean that I can sell my 50 EUR directly to the Federal Reserve?

The structure of the FOREX market

Commander in Pips: Not quite. The reason is that FOREX is not a single level net, it has some hypothetical grades. I say “hypothetical”, because these grades are not fixed in reality and in any document or anywhere else, but they still exist. The point is that for any transaction on FOREX, some documentary basis is needed. If you, as an individual, want to trade on theFOREX market, you will have to sign a typical agreement with some FOREX broker that provides access to the FOREX market for individuals. This agreement should contain all the rules and definitions for transactions and trading. It may be used in the case of some disagreement or even a court case. Individual just can’t sign such agreements with Central banks, because the latter do not deal with the former due to legislative language. Also most individual can’t do that with any large bank directly, because large banks demand too much start-up assets for trading. But if you’re richer than Mr. W. Buffet, than you possibly can start directly with the largest bank.

Pipruit: And what should I do then, what if a bad broker tries to deceive me and gives me unrealistic quotes for trading?

Commander in Pips: Don’t panic, son. It’s not so awful like you imagine. The point is that for the most part, brokers who work with individuals, do not make any real currency settlements. Usually they are linked with some bank or bigger broker, who in turn links with a bank. Your broker just transfers FOREX quotes of this bank to individual clients. There are some algorithms for hedging total client positions that exist for brokers, but for simplicity we’ll say that all transactions of individuals are transferred by the broker to the bank. It appears that the broker is just an intermediate part in the chain, just a retailer. The small banks, in turn, are linked with bigger ones and also can be linked among themselves. Big international banks are linked with each other and with Central Banks. National Central Banks are linked with each other also. When I say “linked”, this means that they have some electronic connections and legal agreements for regulating FOREX transactions amongst themselves. For example, banking activity on FOREX is regulated by national and international law and also two-sided Interbank agreements. Central Bank activity is also regulated by international law and so on. And, as you understand, each part in the chain deals with different tasks. National Central Banks track the overall national currency rate; make transactions in huge volumes with other Central Banks with real settlements. They make payments due to large international contracts and make transactions with big private banks. Big private banks make transactions on FOREX due to contracts with big national companies and other clients (which can also include FOREX brokers), smaller banks do the same, but clients are also smaller. Both small and big banks as a rule have departments who work on FOREX with individuals who have enough trading assets to qualify.
Pipruit: Wow, looks big, but not very complicated. Let me repeat, what I understand. So, structure looks like this:

First of all, the market is spread all over the globe with no control or central processing center so it has no central location. It is traded globally by a huge number of participants – individuals, banks and organizations. And these participants have the possibility to choose with whom they want to trade, based on trading conditions, reputation and other considerations, but inside some hypothetic levels:

- On the ground level are individuals, who deal with bank’s exchange centers and small FOREX brokers. Sometimes, individuals can deal with large banks directly if they are rich enough and want to invest really big money in the currency market;

- FX Brokers, in turn, are linked to banks and should just transfer the bank’s quotes to individuals and individual’s transactions to some bank. This is the first level;

- Small banks are linked with each other and with larger banks not just inside their own country but around the globe; also they can make transactions with National Central Banks – the second stage.

- Large banks are the same – they are linked with each other around the globe and with National Central Banks;

- The last stage is national central banks that are linked with each other.

And all these communications have legal basis due national, international law and agreements.

Commander in Pips: Bull eye!

Pipruit: But now I can’t quite understand how quotes for different currencies are almost the same all around the globe? I mean that a big bank and a small broker have almost the same quotes. Why do the quotes have such very small deviations on different hypothetical levels?

Commander in Pips: Well, the answer is obvious. The major transaction volume is through the Central Banks. So they estimate and transfer their quotes to large banks. Large banks, in turn, transfer them lower to smaller banks and so on until you will see these quotes from your FX broker on your computer. Due to pure electronic quoting and transaction systems, these quotes are transferred during a fraction of a second. If someone on the lower levels will try to skew quotes to one or another side, trying to make money, they can end up getting a really big loss, because they have to predict the quotes from the higher levels. There is too much risk with it. Banks are the most highly regulated authorities and any unwelcome loss on a balance sheet is very dangerous. They just make Bid/Ask spread a bit wider to make their own money, and transfer the quotes down to lower levels. That’s much safer and simpler.

Pipruit: Does this mean that big banks trade with tighter Bid/Ask spread than we do?

Commander in Pips: Absolutely, they even can trade without any spread, at least on major pairs.

Pipruit: It sounds logical, because volumes are much greater than on the lower levels.

Commander in Pips: That’s right. So let’s try to imagine all this stuff in pictures:

The structure of the FOREX market

Pipruit: Wow, wow, wow – hold your horses… Please not so fast. I’m totally messed up in this picture – it looks like absolute chaos out there. Say, we’ve just discussed that FOREX has a structure and then you show me this chaos.

Commander in Pips: What’s wrong, son?

Pipruit: How this chaos could function at all!

Commander in Pips: Looks like exchange traded markets is more attractive for you, eh. Well, It’s not as chaotic as it seems, because, as we’ve just talked about, there is a hierarchy that exists among the participants. The scheme above just shows you that FOREX does not have an absolute center like an exchange. But to become absolutely clear for you, let’s make another picture:

The structure of the FOREX market

Pipruit: That’s much better, thanks. But some positions I do not understand still. What are ECN and also the black rectangle – Reuters dealing trading platform or electronic brokering services?

Commander in Pips: ECN - Electronic Communication Network. This is a type of electronic system that facilitates trading of financial products. In fact, ECN is a kind of electronic server that matches contra-side orders of participants/subscribers (i.e. a sell-order is "contra-side" to a buy-order with the same price and share count) for execution. The ECN will post unmatched orders on the system for other subscribers to view. Generally, the buyer and seller are anonymous, with the trade execution reports listing the ECN as the counter party. In fact, this is a small private exchange that has a bit different and separate regulation rules by the law in most cases.

To trade with an ECN, one must be a subscriber or have an account with a broker that provides direct access to trading with a particular ECN. The most well-known ECN is NASDAQ. An example of a FOREX ECN is accounts that use Currenex.

As for the Reuters Dealing Trading Platform or its rival Electronic Brokering Services (EBS) – this is just software that allows you to make trades on Over-the-counter markets. Counterparties can see orders of each other, put in their own orders and make deals. All participants of this software have to sign a typical agreement that is regulated trade rules via this trading terminal. Another example of such a terminal that is also ECN, by the way, is a Bloomberg Tradebook.

Pipruit: Can I also trade via Reuters Dealing or Bloomberg?

Commander in Pips: Well, you can if you’re ready to pay about 3000$ per month for using this software… But for you there will be no sense to do that. Understand that participants of this trading software are large, medium-sized and may even be some small banks. You can imagine the value of a single trade. Second, these banks do not just trade with each other. Risk-management has forced them to establish limits on each other depending on credit quality, i.e. credit rating. The higher the rating of the bank – the greater credit limit bank can get from a counterparty bank, i.e. the greater volume of currency the bank can trade in every trade. In fact, this is the Interbank market. Other participants take part in it via different kind of middlemen, such as FX retail brokers, Retail ECN that, nevertheless still leads to small banks. Many ECN brokers link to some large bank. For example, Matchbook FX – a well-known ECN that had as members such banks as Citibank, Goldman Sachs, UBS and others.

There is quite different story with the futures market

2011-09-03T10:08:00.000+05:30

Pipruit: Commander, once you’ve said that futures market is also exchange traded, so maybe we should skip this part, because I expect nothing really new from this comparison, unlike stocks vs. FOREX…

Commander in Pips: You think you’re very smart, eh? Although you’ve noted correctly about “Exchange traded”, indeed, futures and stock markets have a lot of common qualities. But at the same time, futures market has some extremely important differences that make currency futures more attractive than spot FOREX for many traders.

Pipruit: Hm, and what are they?

Commander in Pips: For example, you can trade currencies on futures market…but in the beginning, I will point qualities that are common for futures market as for stock market without many details, because we’ve talked about them already in previous part of this chapter.

First of all we will talk about currency futures and not about overall futures market. What is common between futures and stock markets?

1. Both are exchange traded markets. This leads to additional fees and presenting of middlemen – brokerage firms, because places in the Trading Pit on the exchange to trade futures are also very expensive.

2. Both markets are highly regulated by government authorities and exchange itself. The SEC is watching over the stock market and the NFA (National Futures Association) watches over the futures markets. It means that both of these markets are safer than FOREX market in terms of government monitoring. Particularly, the NFA assures that market participants and, more specifically, solicitors such as brokerage firms, brokers, and commodity trading advisors are conducting business in an honest and candid manner. But it’s worthy to say here, that now many US FX brokers are becoming a member of NFA both to attract clients and to comply with new regulations. This is a positive sign. Most of these are well-known brokers with fairly good reputations.

3. As with stock brokers, futures brokers have the same quotes, because all quotes come from exchange and are fixed there. This is a big advantage, because you definitely know what price was valid at a definite period of time. You can track it up to the tick. The FOREX market can’t offer that.

4. Both markets use segregated accounts for client’s assets. We’ve talked about it in a previous chapter. This makes client’s assets safer.

5. Lot or contract sizes are strictly determined by the exchange. These can’t be changed by participants.

And now we will turn to particular qualities of futures market and its differences from FOREX.

MYTH #1 FOREX market is greatly more liquid than futures market…

True

Yes, we’ve talked about it already. Approximately $1.5 Trillion on spot FOREX market versus $100 Billion of average daily trading volume of FX futures on Chicago Mercantile Exchange (CME) in 2009.

But

MYTH #2 … that’s why FOREX has higher price certainty and orders execution than futures market.

False

The major question here is as follows: does this liquidity really lead to faster and sharper execution of your orders? Not quite. I give you just an example that could really happen on the FOREX market, especially if you trade large volumes. It not necessary will happen, but it could. When using the CME electronic futures contracts, price doesn’t have to “trade through your limit order” for you to get a fill—you simply get filled as price trades at your order level. And what about spot FOREX brokers, what they really could do to your order? They can fill you, in fact, at any quote that is suitable for them. Why? Because the FOREX market does not have the central place, where all orders are moved to by market participants, and you can’t prove that this is not “market” price, when you get filled with 30 pips slippage, for example. Although this is very rare if you use a good broker, it still could become a reality, just because of the structure of the FOREX market. That’s not what happens when you trade the CME electronic currency futures. All bids and offers are placed in one market and you have direct access to all the bids and offers. Where your order gets filled depends on what orders are available, not upon whether someone else wants or does not want to fill your order. On spot FOREX rather, your broker (for example some small bank or little brokerage firm) could decide not to fill your stop loss order, just because it has not received quotes from its own counterparty (larger bank) and so on. When the quotes come in, the market could be far away from the stop price and you will be filled with slippage. This is not a typical situation for small accounts, but the structure of the FOREX market does not exclude that. And you should know that this, in fact, is possible.

MYTH #3 FOREX market is 24/7 and futures market is not.

False (mostly)

Futures market has GLOBEX electronic session that has a break for trading with just 1 hour per day. So, the futures market is really a 23-hour market.

MYTH #4 FOREX has guaranteed limited risk that couldn’t be exceeded and futures market does not

False

I think that the futures market even safer from this point of view than spot FOREX. The point is that in the futures market you should transfer to your trading account so-called initial margin. It will be different for different currency pairs. This is a minimum amount of money that is demanded by the exchange for opening positions with 1 lot. Its value is calculated by the exchange and varies with the market’s volatility. Also there is maintenance margin that exists. This is an absolute minimum asset value per 1 contract. When your current loss on an open trade reduces the initial margin to the value of the maintenance margin your position will be closed by the exchange itself. For example, if the initial margin for a full contract ($125,000) on EUR/USD is $4320 per contract, the maintenance margin would be about -$3200. So, if you initially transferred only just the initial margin to your trading account, then, your position will be forcibly closed by the exchange when your current loss on position will be: 4320-3200 = $1120. So, you can never lose more, than the initially transferred money.

On FOREX there is a look-alike system that exists, that also driven electronically. But the controller of this system is not an exchange but your FX broker itself. This offers a lesser level of safety. ner here

MYTH #5 Short selling on FOREX is simpler than on futures market.

False

Futures contracts, in fact, are just agreements between two counterparties to make a deal in the future. And in every deal there is always present those who want to buy and those who want to sell. It means, that futures trades act as the same as a spot FOREX trade. Each could be fulfilled at once you have counterparty. Because both of them assume simultaneous buying of one currency and selling of the other one, there are generally no rules about shorting in currency futures.

Of cause exchange traded markets always have greater regulation and sometimes an exchange can stop trading or forbid some operations for some time.

MYTH #6 FOREX offers higher leverage than futures market
MYTH #7 FOREX demands greatly lower start-up assets than futures market

Partially True

We’ve already discussed, that you can start trading spot FOREX even with only $5, although we do not recommend it due some reasons that we will discuss later. Obviously is that you couldn’t trade 1 lot with just $5. So it is on futures – to trade 1 lot you need at least an initial margin about 4300-4500$. But currently the CME has launched mini-contracts and micro contracts for mostly traded major pairs. A mini contract is 0.5 lot and a micro contract is 0.1 lot. A micro contract demands just 432$ as initial margin to start trading. This is 30:1 leverage, because the notional value of EUR/USD micro contract on CME is 12,500$. The usual leverage on FOREX is 100:1, but for successful trading you should not use it totally due to market volatility and money management strategy. Large FX brokers offer lower leverage 40:1 or even 20:1. So, as you can see, the difference Futures with spot FOREX is not so great. The new rules for US forex brokers bring the leverage between these two markets even closer.

MYTH #8 The Futures market is a bit more difficult to trade due to contract time of expiration schedule and delivery risk

True
Each currency pair trade as futures contract and this contract has predetermined day of expiration and/or delivery. So, if you do not intend to make a real delivery of currency, you should make a roll-over – close your position in current contract that is near to expiration and open it in the next period contract. You will know this date far ahead of time, because the exchange has definite rules when different contracts will expire or can be executed for delivery. If you do not want to dig around for all this stuff, the exchange also publish a schedule for the last trading days of each contract. All you need to do is just look in it and make a roll-over. In fact this is much simpler than it looks at first glance.

MYTH #9 The futures market has less available currency pairs to trade and some exotic pairs have a limited liquidity

Partially True

Well, currently CME (Chicago mercantile exchange) has about 40 pairs to trade. These include crosses, exotic pairs and of course 10-12 major pairs. May be some spot FOREX brokers can offer you more exotic pairs. But taking into account the fact that the most part of trades are made with major pairs, this difference looks insignificant.

MYTH #10 The counterparty of all trades at futures market is exchange itself

True

Exchange is a counterparty of all trades on futures market. It’s a guarantor of fulfillment of all obligations at every trade. It means that the exchange finds the counterparty that want to sell and buy from them – simultaneously it finds the party, who wants to buy and sell to them. This is made electronically and simultaneously, so that exchange does not have one-side positions. But this is a great advantage to traders, because the counterparty of all trades on the exchange is the exchange itself. And this fact guarantees fulfillment of obligations on your trade. Furthermore, if you take into consideration the fact that both – the seller and the buyer have initial margins for their trade, you should understand that trade on exchange is many times safer than on the spot FOREX market.

MYTH #11 The Futures market has greater fees than FOREX, so to trade futures is more expensive

False

Because, brokerage fees on the futures market much less than on the stock market. Let’s see – the Bid/Ask spread on CME EUR/USD futures just 1 point or 0.0001. As the value of 1 contract is $125,000, the spread value is $12.50 (=0.0001*125,000). I can say that broker fees for 1 trade that come to about $10 per contract is treated as high. The average fees on futures market $5 per contract. It means that buying and selling 1 contract (accomplish a full trade) will cost you $10 plus a 2 point spread (1 point during buy operation and 1 point during sell) that is $25 - all together $35. This is your total expenses on futures market. Ok, we can even assume the maximum expenses and take $10 per contract. In this case it will be $45.

Now let’s see what we have on FOREX. No fees, right. But spread is typically at least 2.5 points for 1 side of trade. It leads to 5 point on full trade or $50 for full lot on EUR/USD ($100,000). It’s even greater than max fees on futures market! Interesting, right?

But to be absolutely fair, I have to say that brokerage fees do not depend on the size of contract. If you trade micro contract that is 0.1 of normal one – the fee remains the same – $5 per contract. It means that futures market trading costs become less expensive when you trade big volumes, but a bit more expensive when you trade small volumes.

MYTH #12 You can’t see correct trading volume on FOREX or even the correct close price of the day.

True

Indeed how could you see trading volume, if FOREX market is decentralized market, and there is no center where all orders flow? You can see some trading volumes that are provided by your FX broker but this information will not give you the overall picture, because you can’t see the trading volume of other brokers. The situation isquite different on the futures market, because the exchange is the one place where all orders flow and it shows the real trading volume on the whole market.

The same situation is with daily close price. The FX market is 24/7 so it doesn’t have daily close. In fact the daily close price that you see depends on your FX broker and where is it situated. In the UK there will be one price, in Japan there will be another one, since they end the day at different times. On futures market every electronic GLOBEX session has a break for 1 hour. Besides, there is a Settlement (or Pit) trading session that exists and you can choose what quotes you would like to look at. This fact allows you to make correct technical analysis of the market. On FOREX it will be tricky due to the indefinite daily close price.

Pipruit: Wow, say, the futures market looks attractive and different from stock market too, but still more expensive to start trading with. What should we do, sir?

Commander in Pips: Well, personally, I like the futures market. Yes it has its own difficulties compared to spot FOREX, but it also has a great advantage – higher safety and relatively low trading expenses. If you like to trade currencies – you may trade on spot market first, but when you’ll get solid profit and your assets are becoming greater, I think that the best way to continue trading is to shift into currency futures. That’s my conclusion on the comparison of these two markets.

Pipruit: If I understand right, you mean that futures are preferable for trading than spot FOREX. Futures’ trading is cheaper and safer. Besides, answers on MYTH#1 and MYTH#3 tell us that liquidity itself can not really guarantee better orders and trade execution due to the different trading system and market structure of spot FOREX (Over-the-counter market) and Futures (exchange traded market). But it is difficult to start with futures directly, because it demands much larger start-up capital although it still provides you with solid leverage.

Commander in Pips: Yes, you’re absolutely right!

what the about the stock market?

2011-09-03T10:06:00.000+05:30

Pipruit: Sir, I still have some concerns. Yes, we’ve investigated and seen that the FOREX market is the most liquid and huge and is the best of the best, etc. But, the majority time on TV financial news is about stock markets and other stuff that is linked with stocks. Is it correct to compare these markets from the trading point of view?

what the about the stock market?

Commander in Pips: Not quite, because these markets have absolutely different purposes, this is almost the same as compare fish advantages to bird advantages. But during recent times some myths have appeared concerning FOREX and Stock market comparison. Besides these, there are some points that could be used in comparison, because they are common for any trading market. These things have nothing to do with the nature of particular market, but refer to technical issues of market functioning. I mean timing, fees and other things.

Pipruit: Well, this should be even more interesting than I thought.

Commander in Pips: I hope you’re right, so let’s get started on Stock vs. FOREX myths to find the truth…

MYTH #1 The FOREX market is simpler, because the stock market includes about 8000 stocks (NASDAQ and NYSE listing together), and it is difficult to decide, which one should be traded.

Neither true nor false

This is an excellent example of confusing market purposes. First of all, to own a stock is a quite different than to own a currency. Owning a stock gives you the rights of participation in company governance and on a share in its income. Owning the currency is quite a different thing.

And what if you do not intend to hold any stock or currency for a long time and your target is just a speculative income. That’s ok - from trading perspectives and speculative approach to trading, there is no difference which stock to trade, because the major condition for speculating is liquidity. Take any share of a large company (so-called blue chips) and you will almost always have sufficient liquidity for speculation. If you do not know yet what stock to choose – that’s fine you can trade the whole stock market with stock indexes futures, like an S&P500 that includes 500 most large companies or Dow Jones. Or you can buy shares of index mutual fund, or even an ETF that specialized on stock markets.

MYTH #2 The FOREX market is much less influenced by analytics opinion than stock market.

True

In fact, this is an old story, when well-known analyst of large brokerage company gives some recommendation on some stock that is not necessary the real their opinion. This is a big game of big men and the investing public is just a puppet in their hands. You can easily find these facts in the history, when large brokerage firms had held “Buy” recommendation on shares that were falling like a stone. I give you just one example for what this could be done, but there are others also. This brokerage firm has an order for selling the large number of these shares from a big client, or may be this firm itself has a large number of shares and they had already started to sell them off gradually, so they need to hold the price as high as possible.
Current law has a basis for punishing these abuses currently and although the government tries to control these facts and punish for price manipulation, it’s very difficult to prove it. And in spite of any punishment procedures this happens again and again, because the risk/reward ratio for these companies usually is very large.
There is couple of things that make this possible. First, stock analysis is not simple task to do and a very small number of individuals really do it by themselves. You have to be confident in fundamental analysis, math, valuation and book-keeping to do it. This kind of work demands a lot of time. Usually, the public buys some internet bulletins or something like that and it leads to the possibility of influencing public opinion by large brokerage companies. Second, 5% of shares of overall free float is a big amount. Shares spread widely between lots of participants, that’s why if somebody with large amount of shares intends to buy or sell, it could be a big influence on market behavior.

MYTH #3 The FOREX market can’t be ruled by large participants, at least in the long-term

True

We’ve talked about it already in previous chapter. Even central banks can’t move FX market prices at will for an extended period of time. Yes, a Central Bank can initiate a strong, short-term move with currency intervention, but can’t hold it too long because of the huge trading volume.
In opposition to the FOREX market, the stock market is very sensitive to the buying and selling big amount of shares by anyone, for example, large mutual fund. Even rumors can lead to strong movement in price.

MYTH #4 FOREX does not have any middlemen, and stock market has a lot.
MYTH #5 FOREX has no commissions or they much lower than on stock market.

Both True

But I prefer to say that in a bit other way. Middlemen on FOREX are greatly cheaper than on the stock market. The stock market has some types of fees not seen in the FX market. Because the stock market is exchange traded market, the Exchange itself collects fees from client’s turnover. You can pay only these exchange fees if you will buy an exchange membership. But it’s very expensive, for example, according to NYSE data, the cost of membership in 1999 fluctuated between $2mln and $2.65mln. That’s why most individuals trade stocks via different brokerage companies. But the price for that is an additional brokerage fee. Besides the exchange fee and brokerage fee, some brokers have a custodian fee. This fee is for booking and servicing your shares packs (for example, servicing such procedures as splitting of shares, dividends payout, or just for keeping them, etc). The amount of fees and commissions vary amongst the brokers and depends from some factors, such as full-service broker vs. discount broker, your assets value and turnover etc. But average brokerage fees are between 0.19-0.35$ per share. For example if you buy 100 Google shares for $500 per share and sell for $501, you will get profit of $100 but pay a fees between $38-70 (because of fee demands for both part of trade – buying and selling). Of cause, may be if you will show large turnover, your fees will become lower, but even 0.05$ per share is not very cheap.

On the FOREX market, there is a quite different story. Although I think that retail brokers are still middlemen between public and large banks, in the majority cases your expenses are just built into the bid/ask spread and not any additional fees. Due to the extremely high level of competition between FX retail brokers, this spread has gradually become tighter. Now it’s about 0.0002-0.0005 (2-5 pips) in quotes for major pairs. If, for example, current EUR/USD quote is 1.3050, then even 0.0005 spread is just a 0.04%! The highest spread, i.e. expenditures on the FOREX market are at least 2-2.5 times less than the lowest expenditures on stock market.

MYTH #6 FOREX is 24-hour market but stock market is not.

True

We’ve talked about it already in previous chapter. NYSE, for example has strict trading session time, that starts in 8:30 Chicago time and closes at 15:00. There are some limited ways to trade stocks after hours, but these have issues with liquidity.

MYTH #7 Market Orders on FOREX have Instant Execution.

Partially True

I’m not totally agreeing with this, because there is a major difference between trading shares and FOREX. When you are buying or selling even single stock, your order is transferred by the broker to the exchange directly, and after your transaction, the shares really change their owner. This procedure demands time, and during non-normal trading environment (for example during some breaking news release) the filling of orders when their flow to exchange becomes really big, can lead to slippage and delay in execution.

On the FOREX market, the situation is a bit different. First of all, it’s much bigger, so there is a much greater flow of orders needed to lead to slippage in execution. It means that simple individual may do not see any skewing delay or spread widening in quotes, but some bank that trades with large bank definitely will see it. Second, not every transaction that is made by individual is transferred to the real market and leads to direct currency exchange. The conclusion is as follows – FOREX also has slippage, delays in quoting and widening of spread, but usually when trading volumes are really big and on transactions that are made directly on the market with real currency delivery. These divergences may not have impact on public, but sometimes they do, when the trading environment is strongly stressed. But anyway this happens much rarely than with the stock market, as long as you have a good forex broker and a fast internet connection.

MYTH #8 FOREX has no restrictions on short selling.

True

The stock market has some restrictions on short-selling stocks. Sometimes short selling could be forbidden by regulating authorities and/or the exchange itself, for example, during a financial crisis or some strong geopolitical events, such as awar starting or terrorist attacks. Also most exchanges have limitations for price movements of stocks in one direction during a day. If this limit is reached, the exchange can interrupt trading for some time. The FOREX market does not have all these restrictions, because, as we already know, during transactions one currency is buying but another always selling, so there is no big structural difference in whether you short or long on particular pair. You may do what you want, at least as long as you can find a counterparty for your trade on the market. But as we’ve investigated before, there are few problems on the FOREX market with that due to extremely high liquidity.

MYTH #9 All FOREX brokers have the same quotes and charts, just like stock brokers.

False

In fact, on the FOREX market, quotes at the same moment of time can be different with different brokers, but should be close if they are really connected to large banks. Moreover, the charts of price action that brokers provide depend on broker’s time zone location. Because FOREX is 24-hour market and the stream of quotes never stops (except on the weekend), the start of the chart for the current day, for example in Japan and in UK, can be different. This makes technical analysis on the FOREX market using daily charts a bit tricky.

On the stock market all brokers have the same quotes at the same time, because they are transferred from the exchange (NYSE for example) directly. Even more, you can check every tick that happened during the trading session, because all trades fix and write in the exchange database. This leads to particular nuance that is very important. For example, on the stock market if your stop order has been hit and there is no such price in the exchange’s database, you can file a lawsuit against your broker and you should easily win. Alternatively your stop order execution should be canceled in this case. On the FOREX market you can’t do this, because it has no absolute center of quoting. This is just a community and every member can generate his own quotes. This can lead to some difference in quoting with different brokers. And there is no way to prove which price is truly had place on the market at particular period of time and which one had not.

MYTH #10 The safety of assets and trading procedure on the FOREX market and the Stock market are the same

False

The major difference between stock market and FOREX is application of segregated trading accounts on the former and their absence on the latter. A segregate account is an account only for a client’s trading assets that is separated from the assets of the brokerage firm. A brokerage firm can only use these assets due to a client’s orders and in favor of the client. It can’t use them for their own interests. What does it mean for ordinary client? It means, that if a stock brokerage firm will fall under bankruptcy or meet some financial difficulties, the client’s assets will be untouched and in safe. Personally, I’ve seen this event during REFCO forex brokerage bankruptcy procedure. Other people who have traded on the FOREX market have lost all or part of their money in cases like this. On over-the counter markets, client’s assets are transferred to the account of the broker. This is also typical for the bond market that is also an over-the-counter one. Some FOREX brokers claim to keep client money in segregated accounts. Demand to see proof of this before believing such claims.
Also, there is an insurance pool for client’s stock brokerage accounts in existence with $15 million in assets on average. So, stock trading accounts have much stronger safety than FOREX accounts.

MYTH #11 FOREX market and Stock market are both highly regulated by government authorities.

False

This statement is not correct for some reasons. First, the stock market is highly regulated by the exchange itself. Second, the US stock markets are highly regulated by the SEC (Securities and Exchange Commission). It is a government authority which has the major purpose of monitoring the appropriate functioning of the stock market with a priority on the interests of ordinary investors. The SEC also has strict rules for stock brokerage companies – minimum capital, licensing etc. In general it is not a simple task to become a brokerage company on the stock market.

On the FOREX market rather, brokerage companies have no particular regulation, except for national laws and regulators. Most US FX Brokers become a member of NFA (National Futures Association). We will talk about in the next part, but until recently, they didn’t have a full legal obligation to join the NFA or any regulator. In general, a FOREX broker is just a financial company that can meet with ordinary financial problems and other unwelcome moments that can in general could happen with any financial company. So, despite of any loud scandals and law processes with stock brokers, in general, the stock market is regulated much more strongly than FOREX.

At the end of this conversation I just specify the additional points that we’ve discussed already and that the FOREX market has and the Stock market does not:
1. FOREX has no definite and strictly determined lot size – the lot size on stock market is specified by exchange rules;
2. On the FOREX market, applied leverage that can reach as high as 500:1. In the stock market due to legislative rules, you usually can’t get more than 2:1
3. FOREX has very low demand for start-up assets due to variable lot size and high leverage. The stock market typically demands greater assets for starting up a trading account.
4. FOREX brokers provide clients with free “demo” software with real market quotes that could often be used for an unlimited period of time. Stock brokers also sometimes do this, but usually only for a short period since exchange quoting costs.

Pipruit: Well, thanks Commander. Now it looks less obvious than before. The FOREX market looks simpler, cheaper and more available from a trading perspective. But the stock market is safer, although it’s more expensive. Also I understand that this kind of comparison makes sense only in terms of trading procedure and technical issues of market functioning. Not from market purposes. Because the major purpose of stock market is raising capital for private companies and the purpose of FOREX is currency changing.

Commander in Pips: You’re absolutely right about that comparison. You’re welcome. So let’s make some conclusions about couple of these different markets:

Quality	Stock market	FOREX market
24/5 market	NO	YES
Absence of fees and commissions	NO	YES (many brokers)
High leverage	NO	YES
Expensive middlemen	YES	NO
High entry barriers (initial assets)	YES	NO
Free demo software for unlimited period of time	NO	YES (many brokers)
Highly influenced by analyst opinion	YES	NO
Could be driven by a large participant	YES	NO
Stronger limitations on short selling	YES	NO
Faster order execution and rarer slippage and delay	NO	YES
All brokers have the same quotes	YES	NO (but usually close)
Higher asset safety	YES	NO
Higher government regulation	YES	NO

Why FOREX?

2011-09-03T10:03:00.001+05:30

Pipruit: I want to ask you something – why is FOREX so popular? What does it have that other markets do not?

Why FOREX?

Commander in Pips: The simple and fastest answer is - major possibilities with minor requirements.

Pipruit: Uh, there is no prize for guessing that!

Commander in Pips: Ok, ok. Let’s point out some basic features that add up to FOREX’s strong attractiveness. We will start with the items that we’ve already discussed earlier and then will add some more reasons:

1. 24-hour FOREX market works all around the clock from 5:00 PM on Sunday till 5:00 PM on Friday in New York time. Even major holidays can’t close the market totally. Yes, trading volume can be reduced significantly, but the market continues to work. If you have a job and can trade only part-time during the day, this feature gives you huge benefits. First of all, it does not matter in what country you are living in, because the market is always at your service. Second, you can freely plan your day depending on your own circumstances and trade in the morning, during your lunch, in the evening or instead of sleeping. The market always there, ready to take your trades.

2. Low demand for start-up assets allows you to come aboard with as little as $5-50! The point is that FX retail brokers provide clients with possibility to open “mini” (usually $100-300) or even micro ($5-50!) accounts. I’m not saying that you have to enter the market with lowest assets that you can ever find. But, in fact, you could... This issue does make the FX market much more accessible for individuals who want to start trading, but have limited sums of money to start with.

Pipruit: But how can a trade be done with just $50?

Commander in Pips: In fact it could (but, as you will understand later it is not great idea to enter the market with just $50), because

3. There is no compulsory fixed standard lot on FOREX market. Although historically participants in the FOREX market use 100 000 units (for example US dollars) of currency as a standard lot, your broker may use any fraction of this lot, started from 0.01 part. Depending on your broker and trading account value you can use any lot size at your will (even 0.001 or smaller), or some fractions of single lot that are predefined by the broker. For example, your broker can limit the minimum lot fraction with no less than 0.1. But don’t be confused by these limitations, because brokers link the minimum lot size with client’s account value. It means that you will not be interested or need to trade with lower lot size if to your account assets are larger.

Pipruit: But now, I can’t understand, how we can trade even 0.01 lot size, which is 1000 units, with only $50 of account assets.

Commander in Pips: It is possible due to the

4. Solid Leverage of the FOREX market. In fact, leverage is an additional money loan that your broker provides to you for financing your own positions without any charge. You can’t withdraw this money, and it automatically returns to broker as soon as you will close your trade. In general, the lower your trading account value the greater the leverage. If you trade with a micro account broker may even provide you with 500:1 leverage. What does it really mean? Let’s assume that you have $50 in your account account and broker provides you with 500:1 leverage. It means that you can trade with a bit less than $50*500 = $25000 or, other words 0.25 lot! Usually, the greater the trading account value, the lower the leverage. Big participants usually trade with no leverage at all (Large banks, for example). The most common leverage size starts from 100:1 and then gradually reduces. Recently, the USA lowered the maximum leverage for US brokers to 50:1

Pipruit: Cool! I can imagine what kind of yield from trading it will give me! If I, for example, will buy 0.25 EUR/USD for 1.33 and sell it for 1.34, then I will get $250 ((1.34-1.33)*100 000 (it’s a standard lot)*0.25) just by using assets as low as $50. So, can I increase my account value by 5 times on one trade!

Commander in Pips: I do not want to upset you, but what if rate falls to 1.32?

Pipruit: In this case I will loose $250... Wait a minute, but I have only $50. It means that I will owe my broker $200, doesn’t it?

Commander in Pips: No, most brokers have automatic software that controls your assets value. When your assets on trading account become too small, your positions will be closed automatically and your loss will not exceed your current assets value – in our case 50$. But due 500:1 leverage it will happen much earlier than 1.32 will be reached. Let’s see: 1.33-50$/25000$ = 1.3280.

Pipruit: Oh, 1.3280 is very close to 1.33! I will loose all my capital in a blink of an eye!

Commander in Pips: Yes, it could happen. This is the reverse of the coin and the dark side of the leverage. You can win so much, but can lose it quickly also. It means that you have to learn advanced asset management and risk control before you start trading. We will talk about this in later chapters.

The FOREX market has other advantages over other markets:

5. Tremendous liquidity of the FOREX market makes available for you the opportunity to buy or sell at will in just a fraction of second. This means that there is almost always someone else on the market that willing to be a counterparty of your trade. And this “someone” will be searched out just in a fraction of a second. In a normal market environment, your orders should be filled pip to pip without any slippage, despite the way you’ve entered them. You may buy or sell at directly by clicking your mouse or can place pending orders that open based on price – there is no difference. It’s amazing - see what $3.98 Billion per day turnover can do!

6. As we has discussed previously, as a rule, there are no commissions on most FOREX transactions – no clearing fees, brokerage fees, exchange fees or something. Most FOREX brokers make money only on the Bid/Ask spread and compensate their own expenditures from it. But, to be absolutely honest, sometimes you can meet with brokers that still apply additional fees. This usually only happens if you trade with micro account value or on an ECN broker that is passing along real market spreads with no markup. The absolute majority of brokers do not have any commissions – only Bid/Ask spread. This leads to next advantage of the FOREX market –

7. Low transaction costs. The difference between Bid quote (the price at which you will sell, if you want) and Ask quote (the price at which you will buy, if you want) now about 0.02-0.05% (2-5 pips) on major pairs and about 0.1% on exotic pairs. And this is even for average accounts with a value of only $500-2000. For larger accounts it could be as low as 0.005-0.01%. The biggest participants can sometimes trade without any spread at all.

8. Huge competition amongst brokers and other providers of trading services leads to free software and free “demo” access to FOREX market. It means that absolute majority of retail brokers provide their clients with free (without any delay in quoting) access to FX market. This access is based on free software that besides quotes per se, usually also includes charting services and news. But there is more to come. Also the majority of brokers let you practice in trading on demo accounts absolutely free.

Pipruit: And what is a demo account?

Commander in Pips: Demo accounts contain virtual money, but the quoting and the process of trading are the same as on a real account using real money. The advantage of demo accounts is in the possibility of adding more money at will or even starting with a fresh account. This lets you practice, learn the trading software, and get necessary confidence for trading.

9. The huge trading turnover on the market leads to the impossibility to totally control and manipulate the market by any entity. Central banks can initiate the strong moves on the market (during so-called interventions), but they can’t hold this influence for an extended period of time. A broker might be able to cheat by a few pips, but the biggest banks in the world can’t force the market to go where they want it to.

10. And the last one – the FOREX market does not have any middlemen, so you can trade directly with the market that is responsible for quoting currency pairs. Although there are intermediate chains between personal brokers and huge banks, we’ve talked about this already. Their quotes should always be very close to each other. From this point of view, there is little or no difference with whom to trade.

Forex recommendations for beginners

2011-08-29T08:45:00.000+05:30

Your success on Forex does not depend but on your experience and emotional stability. However, InstaForex Company hopes to make your way to it smoother with the help of the following recommendations.
1. Go for the basics
First of all, one should acquire profound knowledge of financial markets and technical analysis, to realize the laws according to which Forex functions and how to make profit on it.

2. Start with a demo account
Starting trading on real accounts straight away does not help to obtain the abovementioned knowledge. While you are busy learning the basics, your capital is literally melting due to your lack of experience. You have a great opportunity to train your strategies on a demo account for a month or more. It is impossible to become a professional trader at once.

3. Get to know trading instruments
Before beginning work on the market, you should thoroughly examine the technical characteristics of the trading platform you chose and make everything clear. It will then help you to save much time and money.

4. Learn your rights and liabilities
Read carefully the documentation, regulating the relations between you and your broker and make sure you have understood everything. You have the right to know all the information concerning your work on the currency market.

5. Begin with small steps
You can employ micro forex accounts to start with. Assess your skills and abilities and develop them further operating with minimum investments.

6. Keep your cool
Do not go beyond your psychological comfort zone: if you feel that you are losing your cool, pass to smaller amounts.

7. Do not play with fire
Do not treat Forex like a money gambling game. As a rule, men of fortune do not manage to stay on this market long. You want forex work to bring you stable income. So, do not ever follow the “sink or swim” principle. Do not put at stake amounts you cannot afford losing.

8. Recognize your defeat
You should keep in mind that losses as such are usual constituents of trading on Forex. Make your conclusions and take a philosophical approach to this fact.

9. Trade within the set limits
Do not strive for opening as many deals as possible: you may fail to control them all. Trade rationally. Trading on several markets simultaneously is rarely successful at first, since they are regulated by different independent factors.

10. Save the money rather than boost
Bring your risks to minimum, even if it results in less profit. Your aim now is to learn how not to waste your capital. At the beginning stage, “saving” is much more important than “boosting”.

11. Consider possible risks
There is always a possibility of unexpected risks. You should have a certain financial reserve so that you could use it in case of a force-majeure situation. Analysts suggest investing not more than 50% of the total capital in trading and not over 10% - in a deal. Ponder over what part of these funds you feel ready to lose in case of bad luck. Set your own level of admissible risk (preferably, not over 5%).

12. Mind Stop Loss
Do not forget to employ Stop Loss. Improper assets management is the major reason for losses. Stop Loss is meant for preventing your losses, so learn to handle it and set it correctly.

13. Keep away from others’ influence
Elaborate your own strategy. Be careful to change it following someone else’s advice. One can carry out one deal only for the whole year and appear to be more successful than many intraday traders. There is no any system suitable for everyone. No one but you bears responsibility for you capital. Once you have shaped your own vision of forex trading and strategy, be critical to what others say to you. Otherwise, you may then regret having followed someone’s recommendation.

14. Control the situation
A profitable deal may in fact turn out to be unprofitable. If the trend seems favourable to you, thoroughly monitor your open positions, shift stop signals to protect your profit.

15. Do not go against the trend
Remember: trend is your friend. Hoping to earn profit, some invest their money when the trend is moving in an adverse direction. Yet, such a strategy is extremely perilous for a beginner!

16. Retreat if not sure
If the situation development falls short of what you have expected, close your positions. You should understand what is going on on the market, as haphazard actions are unreasonable. If you do not feel sure, retreat for a while. Do not waste your time trading unprofitably and do not attempt to have your money back at once. Keep energy to yourself.

17. Make a script of your trading
Fix all you do on the market in writing. It helps to develop analyzing skills. Write down the explanations of this or that decision you made, description of its effects and the conclusions you drew.

Forex advatanges

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Everyone who is interested in doing this business can work in the Internet in the international currency market Forex staying on-the-job. Only Forex works 24 hours except weekends and holidays! For drawing stable profits and significant income you will have to allow only 2-3 hours of your free time.
High yield rate of Forex currency market: during the day the deposit can be extended ten-fold. Even if you don’t think you are lucky and you are not a professional currency trader, it is much better than putting your funds into the bank and watch how they are decreased by the inflation.
Analysis effectiveness and changes forecasting on Forex market: having analyzed various trends of the market and economic situation in the world it is possible to forereach the rate fluctuations and direct your funds in the right way.
Total mobility of Forex market and perfect operational control of trading within it. You can earn in the Internet having just 1 dollar or 1000 dollars as well. Aside from this, the deals are executed momentarily. The operations can be stopped for a while and you can close your account any time, you also can manage your trading wherever you are, using the Internet from the personal computer, notebook or mobile phone.

Ask and Bid

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When trader wants to open a deal at Forex market he/she should know the currency pair as well as the price of this pair. At Forex market the price of the currency pair is denoted by two symbols Ask and Bid, which has the specific digital notations.

Ask-price is the highest price in the pair’s quotation; for this price the trader buys the currency, which is the first in the abbreviation of the currency pair. In this case, trader sells the currency, which is the second in the abbreviation.

Bid-price is the lowest price in the quotation of the currency pair; for this price the trader sells the currency, which is the first in the abbreviation of the currency pair. Respectively, trader buys the currency, which is the second in the abbreviation.

Let’s consider an example:

We have the currency pair EUR/USD with the quotation 1.3652/1.3655. This means that you can buy 1 euro for 1.3655 dollars or to sell 1 euro for 1.3652 dollars. The difference between Bid price and Ask price is called spread. Spread is a payment for the opportunity to trade at Forex market, so called commission of the brokerage firm. Spreads are very small at exchange market; they are ten or even hundred times smaller than the banks spread. For the most part of the major group, spreads amount to 3 points.

Hedging

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Hedging denotes safety and security. Hedging is protection of the client’s funds from unfavorable currency quoting rate fluctuations. The funds on the account are fixed at their current price through conducting deals at Forex. Thus, hedging helps to reduce the exposure to risks connected with the currency rate changes, which helps to achieve the result not being changed by their fluctuations.

In fact, hedging presupposes using one instrument in order to lower the risk which is connected with influence of the unfavorable market factors on the price of a closely connected with it instrument. More often, the notion ‘hedging’ means insurances from the currency prices fluctuations, assets etc. Hedging can also be viewed at as a sort of investment, made in order to minimize the risk, connected with price movements at the market. The hedging cost should be valued with regard to possible losses in the event of the refusal from it.

Types of hedging at Forex.

The first type is hedging the buyer’s funds to lower the risk connected with a possible increase of the instrument price. Another type is hedging the seller’s funds in order to lower the risk connected with the decrease of the price.

Example of hedging.

A trader who imports foreign currency opens a deal for buying currency on his trading account in advance, and when the real time for buying this currency in his bank comes, he closes his position. And a trader, who is exporting foreign currency, opens a deal for selling the currency on his trading account beforehand, and in the real moment of this currency buying in his bank closes it.

There is a so-called hedging mechanism, which denotes the balancing of obligating documents at the currency market (or securities etc.) and the opposed to it futures market. To hedge capital losses from a particular instrument, the position is opened for another instrument, which can compensate the financial losses.

Forex and Stock markets

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Forex market and stock market (stock and securities market) are two independent markets with no relation to each other. The difference between them is that at Forex market the currencies are being traded, and at stock market the stocks are bought and sold. Stock markets are often located at currency markets. The largest stock markets are situated in New York, London and Tokyo.

Another main difference between Forex and stock markets is the distinction of sums in which the trading is held. In order to buy shares at stock market a considerable capital is needed from $10 to over $100 thousand. At stock market, the trading is conducted at a more moderate and steady pace, unlike at Forex market, where within a short period of time it is possible either to earn a large capital or to sustain significant losses. Some traders having saved a convincing capital at Forex market, skip to stock market further on.

In its turn, stock market is divided into primary and secondary markets.

The primary stock market plays an important role in the market economy of the country; the pace of its development and effectiveness depends on it to a great extent. Here, occurs placement of the security papers, issued for the first time. Securities’ buyers at this market are as a rule individual and institutional (investment funds, insurance establishments and so on) investors. Securities at the primary market are placed by way of turning to investors directly and through intermediaries.

The secondary stock market includes off-the-board market and stock exchange. Here, the on-selling of issued papers and security papers to other investors takes place. Unlike the primary, the secondary market has no influence on the volume of the country’s investments. The main participants at this market are the speculators, who buy securities at a low price and then sell them at a higher price.

One of the major regulators at stock market is a price. In its formation specialists, issue bodies, intermediaries and investors take part. The prices at stock market are formed in accordance with several principles: profitability of the papers, their directivity, lessening of their profit, demand for investors, differences, decreasing or rising of their revenues. These principles get their realization through the strategies of price formation at stock market: to setup the initial high or low price, to gain the profit from selling quickly, to enter the market and to own part of the market.

The work with stocks can be held in different directions. The stocks are bought for: the profit in the form of their rate differences, getting dividends etc. In spite of stability and security of stock market, before starting to work at it, the analysis is made which is targeted to minimize the investment risks.

Trading psychology

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Trading psychology

Trading is less a work, than a psychology, on which your success or on the contrary, your failure at Forex market depends. If you decided to move to systematical trading, it does not unload emotional pressure at taking a trading decision entirely.

Frequently, Forex traders incline to the opinion that only complete absence of emotions can help during trading. Though fear, suspense, greed, hope, belief, regret and happiness accompany a trading process inevitably. Suppressing emotions at the moment of feelings overwhelming you, means disregarding the sixth sense, intuition, and finally, insight.

It is known that emotions are also transmitting a flow of information to us. We are guided by this information, act under impressions from it. But this is given to us in order to control our emotions and to change one sentiment for another.

There are a number of ways to control emotions:

Firstly, it is possible to change your emotions by switching to another object of your concentration. As a rule, this method is very effective. The thing which draws our careful attention becomes real for us. You can consider suffering losses, or vice versa render an opportunity of gaining profit.

Secondly, having changed your convictions and believes you can alter your emotions. Every belief that we attain during our life time are a sort of a filter for us, influencing all the information perceived. All views accumulated during our life affect the interpretations which we are admitting into our consciousness.

And finally, the third way to change our emotions is by modifying physiology. A change of breathing, mimics, body position, the tone and tempo of our voice, all this has a direct influence on the emotive part of not only a Forex trader, but of any person.

Attention concentration

The concentration of attention is one of the most significant constituents of our emotional condition. Because the thing you are focused on in the process of Forex trading becomes not only the object of the happening reality but also the accepting of factual reality. All actions influence on your interpretation of events and consequently affect your emotions. All this manipulates your behaviour, and decisions accept an emotional connotation. In this case it is needed to define the priorities: what are you waiting for? Are you entertaining a possibility of losses? Or are you expecting gainings?

Those who see only losses are likely to hesitate for too long entering the market or can even skip a deal. But once having decided to enter the market, they are quickly gaining profit.

Trading is an attempt to balance the opposites. A trader should focus on profit and loss and try to balance them. A trader should concentrate on the probability of his methods, and on the information provided by the market, as it is the only accurate and reliable one.

Physiology

It is proved, that our body manages our emotions, and emotions affect the thoughts. The easiest and the most correct way to change the emotional condition is to change your physiology - tempo and depth of your breath, voice or even your pose.

Pay attention to your position, the way you sit, breathe, whether the muscles of your face, shoulders and of all body are tense. If you feel discomfort, you should only sit cosily.

Absolutely simple physiological manipulation can serve an effective instrument to control your feelings.

Control your emotions, and this will definitely make a more successful trader out of you!

Swap-free or Islamic accounts

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Swap-free accounts are also called Islamic because owners of such accounts exercise Islamic religion. According to the rules of the Mohammedan religion any business transactions, in which one of the parties must pay or get the interest from another party, are prohibited.

Islamic or swap-free accounts support deals with any currency pair and if position is transferred through the midnight a trader does not get and there is nothing withdrawn from trader's account regardless the volume of opened position. Islamic accounts were created especially for Muslims, because crediting swaps and interests is against their religion.

Accounts which are not influenced by swap allow their owners to hold positions as long as it is necessary. In this case the result of trading depends only on the currency rates change during the certain period of time.

Due to this peculiarity swap-free accounts became popular both in Islamic countries and worldwide. Many Forex brokers provide swap-free service for free.

And what is beyond spot FOREX?

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Pipruit: Commander, I have an assumption, but I’m not sure if it’s correct… I just continuously return to the numbers that you’ve said to me about daily turnover and the share of spot market. But you also have talked about futures, swaps and other stuff that I don’t remember currently. It seems that the FOREX market is tremendously attractive as different members come there to trade in different ways…

Commander in Pips: Your quick eye is worthy of a compliment, son. You are absolutely right.

Pipruit: So, can you give me, some definition of different ways to trade FOREX, at least briefly?

Commander in Pips: Sure, why not:

SPOT MARKET
We already know something about the spot market. The spot part of the market is the most simple in our sense of understanding. Currencies are traded immediately, that’s why it is called “Spot”. The attractiveness of the spot market lies in its liquidity, simplicity, tight spreads and running around the clock. You can easily participate in this part of FOREX, because retail brokers offer to open spot trading accounts, some for as little as $5-25 in assets!

Pipruit: Cool! Can you wait a couple of hours – I’ll just run to nearest broker and open an account! I want so much to try out all this stuff.

Commander in Pips: Stop right there son and don’t move! Have you accomplished our school already, or maybe you already know all lions on the path better than me? If you just want to give all your money to someone else – that’s ok, go ahead (you can give it all to me, for example, ha ha). But if you don’t, then listen carefully and hang on. We will talk in detail about opening trading accounts and funding them in latter lessons.

Pipruit: Sorry…

Commander in Pips: …So. Besides the low-volume spot account brokers usually provide their customers with charts, technical analysis tools and news. That being said, trading on the spot FOREX market represents a “direct exchange” between two currencies that has the shortest time frame.

FORWARD/FUTURES CONTRACTS
Now let’s shift to forward/futures trading. In general, forward/future contract assumes making a deal to buy or sell particular currency at specified exchange rate (i.e. price) on a future date (that’s why they call futures/forward!). Conditions are fixed in contract directly. For example, if the current EUR/USD rate is 1.38 and today is April 20th. Currently I would like to buy EUR for USD (assume that you would like to sell it) in on June 20th for 1.33. So, today we’ve come to agreement (i.e. made a deal) with a future date of execution and a future price. If today we will sign a corresponding contract on paper, then this will be a forward contract on EUR/USD.

Pipruit: If I understand correctly, a forward contract is an agreement to make a deal at specified price and date in the future, but the particular date and price are agreed on today?

Commander in Pips: That’s right.

Pipruit: And why there are two words that are specified that. What is the difference between a forward contract and a futures contract?

Commander in Pips: Good question son. The nature of forwards and futures is the same. There is only a difference that futures contracts are traded via different exchanges. Futures is an organized market and forwards are not. A forward is a contract that trades on an over-the-counter market. This specification leads to some different qualities. First of all, futures contracts have strict specifications by exchange – dates of expirations, value of contracts, delivery dates and other specifications are fixed and well known ahead of time. And the Exchange itself is counterparty for both parties. For the seller and the buyer on their trade, the exchange is the intermediary. On the over-the counter market there is no such tight specification for contract conditions. In fact, you may apply any conditions of your choice if those conditions are acceptable for both parties of the deal – buyer and seller. And you can choose the counterparty for your trade by yourself.

Pipruit: Ok, I’ve got it. It looks like a future contract is an exchange traded forward with standardized contract sizes and maturity dates. This is because contract sizes and maturity dates are determined by the exchange itself and its rules of trading.

Commander in Pips: Right you are. Ok, let’s go further. Swaps and options…

SWAPS
I want to remind you, that swap is a most common type of transaction on FOREX. It’s even bigger than the spot part of the market. The reason is in the high convenience of such kind trade. In general a swap is a transaction when counterparties exchange different currencies for a definite period of time and agreed to make a reverse exchange on predetermined future date. Also they agreed to pay to each other corresponding annual percent rate. For example, if today is November 01 and the EUR/USD rate is 1.33, we could come to an agreement to make a swap with the notional amount of 100 000 EUR and reverse the transaction 30 days later. It means, that I have to transfer to you $133 000 USD and you have to transfer to me 100 000 EUR. When these 30 days have passed – we will have to make a reverse transaction – I will return to you 100 000 EUR plus interest for using them, and you, in turn, return to me USD 133 000$ and interest for using this sum during the period of the swap. These are not standardized contracts and are not traded through an exchange. As you understand, banks are the major participants on swap market.

OPTIONS
Option also is a contract with future date of execution. It’s not a spot kind of trade. It is different from any other types of contracts, since the rights and obligations of buyer and seller of option are different. The buyer of option has right but not an obligation to exchange one currency into another one at a pre-agreed exchange rate on a specified date. But the seller will have to do the transaction (seller has an obligation) if the buyer will ask him to fulfill it. Options exist as both an over-the-counter FX option market as well as an exchange traded one. Options on many FX pairs are traded on the Chicago Mercantile Exchange. As you already know, exchange traded options are highly structured as are futures.

Pipruit: Hm, sounds strange. It sounds unfair. Why does the seller have an obligation but the buyer has no obligations, just rights?

Commander in Pips: The reason for that is in price of option, also known as the premium. The buyer has to pay a premium to the seller to get such a feature. In other words, the buyer purchases these choices to have only rights but not any obligation by paying the option premium to the seller. The buyer then has the option to exercise the contract on the specified date.

Pipruit: Oh, that explains it. Now it sounds more logical.

Commander in Pips: And the last type of possible FOREX trading is ETF

EXCHANGE-TRADED FUND (ETF)
ETF’s or exchange traded funds are a relatively new approach to trading. These funds can be invested in different markets – stocks, bonds, currencies, commodities, real estate etc. Some of them can invest in many different assets simultaneously. The shares of these funds are traded at different exchanges. If you, for example do not want to trade FOREX personally, or do not have sufficient confidence for that yet, you may buy shares of some ETF that invests in the FOREX market. In this case, if this ETF does well and its assets will grow during the time - you will receive profits, because the shares of this fund also will rise in price. Also take a note that ETFs are traded only via exchanges. It means that this market has time breaks and does not operate in 24/5 mode like spot FX. Liquidity there is also lower than on the spot FOREX market and transaction costs are higher.

Pipruit: Sounds interesting, but I’d like to try the FX spot market personally.

Commander in Pips: Be patient. We’ll get there. If you understand the FOREX market first, you are more likely to make money than to give it all away.