When there are movements in currencies, a hedging strategy can reduce the risk of disadvantageous price shifts. The protection of this technique is often a short term solution. Traders often turn to hedge in a panic as a result of the financial media reporting volatility in currency markets.

This is usually down to huge events like geopolitical turmoil conflict in the middle east , global health crisis COVID and of course the great financial crisis of To counteract negative price movements, market players will tactically take advantage of attainable financial instruments in the market. This is hedging against risk in its truest form. Hedging will give you some flexibility when it comes to enhancing your forex trading experience, but there are still no guarantees that you will be totally protected from any losses or risks.

While it can take some time to get your head around heading in the forex markets, the overarching concept is that it presents both outcomes. That is to say, irrespective of which way the markets move, you will remain at the break-even point less some trading commissions. More specifically, the spot trade is a spot transaction, with reference to the sale or the purchase of a currency. Essentially, spot forex is to both sell and buy foreign currencies.

A good example of this is if you were to purchase a certain amount of South African rands ZAR , and exchange that for US dollars USD. If the value of the ZAR increases, you are able to exchange your USD back to ZAR, meaning you get more money back in comparison to the amount you originally paid.

CFD is basically a contract which portrays the price movement of financial instruments. So, without having to own the asset, you can still make the most of price movements, whilst also avoiding the need to sell or buy vast amounts of currency. CFDs are also accessible in bonds, commodities , cryptocurrencies, stocks, indices and of course — forex. With a CFD you are able to trade in price movements, cutting out the need to buy them at all.

This section of our forex trading PDF is all about forex charts. When it comes to a MetaTrader platform, traders can use bar charts, line charts and candlestick charts. You can usually toggle between the different charts, depending on your preferences, fairly easily. The first record of the now-famous candlestick chart was used in Japan during the s and proved invaluable for rice traders. These days, this price chart is without a doubt one the most popular amongst traders all over the world.

Much like the OHLC bar chart see below , candlestick charts provide low, high, open and close values for a predetermined time frame. Live forex traders love this chart due to its visual appearance and the range of price action patterns utilised.

This allows you to gain a better understanding of how live trading works before you take any big financial risks in the market. As the title suggests, this one is a bar chart, and each time frame a trader is looking at will be displayed as a bar.

In other words, if you are viewing a daily chart you will see that every bar equates to a full trading day. With this price chart, traders are able to establish who is controlling the market, whether it be sellers or buyers.

OHLC analysis was the starting block for the creation of the ever-popular candlestick charts please further down. It is a great tool for looking at the bigger picture when it comes to trends. The line chart arranges the close prices at the end of that time frame; so in this case, at the end of the day, the line will connect the closing price of that day. In this section of our forex trading PDF, we are going to talk about the different ways in which you can sell and buy a forex position as well as things to look out for.

When it comes to forex trading you can trade both short and long, but always make sure you have a good understanding of forex trading before embarking on trades. After all, forex trading can be a bit complex to begin with, especially when mixing long and short trades. In a nutshell, going long is usually a term used for buying.

So, when traders expect the price of an asset to rise, they will go long. When forex traders expect the price of an asset to fall, they will go short. This means benefiting from buying at a lesser value. To achieve this, you simply need to place a sell order. The current exchange rate of a forex pair is always based on market forces.

This will change on a second-by-second basis. As we noted earlier, you also need to take the spread into account, so there will always be a slight variation in pricing.

For instance, if you exchange 1 USD for 17 ZAR, the sale and purchase price offered by your forex broker will be either side of that figure. The currency pairs with the most notable supply and demand attached to them will be considered the most liquid in the forex market.

The supply and demand aspect is thanks to the investment of importers, exporters, banks and traders — to name a few. The most liquid currency pairs are therefore the ones in high demand. When you feel you are ready to take the plunge and begin live trading, you need to select a forex trading system.

There is a vast amount of trading strategies for you to pick from. This is because investors, speculators, corporations and banks have been trading for decades. In this part of the forex trading PDF, we are going to explain a few of the strategies available to you.

If you want to buy and sell currency pairs from the comfort of your home or even via your mobile device , you will need to use a trading platform. Otherwise referred to as a forex broker, there are literally hundreds of trading platforms active in the online space. This makes it extremely difficult to know which broker to sign up with. In the below sections of our forex trading PDF, we explain some of the considerations that you need to make.

You should also look out for analysis tools available to you. In some cases, this might be embedded, while some offer tools such as technical analysis and fundamental analysis. This is because it will save you a lot of leg work having to move between different sites and sources of information. Some of the fastest and easiest trading platforms are MetaTrader 5 MT5 and MetaTrader 4 MT4. Crucially, both MT4 and MT5 are fast and receptive trading platforms, both providing live market data and access to sophisticated charts.

It is essential before you begin trading seriously that you fully trust the trading platform you intend on using. This is especially the case if you intend on using a scalping strategy, for example. However, if you like to trade, it is vital for your peace of mind and your finances that you are fully confident with the fast execution of data transfer.

This is also the case with the precision of quoted prices, and the speed of order processing. All of these things are going to help you to have a successful forex trading experience. To enable you to make the most of new opportunities, the ideal forex broker will be available to you 24 hours a day and 7 days a week, in line with the forex market opening hours. To save you from having to request that your broker takes action for you, your forex broker should enable you to manage your account and your trades separately.

By doing this, you will be in a much better position to quickly react to any shifts in the market, and hopefully, make the most of potential opportunities. This will enable you to gain better control over any open positions as and when they arise.

It is important to ensure that your forex broker of choice is a reputable company, who will ensure that your personal information and trading funds are fully protected and backed up. Segregation is frequently used amongst forex brokers as a way to separate your funds from the funds of the company i. their daily costs, debts and running costs. So, no matter what happens to the forex broker, your money is safe and segregated. If you find that a forex broker is unable to do this, we would suggest you find a better broker as it is standard practice these days.

All of the brokers listed towards the end of this forex trading PDF are regulated by at least one reputable licensing body. Your goal is to make more overall profits than losses over a period of time, and to emerge an overall winner. My approach to consistent trading success lies in three main pillars, or the 3Ms: Mind, Money and Method.

It is often said that we are our own worst enemy. Human beings are emotional creatures, and most of our decisions are guided more by emotions than logical thinking.

Our mind is capable of playing tricks on us; we can get seduced into unfavourable situations by our emotions. Emotions can work for us or against us.

Sometimes they can save us from landing in a pile of sticky mess, but sometimes they can land us in it. We can also turn the tables around by playing tricks on our mind, making it believe whatever we want it to believe.

Do you have the mental strength? Whether you are new to trading currencies or a forex trader who has some experience, here are some questions to ask yourself: Do you really have a strong desire to succeed in forex trading? Sure, every one wants to succeed in something, but do you have the desire to want to succeed in forex trading?

First of all, this field is not for every one, for you must have the passion for it. If you just want to try your luck, or dabble, in trading, you will just end up among the majority who lose their money.

You must have the deep desire to want to accomplish your goals, because without this desire, your thoughts will not materialise into action, and it is action that could transform your goals to reality.

To be a successful trader, you must be highly self-motivated, have a concrete plan of action, and not be afraid of failure. Are you prepared to devote a lot of time and effort into picking up trading skills and knowledge?

To be really good at anything, you need skills and knowledge in that field. A huge amount of time, effort and money is required for a trader to attain consistent success in forex trading. Despite the availability of forex trading-related resources on the internet, and in the bookstores, traders can find it quite daunting to learn about trading on their own as they do not know what there is to be known. I recommend that you check out those which are offered by skilled and practising instructors.

Note: Be wary of signing up for courses or seminars that are full of hype, for they can be very misleading. Avoid those that give you the impression that you can attain consistent profits after two days of intensive learning, or those that require you to purchase expensive software.

While there are some shortcuts to gaining knowledge via courses or seminars, there is no substitute for honing your trading skills in the market. Are you willing to accept losses as part of trading? Every one makes mistakes, and mistakes are inevitable. Got a trading loss? Then whip out your trading log to record what your mistakes are and what you have learnt from that losing trade. Always have something positive to take away from your losses, and treat it as a learning experience. Know that there will be other trades coming your way.

Are you willing to take sole responsibility for your trading decisions? You read some market analysis, and then trade according to what the analyst is saying. That trade turns out to be a loser, and you turn around to blame it on that market report.

It is dangerous to blame losses on other people, the forex market, or the stars, for you are the only person responsible for pulling the trigger. And if you blame others you will never be able to find out how you can improve. Fear and greed Fear and greed are the two dominant emotions that affect not just the state of our mind, but also the currency market.

In fact, the fluctuations of these two emotions are the main drivers of the currency market. There are, of course, other emotions that exist in the market such as disappointment, regret and so on, but fear and greed are the principal forces that tilt the scales of supply and demand of currencies. When traders feel overly optimistic about a country or its currency, they become consumed by the great hope that the currency would appreciate in value against another currency.

They are then guided by this hope and greed to buy the currency pair now so that they could hopefully sell it at a higher price in the future. Greed then grows into euphoria, as traders continue to buy and buy, thus taking currency prices to newer highs. When people are buying a currency with great hope, they are also selling the other currency in the pair with great fear. On the other hand, when currency prices go down, fear and greed are also the main drivers of the move.

All in all, fear and greed are behind the steering wheel of the currency market. So, while you must learn to recognise these emotions in the market, the problem comes when you allow them to distort your logic when it comes to making trading decisions, as most of these decisions will turn out bad, and are likely to cause you to regret your actions later.

Since there is no way of banishing these emotions for good, the best thing to do is to control these emotions, instead of letting them control the way you think and act. Face and control your fears Since greed can be categorised as a kind of fear, which is the fear of missing out, I will discuss the primary types of fears relating to trading, and how they can be overcome.

The first step to preventing fears from ruining your trading performance is to recognise the various forms of fear that is connected to trading.

And once you recognise the type of fear you are experiencing, the easier it is for you to handle that emotional obstacle so that you can trade better. That is the key to emotion-free trading. It is not about pretending that those fears do not exist, but how you handle them that matters. Here are some common trading-related fears. Fear of missing out Why do so many people rush to departmental store sales, or rushed to buy technology stocks during the dot-com boom?

Any kind of buying mania stems from a very strong emotion that is commonly invoked in people, and that is the fear of missing out. In trading, this fear manifests itself especially during a sharp rally or decline of a currency pair. Your heart begins to pound really fast, and you have a million thoughts zipping through your brain, with most of the thoughts urging you to buy now, now, now.

I am losing out! Traders suffering from this type of fear are usually the ones who get onto a trend too late. Be disciplined and hold off that mouse whenever you sense that this type of fear is creeping up on you.

Think instead of all those traders who are pouring dumb money into the market, and be glad that you know better than them not to join in the craze. Fear of losses Trading is a game — there will be winners, and there will be losers. Sometimes you win some, sometimes you lose some. Losses are bound to happen, no matter how accurate a trading system may be. The fear of losing is most prominent in new traders as they do not yet have adequate trading skills and knowledge to help assess and evaluate trading opportunities with a high level of confidence.

This can lead to trading paralysis, whereby traders become afraid of pulling the trigger when it comes to entering or exiting trades as they fear losing money or a big portion of their trading capital. However, if you have a reasonable stop-loss order in place, that is in accordance to your money management rules, you should have no reason of being fearful of damaging the trading account based on just one trade.

That is what stop-loss orders are for — to guard against huge losses. When you do encounter hesitancy in pulling the trigger, evaluate if you have valid reasons for doing so or if you are simply held back by fear. Traders just have to get used to the reality that losses are inevitable. The trick is to ensure that your losses are kept small so that you do not harm both your trading account and your state of mind. A trader does not have to be right. It does not matter at all whether he or she is right or wrong; what counts is whether he or she is profitable in the long run.

Traders should not be hung up on the outcome of single trades, or even a few trades, as trading performance has to be assessed over a period of time. What matters is that you end up profitable over a period of time. Once you place less emphasis on being correct on a current trade, your fear of making wrong decisions should abate, thus enabling you to make better trading decisions without feeling burdened by the overwhelming pressure to be correct in that trade.

Remember that there will be times of losses and times of profits, which is why it is so important to enter only trades that have a high probability of success. Focus on the big picture Do not get caught up in feeling invincible or pessimistic after a win or a loss. As trading is a very highly charged and emotional activity, it is very easy for traders to oscillate between emotional highs and lows.

The outcome of just one trade should not affect your overall performance, unless you have violated proper risk management guidelines by betting the farm on a single trade or by over-leveraging. A trade is just one of many trades. When you are wrong on one trade or several trades, try not to beat yourself up or feel regret. Instead, analyze to see where and how you could have done better in those trades or what mistakes you may have made, and record what you have learnt from them.

If there was really nothing that could have been preventable, just accept that the market is unpredictable. The outcome of one or a few winning or losing trades should not be magnified. Other trades will surely come. I strongly believe that once a trader has honed his or her trading skills, the ultimate factor that will affect his or her overall profitability is money management skills.

Money management is all about managing the possible risks, and it is the defining factor that separates winners and losers in forex trading. Novice traders think of how much they can harvest from the market; experienced traders think of how much they can lose to the market.

Many traders are so eager to trade to make big money that they completely overlook money management. Poor money management also explains why so many traders get wiped out by the market. Money management is about fully optimising your trading capital. It allows you to be proactive in managing risks, and to cope with trading losses — which are part and parcel of the game. It is an essential tool to ensure that you will have more than enough to last another day in the trading game. No matter how good a trading system may be, there will be times when you will experience a series of losses.

Success comes to those who have set down rules for money management, and have the discipline to follow them through their trading. Preserve your capital The shining light that attracts all traders to the forex market is the prospect of being able to grow their money by tapping into the online trading platform as their own in-house money tree. In almost any field, it is true that most people are drawn to short-term benefits, but are myopic when it comes to long-term planning.

Trading is no exception. When risk capital is put aside for trading, you are hoping that this amount of money could be transformed into a much bigger amount; otherwise, what would be the point of risking it? But if this capital runs out, what can you bank on to make your desired profits?

After all, money begets money. To drive home the importance of capital preservation, I will discuss the concept of drawdown, and how that is relevant to money management. In other words, it is the amount of money that you lose — it is usually expressed as a percentage of your total trading equity at any given time.

Drawdown is not an indication of your overall trading performance, as it is calculated when you have a losing trade against your new equity high or your original equity, depending on which is higher. Recovering from drawdown As drawdown gets bigger and bigger, it becomes increasingly difficult to recover the equity.

Many people are not aware that in order to recoup the percentage of equity that they lose, they will need to gain a bigger percentage just to break even. The answer is no. It will require an Let me show you with numbers.

OK, that is not scary yet, but if you start losing more and more of your capital bigger and bigger drawdowns , the faster you will go down the rabbit hole. While many traders hope for that One Big Win that will magically transform them into millionaires overnight, they are more likely to be confronted with the One Big Loss that will threaten their survival in the forex market if they do not exercise careful money management.

If a trader has a big loss, he or she will have to spend more time to get back to where he or she was before, instead of using the time to make profits. Traders who burn out quickly in the market are those who do not show respect for risk. On the other hand, traders who have flourished are those who fully understand the importance of stringent money management and incorporate that into their trading approach.

There is no way around to recouping slowly, unless you want to drive yourself to total destruction by risking more and more of your equity to try to make back your losses. Holding on to a losing trade for too long is the biggest cause of a big drawdown. Be well-capitalised Most new traders run out of money even before they see any profits in their trading account.

Indeed, those who are new to trading most likely do not have a good understanding of the risks and dangers that are lurking in the market, and few even know what drawdown means or have even heard of this word. Many of them do know that trading can be very risky if they do not know what they are doing or how things work in the currency market and, to them, one of the obvious but incorrect ways to limit this risk is by allocating just a small amount of money to their trading account.

There are also many new traders who begin their trading business with little initial capital as they simply do not have enough money.

Whatever their reasons may be, being under-capitalised will be more than just a mistake; it is often the prelude to trading failure. Forex traders who want to set themselves up for success must be well-capitalised.

Never mind that some retail brokers are offering a minimum account deposit of just a few hundred dollars — a paltry amount that almost every one can afford.

Sufficient initial capital must be available to cushion the impact of a string of consecutive losses, so that you do not wipe out your trading account.

A series of losses is really not that uncommon in trading, and all traders must be financially prepared for it. Those with insufficient trading capital tend to set really tight stops, which will naturally then lead to a higher probability of being stopped out.

They also tend to have a good chunk of their account eaten away by unreasonably large losses in relation to their trading account, if they do not set tight stops. So it seems that whichever way they turn, they are setting themselves up for failure, unless they are willing to trade smaller lot sizes. Looking outside of trading, many other businesses fail because the owners often do not have enough capital to tide them over the initial starting phase.

For example, a new restaurant owner must set aside enough money to pay the rent of the restaurant for at least a few months to a few years, assuming that the restaurant would not make any net profits in that period of time. If the owner only has enough to pay for two months rent from his or her own pocket, and the restaurant is still not making enough to cover the rent and other expenses in the third month, how do you think the business is going to sustain itself?

The entire business could fail, not because of the business model, but because of the lack of sufficient capital to keep the business running while the customer base builds up. Trading, as I have mentioned before, must be treated just like any other business, not a frivolous casual pursuit. The point is this: by starting off sufficiently capitalised, you are more likely to adhere to your money management rules and, by doing so, you are really giving yourself a good fighting chance in the market.

Losses are really just part of the trading game. If trading losses are kept manageable and reasonable, they should not dent your trading account too much, provided that you are well-capitalised. Knowing when to get out of a losing position in the currency market is a very important tool of risk management. Stop-loss orders allow traders to set an exit point for a losing trade, and are the best weapon against emotional trading.

While I recommend that traders place a stop-loss order at the time of placing their entry order, mental stops may also be used — but preferably by traders who are more disciplined. From experience, it is much wiser to have a wider but reasonable stop than to have an unreasonably tight stop.

Generally, a stop-loss order should not be shifted in the losing direction while a position is opened. A good trader should know beforehand when to cut his or her losses, and also when to get out of the market with profits.

It is indeed the elusive factor that courts the relentless determination of its seekers. Want to know where it lies? It only exists in the creative part of the mind — together with fairies and gnomes. There is no perfect formula or strategy that can achieve that unrealistic goal because people who are involved in the financial markets evolve with changing market circumstances, even though certain old habits die hard.

Despite the non- existence of the magic formula, there are certainly high probability ways of trading the forex market. While the bulk of this book is focused on the Method part, you need to combine Method with both Money and Mind in order to attain success in the trading business. The old question: technicals or fundamentals?

There are generally three broad categories of forex traders pertaining to what they base their trading decisions on: 1. the technical trader, 2. the fundamental trader, 3. the trader who combines both technicals and fundamentals.

Each type of trader has a distinctively different way of interpreting the currency market based on his or her own opinions. Technical trading A technical trader believes that historical data has a big role in the forecasting of future price action, and is thus devoted to currency price chart analysis, making use of various charting tools such as support and resistance levels, trendlines and a myriad of chart indicators to understand past price behaviour so as to predict what the market will do next.

Most forex traders employ some kind of technical analysis to help them make trading decisions. Technical traders assume that everything that is to be known about the market has already been factored into the current price. Fundamental traders believe that the exchange rate of currencies are largely driven by economic and geopolitical conditions, aside from central bank interventions, and will keep track of economic data such as trade balances, inflation, Gross Domestic Product GDP , unemployment rates, interest rates and so on.

They are also concerned about what policymakers have to say regarding the monetary policy of the country, and will keep on top of these when speeches are scheduled. Combing technicals and fundamentals Since there are advantages of analyzing the forex market from these two different fields, it would be too restrictive to just side with one area and ignore the other.

The most effective traders tend to make trading decisions based on a combination of both technical and fundamental factors in order to get a feel of the overall market sentiment, and then decide to either trade that sentiment or to trade against it taking a contrarian approach. The strategies taught in this book must always be combined with the prevailing market sentiment, which is influenced mainly by fundamentals.

Some strategies may work well for some traders, but may not have the same results for others over a period of time. This may seem puzzling for some people who are wondering that if something works for someone, then it should work for other people as well.

In trading, there are so many other factors specific to each trader that can influence the overall trading performance — his or her emotions, psychology, trading time frame, money management rules, lifestyle, trading capital and so on. The strategies included in this book are open to customisation according to your own personal preference. Many traders do not give themselves the fighting chance and time to stay in the game as they are prone to getting wiped out very quickly.

The Ten Rules For Forex Trading I list here ten rules that I think are important for trading forex. Dos 1. When trying out a new trading strategy, always test it in a demo account, or with a small amount of money, before you commit more money to it. Always keep a record of each of your trades, with details of: why you got in, how you got out and why it turned out the way it did. Have a personalised trading plan and update it as you learn from the market.

If you are unsure of a trade, stay out. It is better to miss an opportunity than to have a loss. When trading, keep up-to-date with both the fundamentals and technicals affecting the market. A trader in the dark is a trader in the red.

It will affect you emotionally, and you will most likely lose it to irrational trading. Always know why you are getting into a trade, and how you are going to get out of it. Just be concerned about being profitable. Chances are that your account will be decimated before you can recoup your losses and go into profit. Vent your frustrations elsewhere after a loss. Do you see it as a big mechanical matrix which is devoid of emotions?

Or do you think of it in mathematical and probability terms? Perhaps, you may even view it as just a vast network of computers which are designed to cheat the trader sitting in front of his or her computer and trading electronically. Most traders I know have a love-hate relationship with the forex market, thinking that the market is, in turn, either against them or for them. To me, the forex market is nothing more than the compressed display of emotions at any one time emanating from currency speculators around the world.

It is similar to a big living organism, like a human being, which is made up of numerous cells, with each cell carrying out its own function and interacting with other cells of the body, working to keep the body alive with round-the-clock chemical and biological processes. The forex market is alive as a macro living organism, which comprises a vast number of market participants acting out their perceptions and emotions, thus driving the blood around the invisible entity.

The participation of each player, whether the player is an institutional dealer or an independent trader, is akin to the individual functioning of a cell, which collectively will constitute the whole organism — the forex market in this case. Knowing what the market thinks and how it thinks is crucial to trading success because, ultimately, the trader is dealing with other traders out there, and needs to know what they are thinking.

Even if you see the market as an enemy, what could be better than knowing the weak points and being able to read the mind of your adversary? In this chapter, I shall focus on how you can better understand the market, and use that knowledge as one of your trading weapons. Market sentiment is simply what the majority of the market is perceived to be thinking or feeling about the market — it is the most important factor that drives the currency market.

This is so because traders tend to act based on what they feel and think of certain currencies, regarding their strength or weakness relative to other currencies.

Market sentiment sums up the overall dominating emotion of the majority of the market participants, and explains the current actions of the market, as well as the future course of actions of the market.

The trend adopted by the forex market is actually a reflection of the current market sentiment, which in turn guides the trading decisions of other traders, whether they should long or short a currency pair. In the process of making educated trading decisions, traders have to weigh a multitude of factors which could influence the bias of a currency, before making up their minds about the current and future state of certain currencies.

There are three main types of sentiment when it comes to forming opinions in the forex market: 1. bullish, 2. bearish or 3. just plain confused. If the majority of the market wants to sell that currency, the market sentiment is deemed to be bearish; if the majority wants to buy that currency, the market sentiment is bullish; and when most market participants are unsure of what to do at the moment, the sentiment ends up being mixed.

Market sentiment acts like a fickle lover, capable of changing its mind based on certain incoming new information which can upset the existing sentiment. One moment everyone could be buying the US dollar in anticipation of a stronger dollar; the next second they could all be dumping it as they fear the dollar would start to weaken due to the impact of some new piece of information, which is almost always some fundamental news.

Interest rates Trends in interest rates are one of the most significant factors influencing market sentiment, as interest rates play a huge role affecting the supply and demand of currencies. Every currency in the world has interest rates attached to them, and these rates are decided by central banks. Some currencies have higher interest rates than others, and these are usually the currencies that attract the most attention from savvy international investors who are always looking across the global landscape in the continual search for a better interest rate yield on fixed-income investments.

This, of course, also depends on the geopolitical or economic risks of that particular currency. Just like when a bank lends money to a higher-risk borrower, high-risk currencies require a significantly higher interest rate for investors to consider keeping money in those currencies. What causes fluctuations in interest rates? The value of money can and does decrease when there is an upward revision of prices of most goods and services in a country.

The nice word for this erosion in value is, of course, inflation. Controlling inflation Central banks are responsible for ensuring price stability in their own country, and one of the ways they employ to fight inflationary pressures is through the setting of interest rates. If inflation risks are seen to be edging upward in, say, the US, the Fed would raise the federal funds rate, which is the rate at which banks charge each other for overnight loans.

When the overnight rate is changed, retail banks will change their prime lending rates accordingly, hence affecting businesses and individuals. An increase in interest rates is an attempt to make money more expensive to borrow so that there will be a gradual decrease in demand for that currency, thus slowing down an overheated economy.

Interest rates and currencies The most important way in which interest rates can influence currency prices is through the widespread practice of the carry trade.

A carry trade involves the borrowing and subsequent selling of a certain currency with a relatively low interest rate, then using the funds to buy a currency which gives a higher interest rate, in an attempt to gain the difference between these two rates — which is known as the interest rate differential. The trader is paid interest on the currency he or she is long in, and must pay interest on the currency he or she is shorting.

This difference is the cost of carry. Therefore, a currency with a higher interest rate tends to be highly sought after by investors looking for a higher return on their investments. The increased demand for that particular currency will thus push up the currency price against other currencies.

For instance, in there was a strong interest among Japanese investors to invest in New Zealand dollar-denominated assets due to rising interest rates in New Zealand. The then near-zero interest rates in Japan forced a lot of Japanese investors to look outside of their country for better yields on cash deposits or fixed- income instruments.

See Figure 5. When forex traders anticipate this kind of situation, they become more inclined to buy that high-interest-rate currency as well, knowing that there is likely to be massive buying interest for that currency. So, in general, rising interest rates in a country should boost the market sentiment regarding the currency of that country. The opposite is true too: when interest rates are cut in a country, that would result in quite a bearish sentiment regarding the currency of that country, and traders would be more willing to sell than buy that particular currency.

Economic growth Besides interest rates, economic growth of countries can also have a big impact on the overall currency market sentiment. Since the United States has the largest economy in the world, the US economy is a key factor in determining the overall market sentiment, especially of currency pairs that have the USD component. A robust economic expansion, coupled with a healthy labour market, tends to boost consumer spending in that country, and this helps companies and businesses to flourish.

A country with a strong economy is in a better position to attract more overseas investments into the country, as investors generally prefer to invest in a solid economy that is growing at a steady pace.

Forex traders, expecting this consequence, will put on their bullish cap to buy that currency before the investors do. Gross Domestic Product GDP , 2. the unemployment rate, and 3. trade balance data. These are explained below. Unemployment rate The unemployment data reports the state of the labour market of a country. Trade balance data Another widely watched economic indicator is the trade balance data. Trade balance measures the difference between the value of imports and exports of goods and services of a country.

If a country exports more than it imports, it has a trade surplus. For example, if the US imports an increased amount of goods and services from Europe, US dollars will have to be sold in exchange to buy euros to pay for those imports.

The resulting outflow of US dollars from the United States could potentially cause a depreciation of the US dollar against the euro or other currencies, and that can affect market sentiment surrounding the USD. The opposite scenario is true for a country that is experiencing a trade surplus.

Global geopolitical uncertainties such as terrorism, transitional change of government or nuclear threats can cause investors to lose faith in some particular currencies, and they may prefer to shift their assets into a safe haven currency when these circumstances arise. Market sentiment is very sensitive to such geopolitical developments, and can cause a strong bias towards a particular currency.

For example, during periods of high tension in the Middle East in , the market formed a very bullish sentiment towards the US dollar, which became the preferred currency to hold in such turbulent times, replacing the traditional status of the Swiss franc as the safe haven currency.

Forex traders should be keenly aware of the current geopolitical environment in order to keep track of any potential change in market sentiment, which could impact currency prices. But how can you get an idea of the overall sentiment of the market?

You can do so by reading reports by analysts and financial journalists in news wires or by visiting online trading forums to see what other traders are discussing. However, these ways of getting a feel of the current market sentiment are not too accurate; you may think that other traders are in a buying or selling mood, but that may not be what is really happening in reality.

Here are some of the more effective ways of gauging market sentiment: 1. The Commitment of Traders COT report 2. Commitment Of Traders COT report What is the COT? The COT report provides traders with detailed positioning information about the futures market, and is, in my opinion, one of the most underrated tools that forex traders can make use of to enhance their trading performance.

The report is compiled and released weekly by the Commodity Futures Trading Commission CFTC in the United States every Friday at Eastern Time, and records open interest information about the futures market based on the previous Tuesday.

Anyone can access the COT report for free on the CFTC website www. There are basically two types of reports available: the futures-only COT report and the futures-and-options-combined COT report.

I usually just access the futures- only report for a glimpse of what has happened in the futures dimension of the forex market. In order to get through to the currency futures data, you have to wade past other commodities like milk, feeder cattle and so on, so a little patience is required. Even though the data arrives three days late, the information nonetheless can be helpful since many traders spend their weekend analyzing the COT report.

The time lag between reporting and release is the main handicap of the COT data, but despite this limitation, you can still use it as a sentiment tool. Figure 5. You can see the long and short positions held by traders in each of the three main categories defined by the CFTC, as explained below. Some notes to the figure above. For example, a German car-maker, who exports to the US, expects to receive 10 million euros worth of sales within the next quarter.

To hedge against the possibility of a US dollar decline which would affect the amount of euros it would receive once converted, the German car-maker would short 10 million in Euro FX futures. The Forex hedging strategy is a great way to minimize your exposure to risk. It not only helps you to protect against possible losses but also it can help you to make a profit. Be sure to check out our article on. If this is your first time on our website, our team at Trading Strategy Guides welcomes you.

Make sure you hit the subscribe button, so you get your Free Trading Strategy every week sent right to your inbox. Please Share this Trading Strategy Below and keep it for your own personal use! Thanks Traders! We specialize in teaching traders of all skill levels how to trade stocks, options, forex, cryptocurrencies, commodities, and more.

Our mission is to address the lack of good information for market traders and to simplify trading education by giving readers a detailed plan with step-by-step rules to follow. Please Longing EURUSD and Shorting USDJPY or BUYING USDCAD and SELLING OIL is not Hedging, its exposing to even more risk.

Buy both EURUSD and USDJPY to hedge USD. Think about it. Nice, but finally how can we use the three currency to make money in hedging EURUSD USDJPY EURJPY. When close The position of 3 currency hedge? There are 2 type , buy buy sell or sell sell buy, when must choose one and Leave the other?

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edu no longer supports Internet Explorer. To browse Academia. edu and the wider internet faster and more securely, please take a few seconds to upgrade your browser. Foreign exchange, popularly known as 'Forex' or 'FX', is the trade of a single currency for another at a decided trade price on the over-the-counter OTC marketplace. wilson putra. this is something you have looking for when making serious decision about Dollar investment stuff.

Log in with Facebook Log in with Google. Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link. Need an account? Click here to sign up. Download Free PDF. Forex for Beginners: How to Make Money in Forex Trading Currency Trading Strategies.

Rajiswaran Muniandi. Continue Reading Download Free PDF. Related Papers. How To Trade Dollar. Download Free PDF View PDF. All rights reserved. Table of Contents 1. Making Money in Forex Trading 2.

What is Forex Trading 3. How to Control Losses with "Stop Loss" 4. How to Use Forex for Hedging 5. Advantages of Forex Over Other Investment Assets 6. The Basic Forex Trading Strategy 7. Forex Trading Risk Management 8. What You Need to Succeed in Forex 9. Technical Analysis As a Tool for Forex Trading Success Developing a Forex Strategy and Entry and Exit Signals Thousands of people, all over the world, are trading Forex and making tons of money. Why not you?

All you need to start trading Forex is a computer and an Internet connection. You can do it from the comfort of your home, in your spare time without leaving your day job. And you don't need a large sum of money to start, you can trade initially with a minimal sum, or better off, you can start practicing with a demo account without the need to deposit any money. Once you consider to start Forex trading, one of the first things you need to do is choose a broker, choosing a reliable broker is the single most critical factor to Forex success.

There are dozens of online brokers out there but your best bet is to go with one of the leaders. Here are 2 online brokers that are reputable and are most suitable for beginners and pros alike: 1. Forex Inc - The best broker for US residents If the link doesn't work, copy and paste the following URL into a browser: www. eToro - accepts worldwide traders except US residents If the link doesn't work, copy and paste the following URL into a browser: www.

Now I would strongly encourage you to go and visit these broker's sites right now even if you are not yet decided whether you want to go into Forex trading. because each provides tons of free education materials, videos and best of all a demo account that allows you to practice Forex trading for free without the need to deposit any money. Simply go to each of these brokers, register for a free demo account and start "trading" - by actually practicing and experiencing it firsthand you'll be able to decide whether Forex trading is for you.

In any case, before starting to trade for real, it is advisable that you practice with a demo account. Once you build some skill and feel more comfortable with the system you can start trading gradually for real money. Now which of the two brokers you should choose? while both are reputable and reliable they do have some differences. For starter if you are a US resident you should choose Forex Inc, as eToro does not accept US residents.

Here is a summary of the specific advantages of each of them. Choose based on your personal preferences: Forex Inc www. It has several different account levels that make it easy for anyone to open an account. Forex Inc is an excellent broker suitable for beginners and pros alike. eToro www. You can also communicate with other traders including the top traders. What is Forex Trading Foreign exchange, popularly known as 'Forex' or 'FX', is the trade of a single currency for another at a decided trade price on the over-the-counter OTC marketplace.

In essence, Forex currency trading is the act of simultaneously purchasing one foreign currency whilst selling another, mainly for the purpose of speculation. Foreign currency values increase appreciate and drop depreciate towards one another as a result of variety of factors such as economics and geopolitics. The normal objective of FX traders is to make money from these types of changes in the value of one foreign currency against another by actively speculating on which way foreign exchange rates are likely to turn in the future.

In contrast to the majority of financial markets, the OTC over-the-counter currency markets does not have any physical place or main exchange and trades hours every day via a worldwide system of companies, financial institutions and individuals.

Because of this, currency rates are continuously rising and falling in value towards one another, providing numerous trading choices. One of the important elements regarding Forex's popularity is the fact that currency trading markets usually are available hours a day from Sunday evening right through to Friday night. Buying and selling follows the clock, beginning on Monday morning in Wellington, New Zealand, moving on to Asian trade spearheaded from Tokyo and Singapore, ahead of going to London and concluding on Friday evening in New York.

The fact that prices are available to deal hours daily makes certain that price gapping whenever a price leaps from one level to another with no trading between is less and makes sure that traders could take a position each time they desire, irrespective of time, even though in reality there are particular 'lull' occasions when volumes tend to be below their daily average which could widen market spreads.

Forex is a leveraged or margined item, which means that you are simply required to put in a small percentage of the full value of your position to set a foreign exchange trade. Because of this, the chance of profit, or loss, from your primary money outlay is considerably greater than in conventional trading. Currencies are designated by three letter symbols. The first currency is the base currency and the second currency is the quote currency.

The price, or rate, that is quoted is the amount of the second currency required to purchase one unit of the first currency. As we see, the US dollar is represented in all currency pairs, thus, if a currency pair contains the US dollar, this pair is considered a major currency pair.

Pairs which do not include the US dollar are called cross currency pairs, or cross rates. One of the most interesting movements in the Forex market involving the British pound took place in the September 16, That day is known as Black Wednesday with the British Pound posting its biggest fall. the US dollar currency pairs. The general reasons for this "sterling crisis" are said to be the participation of Great Britain in the European currency system with fixed exchange rate corridors; recently passed parliamentary elections; a reduction in the British industrial output; the Bank of England efforts to hold the parity rate for the Deutschemark, as well as a dramatic outflow of investors.

At the same time, due to a profitability slant, the German currency market became more attractive than the British one. All in all, the speculators were rushing to sell pounds for Deutschemarks and for US dollars. As a result, the pound returned to a floating exchange rate. Another intriguing currency pair is the US dollar vs. It is traded most actively during sessions in Asia.

From the mid 80's the Yen ratings started rising actively versus the US Dollar. In the early 90's a prosperous economic development turned into a standstill in Japan, the unemployment increased; earnings and wages slid as well as the living standards of the Japanese population.

And from the beginning of the year , this caused bankruptcies of numerous financial organizations in Japan. As a consequence, the quotes on the Tokyo Stock Exchange collapsed, a Yen devaluation took place, thereafter, a new wave of bankruptcies among manufacturing companies began. The above started an Asian crisis in the years that led a Yen crash. It resulted in a tumble of the Yen-US dollar pair from Yens for one US dollar to The global economic crisis touched almost all fields of human activities.

Forex currency market was no exception. Though, Forex participants central banks, commercial banks, investment banks, brokers and dealers, pension funds, insurance companies and transnational companies were in a difficult position, the Forex market continues to function successfully, it is a stable and profitable as never before.

The financial crisis of has led to drastic changes in the world's currencies values. During the crisis, the Yen strengthened most of all against all other currencies. Neither the US dollar, nor the euro, but the Yen proved to be the most reliable currency instrument for traders. One of the reasons for such strengthening can be attributed to the fact that traders needed to find a sanctuary amid a monetary chaos.

Ask and Bid When traders want to place an order on the Forex market they should be aware of the currency pair as well as the price of this pair. A Forex market price of a currency pair is denoted by two symbols, Ask and Bid, which have specific digital notations.

Consequently, a trader sells the currency standing second. Bid price is the lowest price in the quotation of the currency pair, at which a trader sells the currency standing first in the abbreviation of the currency pair. Respectively, a trader buys the currency standing second. Seem complicated? This means that you can buy 1 euro for 1.

Day trading Day trading is one of the more popular types of trading, whereby traders open and close positions within a day. Therefore, learning how to trade in an imperfect world is very important. Y-axis displays the net number of speculative contracts. While there are also many traders out there who do not have risk management rules in place, traders overall are generally more aware of proper risk management than most investors. Under these circumstances, it is better to assume that the price move is hardly supported by substance, and could reverse sometime soon. This allows you to gain a better understanding of how live trading works before you take any big financial risks in the market.

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