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Saturday, April 19, 2008

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How To Identify The Major Economic Factors That Are Important In Forex Trading

By Greg Hall

Unlike other trading exchanges such as the NYSE, NASDAQ, and other major stock trading organizations, trading in the foreign exchange market can be extremely volatile on a day-to-day basis. It is crucial that anyone who is going to invest in the Forex market be as informed as possible on the global economic news of the day that influences the market. There are numerous economic factors that influence the movement of a particular currency. Unlike other trading exchanges such as the NYSE, NASDAQ, and other major stock trading organizations, trading in the foreign exchange market can be extremely volatile on a day-to-day basis. It is crucial that anyone who is going to invest in the Forex market be as informed as possible on the global economic news of the day that influences the market. There are numerous economic factors that influence the movement of a particular currency.

When you are considering investing in the foreign exchange market there are many economic indicators and factors that governments, as well as privately owned companies provide that can give an inside look at possible economic performance. When countries issue economic reports they not only show the country's particular policies and current events but also reveal the economic health of the country.

Many times a responsible and reputable broker can be a good source of economic news and give good advice on what particular trades may be good at a particular time. If you don't have the time to stay up on the most current reports, a good broker can be crucial to your Forex trading success by studying these reports and determining whether a particular country is in an economic decline or enjoying a major increase. The great thing about Forex is that you can make money either way.

News that is necessary for the Forex trader is of much greater detail than the typical investor is interested in or even cares to follow. When you are considering investing in a particular country's currency, a few of the main factors to look at include current events and the state of the economy in that given nation. Statistics such as housing, unemployment, inflation, budget deficits, and current political climate can all affect the value of the currency. As mentioned before, money can be made in positive as well as negative political climates. You can make money from countries that are experiencing tremendous political unrest and rampant inflation as easily as one that is fiscally responsible and experiencing great economic growth.

The Gross Domestic Product, known more commonly as the GDP, is another huge economic indicator that experienced traders look at intensely when considering trades. The GDP is the total market value of all goods and services that are normally produced within a particular country. Normally this figure is an annual one and is not given in shorter periods. Because of the volatility of the Forex market this is considered a lagging indicator that becomes more measurable after the particular country's economy has started to follow a unique trend.

Other important factors for Forex trading include retail sales reports, which are the total sales receipts of all the retail stores in the country, industrial production that includes factories, mines, utilities and more, and the CPI or consumer price index. The CPI is the measure of the change in the prices of consumer goods in 200 different categories. This report can show whether or not a country is making a profit or losing money on their products and services. The exports a country contributes is are very important when looking at this indicator because the amount of exports can reflect a currency's weakness or its strength.

As you can see there are a lot of factors that need to be considered when investing in foreign currencies. It can be fun and exhilarating, but doing your homework will always pay the largest dividends.

Gregg Hall is an author living in Navarre Beach, Florida. Find more about this as well as FX trading strategies at www.FXTradingStrategies.com

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For the most part, a reputable broker can look at economic indicators and know which trades will be best. Reports on these indicators are released at scheduled times and can tell if a certain country is experiencing improvement in the economy or if the country's economy is on the decline. When the prices fluctuate, a great deal one way or the other, the price can be affected.
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For position traders, the basic bias of the market in his trading time frame, the liquidity situation of the market in that time frame, and the size of trading positions must be all taken into account when exercising stops, be it based on tech levels or a certain sum of money or a percentage of a total equity. It is a must but also it is form of art like trading itself. And every trader must develop his own unique style of using stops. But unfortunately, all this can be learned only by paying a certain amount of tuition fee to the market.

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Why should you worry about the price of oil if you're not buying and selling oil? If you're trading currencies, there's one very good reason. Many of the most important currency trading pairs rise and fall on the price of a barrel of oil. The price of oil has been a leading indicator of the world economy for decades, and experts predict that that won't be changing any time soon. The connection between the price of oil and the economy of many countries is based on a couple of simple facts:
- Countries with healthy supplies of crude oil benefit economy-wise from higher oil prices
- Countries who depend on imports for their energy needs benefit from lower oil prices and lose when oil prices rise
- When the economy of a country is strong, its currency is also strong in the forex market
- When the economy in a country takes a downturn, its currency loses value in the currency exchange rate.
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Activities by professional currency managers, generally on behalf of a pool of funds, have also become a factor moving the market. While professional managers may behave independently and view the market from a unique perspective, most, if not all, are at least aware of important technical chart points in each major currency. As major support or resistance levels approach, the behavior of the market becomes more technically oriented and the reactions of many managers are often predictable and similar. These market periods may result in sudden and dramatic price swings as substantial amounts of capital are invested in similar positions.
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Introduction to Currency Exchange and the FX Market

What is Currency Exchange?

Currency exchange is the trading of one currency against another. Professionals refer to this as foreign exchange, but may also use the acronyms Forex or FX.
The Need for Currency Exchange

Currency exchange is necessary in numerous circumstances.

Consumers typically come into contact with currency exchange when they travel. They go to a bank or currency exchange bureau to convert one currency (typically, their "home currency") into another (i.e., the currency of the country they intend to travel to) so they can pay for goods and services in the foreign country. Consumers may also purchase goods in a foreign country or via the Internet with their credit card, in which case they will find that the amount they paid in the foreign currency will have been converted to their home currency on their credit card statement. Although each such currency exchange is a relatively small transaction, the aggregate of all such transactions is significant.

Businesses typically have to convert currencies when they conduct business outside their home country. For example, if they export goods to another country and receive payment in the currency of that foreign country, then the payment must often be converted back to the home currency. Similarly, if they have to import goods or services, then businesses will often have to pay in a foreign currency, requiring them to first convert their home currency into the foreign currency. Large companies convert huge amounts of currency each year; for example, a company such as General Electric (GE) converts tens of billions of dollars each year. The timing of when they convert can have a large affect on their balance sheet and "bottom line.

Investors and speculators require currency exchange whenever they trade in any foreign investment, be that equities, bonds, bank deposits, or real estate. For example, when a Swedish investor buys shares in Sun Microsystems on the NASDAQ, she will have to pay for the shares in U.S. Dollars and likely have to convert Swedish Krona to U.S. Dollars. Similarly, a Japanese real estate investor who sells a New York property may well want to convert the proceeds of the sale in U.S. Dollars to Japanese Yen.

Investors and speculators also trade currencies directly in order to benefit from movements in the currency exchange markets. For example, if an American investor believes that the Japanese economy is strengthening and as a result expects the Japanese Yen to appreciate in value (i.e., go up relative to other currencies), then she may want to buy Japanese Yen and take what is referred to as a long position. Similarly, if an American investor believes that the Euro will go down over time, then she may want to sell Euro to take a short position. Interestingly, investors and speculators can profit equally from currencies becoming stronger (by taking a long position) or from currencies becoming weaker (by taking a short position). Speculators are often day traders, trying to take advantage of market movements in very short time periods; buying a currency and then selling it again may happen within hours or even minutes. They are attracted to currency trading for numerous reasons, including (i) the size and daily volatility of the market, which gives them unparalleled excitement, (ii) the almost perfect liquidity of the currency exchange market, (iii) the fact that the currency exchange market is "open" 24 hours a day market, and (vi) the fact that currencies can be traded with no brokerage charges.

Commercial and Investment Banks trade currencies as a service for their commercial banking, deposit and lending customers. These institutions also generally participate in the currency market for hedging and proprietary trading purposes.

Governments and central banks trade currencies to improve trading conditions or to intervene in an attempt to adjust economic or financial imbalances. Although they do not trade for speculative reasons --- they are a non-profit organization --- they often tend to be profitable, since they generally trade on a long-term basis.
Currency Exchange Rates and Spreads

Currency exchange rates are determined by the currency exchange market. (The currency exchange market is described further below.) A currency exchange rate is always quoted for a currency pair using ISO code abbreviations. For example, EUR/USD refers to the two currencies Euro (the European currency) and U.S. Dollar. The first is referred to as the base currency, while the second as the quote currency. The EUR/USD exchange rate specifies how many US Dollars you have to pay to buy one Euro, or conversely how many US Dollars you obtain when you sell one Euro. More generally, if buying, an exchange rate specifies how much you have to pay in the quote currency to obtain one unit of the base currency, and if selling, the exchange rate specifies how much you get in the quote currency when selling one unit of the base currency.

A currency exchange rate is typically given as a pair consisting of a bid price and an ask price. The ask price applies when buying a currency pair and represents what has to be paid in the quote currency to obtain one unit of the base currency. The bid price applies when selling and represents what will be obtained in the quote currency when selling one unit of the base currency. The bid price is always lower than the ask price.

In the currency market, the following abbreviation for the currency exchange rate pair is used:

0.8423/28

The first component (before the slash) refers to the bid price (what you obtain in USD when you sell EUR), and in this case includes four digits after the decimal point. The second component (after the slash) is used to obtain the ask price (what you have to pay in USD if you buy EUR). The ask price is obtained by increasing the first component until the last two decimal places are equal to the digits in the second component. In this example, the ask price is 0.8428. As another example, 0.8498/03 refers to a bid price of 0.8498 and an ask price of 0.8503. (Note that for some exchange rates it is customary to quote rates in units of 100, as is the case with USD/JPY.)

The difference between the bid and the ask price is referred to as the spread. When trading large amounts of $1M or higher, the spread obtained in a quote is typically 5 basis points or PIPs, with each basis point referring to 0.0001 (or 0.01 when, say, the Yen is involved). In the example above, the spread is 0.0005 or 5 PIPs. When trading smaller amounts, the spread may be larger; for example, when trading less than $100,000, spreads of 50-200 PIPs are common. Credit card companies typically apply a spread of 200-300 PIPs. Banks and exchange bureaus typically use a spread in the range of 200-1000 PIPs (in addition to charging a commission). For investors and speculators, a lower spread translates into easier profit taking due to movements in exchange rates.
The Currency Exchange Market

The currency exchange market is an inter-bank or inter-dealer market that was established in 1971 when floating exchange rates began to materialize. In addition, it is an Over-The-Counter market, meaning that transactions are conducted between any two counter parties that agree to trade via the telephone or electronic network. Trading is thus not centralized, as is the case with many stock markets (i.e., NYSE, ASE, CME) or as the case for currency futures and currency options, which trade on special exchanges. Dealers often "advertise" exchange rates using a distribution network, such as the one provided by Reuters or Bridge. Dealers then use the information obtained there (or directly) to "agree" to a rate and a trade.

The major dealing centers today are: London, with about 30% of the market, New York, with 20%, Tokyo, with 12%, Zurich, Frankfurt, Hong Kong and Singapore, with about 7% each, followed by Paris and Sydney with 3% each.

In terms of trading volume, the currency exchange market is the worlds largest market, with daily trading volumes in excess of $1.5 trillion US dollars. This is orders of magnitude larger than the bond or stock market. For example, the New York Stock Exchange has a daily trading volume of approximately $60 billion. Thus, the currency exchange market is by far the most liquid market in the world today. Because of the volume in trading, it is impossible for individuals or companies to affect the exchange rates. In fact, even central banks and governments find it increasingly difficult to affect the exchange rates of the most liquid currencies, such as the US dollar, Japanese Yen, Euro, Swiss Frank, Canadian Dollar or Australian Dollar.

The currency exchange market is a true 24-hour market, 5 days a week. There are dealers in every major time zone. Trading begins Monday morning in Sydney (which corresponds to 3pm EST, Sunday) and then daily moves around the globe through the various trading centers until closing Friday evening at 4:30pm EST in New York.

Today, over 85% of all currency exchange transactions involve a few major currencies: the US Dollar (USD), Japanese Yen (JPY), Euro (EUR), Swiss Frank (CHF), British Pound (GBP), Canadian Dollar (CAD), and Australian Dollar (AUD). In the currency exchange market, most of the currencies are traded only against the US Dollar. The term cross rate refers to an exchange rate between two non-dollar currencies. Trading between two non-dollar currencies usually occurs by first trading one against the US Dollar and then trading the US Dollar against the second non-dollar currency. Because of this, the spread in the exchange rate between two non-dollar currencies is often higher. (There are a few non-dollar currencies that are traded directly, such as GBP/EUR or EUR/CHF.) The following directly traded currency pairs make up the vast majority of the trading volume and are thus considered to be the most important ones: EUR/USD, USD/JPY, EUR/JPY, USD/CAD, EUR/GBP, GBP/USD, USD/CHF, AUD/USD, and AUD/JPY.
How currency trading is done traditionally

Currency trading is always done with currency pairs, such as EUR/USD, and so it is useful to consider the currency pair as an instrument, which can be bought or sold.

* Buying the currency pair implies buying the first, base currency and selling (short) an equivalent amount of the second, quote currency (to pay for the base currency). (It is not necessary for the trader to own the quote currency prior to selling, as it is sold short.) A speculator buys a currency pair, if she believes the base currency will go up relative to the quote currency, or equivalently that the corresponding exchange rate will go up.
* Selling the currency pair implies selling the first, base currency (short), and buying the second, quote currency. A speculator sells a currency pair, if she believes the base currency will go down relative to the quote currency, or equivalently, that the quote currency will go up relative to the base currency.

After buying a currency pair, the trader will have an open position in the currency pair. Right after such a transaction, the value of the position will be close to zero, because the value of the base currency is more or less equal to the value of the equivalent amount of the quote currency. In fact, the value will be slightly negative, because of the spread involved.

In todays currency market, a trade goes through a three-step process:

1. the trader communicates the currency pair and the amount he/she would like to trade with another dealer.
2. the dealer responds with a bid and an ask price
3. the trader responds to the bid and ask price with one of:
1. buy (by saying "Mine" or "I buy" or "I take")
2. sell (by saying "yours" or "I give you" or "I sell")
3. refuse.

The transaction occurs if the final response is either a buy or a sell. The dealer is required to quote a "good" market price, since he does not know whether the trader will buy or sell.

The currency exchange market described above is referred to as the spot market and the transaction described is referred to as a spot deal. A spot deal consists of a bilateral contract between a party delivering a specified amount of a given currency against receiving a specified amount of another currency from a second counter party, based on an agreed exchange rate, within two business days of the deal date, which is referred to as the settlement date. (The settlement date for USD/CAD is one business day after the deal date.) Speculators rarely deliver, however. Instead, they use what is referred to as a rollover swap. The rollover swap is designed to allow the changing of an old deal date to the current date by simultaneously closing an open position for todays date and opening the same position for the next day at a price reflecting the interest rate differential between the two currencies.

When a trader buys or sells a currency pair, the value of the currency pair, as an instrument, initially is close to zero. This is because (in the case of a buy) the quote currency is sold to buy an equivalent amount of the base currency. As the market rates fluctuate, however, the value of the currency pair position held will also fluctuate. Thus, if the rate for the currency pair goes down, the speculators long position will lose in value and become negative. To ensure that the speculator can carry the risk for the case where the position results in a loss, banks or dealers typically require sufficient collateral to cover those losses. This collateral is typically referred to as margin.

To limit down-side risk, traders often specify a Stop-Loss rate for each open trade. The Stop-Loss specifies that the trade should be closed automatically when the currency exchange rate for the currency pair in question reaches a certain threshold. For long positions, the Stop-Loss rate is always lower than the current exchange rate; for short positions, it is always higher. Traders, at times, also specify a Take-Profit rate for their trades in order to lock in a profit when the exchange rate reaches a certain threshold. For long positions, the Take-Profit rate must be above the current rate, while for short positions, it must be below the current rate.

A trader may also leave an order with a bank, broker or dealer. These so called leave orders are orders that a trade should be executed (in the future) when certain market conditions occur. There are three types of leave orders:

1. entry orders: specifies that a currency pair should be traded when it reaches a certain exchange rate. Entry orders are used when the trade would not offset a current position.
2. take-profit orders: are used to clear a position by buying (or selling) the currency pair of the position when the exchange rate reaches a specified level.
3. stop-loss orders: are used to clear a position by buying (or selling) the currency pair of the position when the exchange rate reaches a specified level.

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There are risks in trading foreign currencies. Like any investment, forex investing carries substantial risk. You can lose all of your money and foreign currency trading can be extremely volatile. Make sure you thoroughly research futures trading and foreign exchange trading entirely before setting off on your adventure.

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Currency prices are affected by a variety of economic and political conditions. The beginner trading forex currency should take note to probably the most important influences to the currency prices are interest rates, international trade, inflation, and political stability. Governments participate in the foreign exchange market to influence the value of their currencies. The governments flood the market with their domestic currency in an attempt to lower the currency price or conversely, buying in order to raise the price. This is generally known as central bank intervention. The beginner trading forex currency should be aware that large market orders can cause high volatility in currency prices. Due to the size and volume of the forex market its impossible for any entity to drive the market for any length of time.

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Forex fx currency symbols are always three letters, where the first two letters identify the name of the currency and the third letter identifies the name of the country's currency.

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Forex, FX and the Forex market are some common abbreviations for the Foreign Exchange market. Actually it is the largest financial market in the world, where money is sold and bought freely. In its present condition the Forex market was launched in the seventies, when free exchange rates were introduced, and only the participants of the market determine the price of one currency against the other proceeding from demand and supply. As far as the freedom from any external control and free competition are concerned, the Forex market is a perfect market.
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Forex Trading Basics

Forex Market Basics

The Foreign Exchange market (also referred to as the Forex, FX market, "Cash" Forex or Spot Forex market ) is the largest financial market in the world, with more than $1.5 trillion changing hands every day � 30 times larger than the combined volume of all U.S. equity markets. Another major feature of the Forex market is that it operates 24 hours a day, corresponding to the opening and closing of financial centers in countries all across the world, starting each day in Sydney, then Tokyo, London and New York. At any time, in any location, there are buyers and sellers, making the Forex market the most liquid market in the world.

What to trade in Forex Market?

In the forex market, currency trading is always done in currency pairs, such as EUR/USD or GBP/USD. Accordingly, all trades result in the simultaneous buying of one currency and the selling of another. The base currency is the "basis" for the buy or the sell. It is useful to consider the currency pair as an instrument, which can be bought or sold.

Understanding Forex quote

* Base currency: The first currency in the pair.
* Counter Currency: The second currency in the pair. Also known as the terms currency.

The US dollar is the centerpiece of the Forex market and is normally considered the �base� currency for quotes. This includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/CAD 1.1302 means that one U.S. dollar is equal to 1.1302 Canadian dollar.

BID and ASK Prices

When trading forex you will often see a two-sided quote, consisting of a �bid� and �ask�. The �bid� is the price at which you can sell the base currency (at the same time buying the counter currency). The �ask� is the price at which you can buy the base currency (at the same time selling the counter currency).

Commission-free, but with spreads

Most Forex brokers offer commission-free Forex trading. Spread - The difference between the bid and ask price of a currency. Normally 3-5 pips on the Majors.

Rollover - What happens to my open positions at the end of the trading day?

Process whereby the settlement of a deal is rolled forward to another value date. The cost of this process is based on the interest rate differential of the two currencies. Most brokers will automatically roll over your open positions, allowing you to hold a position for an indefinite period of time.

Leverage & Margin

The leverage available in forex trading is one of main attractions for many traders. Leveraged trading, or trading on margin, simply means that you are not required to put up the full value of the position. Forex brokers provide more leverage than stocks or futures. In forex trading, the amount of leverage available can be up to 400 times the value of your account.

From http://www.forex-articles.net/article-1.html

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I always try to pyramid while position trading medium-term once I am convinced of a new medium-term trend emerging. Like in USD/JPY position trading 135-132 as an initial position, adding in 132 and 129 areas. Same for AUD/USD and EUR/USD with similar strategies. But sitting on positions and watching the counter-rallies costing truck load of money is not easy job to do and causes lots of pain all the time. Most traders even among experienced ones cannot bear that pain and give up too early. But there is no other way to make a big money and we have to bite the bullet and "sit and accumulate" as long as the medium-term trend is intact. That is why I always believe psychological aspects of trading is far more important than anything else in successful trading. A mind game like those bluffing game of poker.

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Current events and the state of the economy in any given nation is one of the top economic indicators used when analyzing the Forex. Factors such as unemployment numbers, housing statistics and the current state of a country's government can all affect changes in the Forex. When a country is feeling optimisitic about the current state of affairs in their country, prices of the Forex will reflect this. When a nation experiences political unrest, large amounts of unemployed workers and inflation, the rate of the currency will be reflected. Sometimes, this indicator tends to be overlooked, but can serve as an important gauge in the fluctuations of the Forex.

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Forex currency trading is the simultaneous buying of one currency and selling of another.

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First what is Forex: The FOREX or Foreign Exchange market is the largest financial market in the world, with an volume of more than $1.5 trillion daily, dealing in currencies. Unlike other financial markets, the Forex market has no physical location, no central exchange. It operates through an electronic network of banks, corporations and individuals trading one currency for another.
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