Currency Trading for dommies starded Editions

Welcome to FOREX.com
There has never been a more
challenging and exciting time to
be trading in the foreign exchange
market. What started out as a market
for professionals is now attracting
traders from all over the world and
of all experience levels.
At FOREX.com, we focus exclusively
on the needs of individual forex trader,
offering an advanced trading platform,
premium tools, and customized
services for the way you trade. Our
commitment to your success extends to our professional dealing
practices and world class service.
After reading this Getting Started Edition, I encourage you to explore
our Web site for additional information about the forex market and
our trading services, and to sign up for a free practice account to
experience both firsthand.
Mark Galant
Chairman & Founder
GAIN Capital Group


Currency Trading For Dummies®, Getting Started Edition
Published by
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Hoboken, NJ 07030-5774
Copyright © 2007 by Wiley Publishing, Inc., Indianapolis, Indiana
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ISBN: 978-0-470-25143-0
Manufactured in the United States of America
10 9 8 7 6 5 4 3 2 1
Introduction
Thanks to the Internet, tens of thousands of individual
traders and investors all over the world are discovering
the excitement and challenges of online trading in the forex
market. Yet in contrast to the stock market, the forex market
somehow remains more elusive and seemingly complicated
to newcomers.
Currency Trading For Dummies, Getting Started Edition, strips
away the mystique of the forex market for smart, intelligent
investors like you who know something about the potential
of the forex market but don’t have the foggiest how it actually
works. Read this book and then, if you like what you’ve read,
put your knowledge and intuition to the test by getting a
practice trading account with an online forex brokerage
before you put any actual money at risk.
Note: Trading foreign currencies is a challenging and potentially
profitable opportunity for educated and experienced
investors. However, before deciding to participate in the
forex market, you should carefully consider your investment
objectives, level of experience, and risk appetite. Most important,
don’t invest money you can’t afford to lose.
About This Book
Currency Trading For Dummies, Getting Started Edition, contains
the no-nonsense information you need to take the first step
into the world of currency trading:

Chapter 1: What Is the Forex Market? introduces you to
the global forex market and gives you an idea of its size
and scope.

Chapter 2: The Mechanics of Currency Trading examines
how currencies are traded in the forex market:
which currency pairs are traded, what price quotes
mean, how profit and loss is calculated, and how the
global trading day flows, just to name a few.

Chapter 3: Choosing Your Trading Style reviews the
various approaches used by professional currency
traders and how they influence trading decisions, as
well as how to develop a disciplined trading plan and to
stick with it.

Chapter 4: Getting Started with Your Practice Account
walks you through the various ways of establishing a
position in the market, how to manage the trade while
it’s open, how to close out the position, and how to evaluate
your results critically.
Icons Used in This Book
Throughout this book, you see icons in the margins next to
certain paragraphs. Here are the icons and what they mean:
Theories are fine, but anything marked with a Tip icon tells
you what currency traders really think and respond to. These
are the tricks of the trade.
Paragraphs marked with the Remember icon contain the key
takeaways from this book and the essence of each subject’s
coverage.
Achtung, baby! The Warning icon highlights errors and mistakes
that can cost you money, your sanity, or both.
You can skip anything marked by the Technical Stuff icon without
missing out on the main message, but you may find the
information useful for a deeper understanding of the subject.
2 Currency Trading For Dummies, Getting Started Edition
Want to go deeper? Try the big book
If you want to delve more deeply
into currency trading, consider picking
up the full version of Currency
Trading For Dummies, from which
this special edition was derived. The
full version of Currency Trading For
Dummies shows you how the forex
market really works, what moves it,
and how you can actively trade it.
We also provide you with the tools
to develop a structured game plan
you need to seriously trade in the
forex market.
Chapter 1
What Is the Forex Market?
In This Chapter

Getting inside the forex market

Understanding that speculating is the name of the game

Trading currencies around the world

Linking other financial markets to currencies
The foreign exchange market — most often called the forex
market, or simply the FX market — is the most traded financial
market in the world. We like to think of the forex market as
the “Big Kahuna” of financial markets. The forex market is the
crossroads for international capital, the intersection through
which global commercial and investment flows have to move.
International trade flows, such as when a Swiss electronics
company purchases Japanese-made components, were the
original basis for the development of the forex markets.
Today, however, global financial and investment flows dominate
trade as the primary non-speculative source of forex market
volume. Whether it’s an Australian pension fund investing in
U.S. Treasury bonds, or a British insurer allocating assets to the
Japanese equity market, or a German conglomerate purchasing
a Canadian manufacturing facility, each cross-border transaction
passes through the forex market at some stage.
More than anything else, the forex market is a trader’s market.
It’s a market that’s open around the clock six days a week,
enabling traders to act on news and events as they happen.
It’s a market where half-billion-dollar trades can be executed
in a matter of seconds and may not even move prices noticeably.
Try buying or selling a half billion of anything in another
market and see how prices react.
4 Currency Trading For Dummies, Getting Started Edition
Getting Inside the Numbers
Average daily currency trading volumes exceed $2 trillion
per day. That’s a mind-boggling number, isn’t it?
$2,000,000,000,000 — that’s a lot of zeros, no matter how you
slice it. To give you some perspective on that size, it’s about
10 to 15 times the size of daily trading volume on all the
world’s stock markets combined.
Speculating in the
currency market
While commercial and financial transactions in the currency
markets represent huge nominal sums, they still pale in comparison
to amounts based on speculation. By far the vast majority
of currency trading volume is based on speculation — traders
buying and selling for short-term gains based on minute-tominute,
hour-to-hour, and day-to-day price fluctuations.
Estimates are that upwards of 90 percent of daily trading
volume is derived from speculation (meaning, commercial or
investment-based FX trades account for less than 10 percent
of daily global volume). The depth and breadth of the speculative
market means that the liquidity of the overall forex
market is unparalleled among global financial markets.
The bulk of spot currency trading, about 75 percent by
volume, takes place in the so-called “major currencies,” which
represent the world’s largest and most developed economies.
Additionally, activity in the forex market frequently functions
on a regional “currency bloc” basis, where the bulk of trading
takes place between the USD bloc, JPY bloc, and EUR bloc,
representing the three largest global economic regions.
Getting liquid without
getting soaked
Liquidity refers to the level of market interest — the level of
buying and selling volume — available at any given moment
for a particular asset or security. The higher the liquidity, or
the deeper the market, the faster and easier it is to buy or sell
a security.
From a trading perspective, liquidity is a critical consideration
because it determines how quickly prices move between
trades and over time. A highly liquid market like forex can see
large trading volumes transacted with relatively minor price
changes. An illiquid, or thin, market tends to see prices move
more rapidly on relatively lower trading volumes. A market
that only trades during certain hours (futures contracts, for
example) also represents a less liquid, thinner market.
Around the World
in a Trading Day
The forex market is open and active 24 hours a day from the
start of business hours on Monday morning in the Asia-Pacific
time zone straight through to the Friday close of business
hours in New York. At any given moment, depending on the
time zone, dozens of global financial centers — such as
Sydney, Tokyo, or London — are open, and currency trading
desks in those financial centers are active in the market.
Currency trading doesn’t even stop for holidays when other
financial markets, like stocks or futures exchanges, may be
closed. Even though it’s a holiday in Japan, for example,
Sydney, Singapore, and Hong Kong may still be open. It might
be the Fourth of July in the United States, but if it’s a business
day, Tokyo, London, Toronto, and other financial centers will
still be trading currencies. About the only holiday in common
around the world is New Year’s Day, and even that depends on
what day of the week it falls on.
The opening of the trading week
There is no officially designated starting time to the trading
day or week, but for all intents the market action kicks off
when Wellington, New Zealand, the first financial center west
of the international dateline, opens on Monday morning local
time. Depending on whether daylight saving time is in effect in
your own time zone, it roughly corresponds to early Sunday
afternoon in North America, Sunday evening in Europe, and
very early Monday morning in Asia.
Chapter 1: What Is the Forex Market? 5
The Sunday open represents the starting point where currency
markets resume trading after the Friday close of trading in
North America (5 p.m. Eastern time). This is the first chance
for the forex market to react to news and events that may have
happened over the weekend. Prices may have closed New York
trading at one level, but depending on the circumstances, they
may start trading at different levels at the Sunday open.
Trading in the Asia-Pacific
session
Currency trading volumes in the Asia-Pacific session account
for about 21 percent of total daily global volume, according
to a 2004 survey. The principal financial trading centers are
Wellington, New Zealand; Sydney, Australia; Tokyo, Japan;
Hong Kong; and Singapore. In terms of the most actively
traded currency pairs, that means news and data reports from
New Zealand, Australia, and Japan are going to be hitting the
market during this session
Because of the size of the Japanese market and the importance
of Japanese data to the market, much of the action during the
Asia-Pacific session is focused on the Japanese yen currency
pairs (explained more in Chapter 2), such as USD/JPY – forexspeak
for the U.S. dollar/Japanese yen -- and the JPY crosses,
like EUR/JPY and AUD/JPY. Of course, Japanese financial institutions
are also most active during this session, so you can frequently
get a sense of what the Japanese market is doing based
on price movements.
For individual traders, overall liquidity in the major currency
pairs is more than sufficient, with generally orderly price
movements. In some less liquid, non-regional currencies, like
GBP/USD or USD/CAD, price movements may be more erratic
or nonexistent, depending on the environment.
Trading in the European/London
session
About midway through the Asian trading day, European financial
centers begin to open up and the market gets into its full
swing. European financial centers and London account for
6