In the previous article, we have been introduced to the different tradable currencies in the market. Investopedia has given a bird's eyeview of the top 6 tradable currency pairs in the world.
The forex market is the fastest growing marketplace around. Forex trading allows traders to trade a wide range of currencies online, 24 hours a day, five days a week.
Traders also have the luxury of highly leveraged trading with lower margin requirements than equity markets. But before you jump in head first to the fast-paced world of forex trading, you'll need to know the currency pairs that traders trade most often.
Here's a look at six of the most tradable currency pairs in forex.
EUR/USD
The euro and U.S. dollar cross is far and away the most actively traded currency pair for forex traders. Known as "trading the euro", forex traders love this currency pair for the liquidity it offers.
The EUR/USD currency pair tends to have a negative correlation with USD/CHF and a positive correlation with the GBP/USD. This is due to the positive correlation of the euro, the British pound and the Swiss franc.
USD/JPY
The next most actively traded pair has traditionally been the Japanese yen - U.S. dollar pair. Known as "trading the gopher", this pair has been sensitive to political sentiment between the United States and the Far East.
The USD/JPY currency pair tends to be positively correlated to the USD/CHF and USD/CAD currency pairs due to the U.S. dollar being the base currency in all three pairs.
GBP/USD
One of the original forex currency pairs was the Great British pound - U.S. dollar pair. This currency pair is known as "trading the cable", a saying that originates from the days when the markets in New York and London were synchronized by a cable which spanned the Atlantic Ocean.
The GBP/USD pair tends to have a negative correlation with the USD/CHF and a positive correlation to the EUR/USD. This is due to the positive correlation between the pound, euro and the Swiss franc.
USD/CAD
With Canada being the United States' largest trading partner, one can easily see why the Canadian - U.S. dollar currency pair is so heavily traded. It is often referred to as "trading the loonie", a reference to the nickname of the Canadian dollar coin.
The USD/CAD currency pair tends to be negatively correlated with the AUD/USD, GBP/USD and EUR/USD pairs due to the U.S. dollar being the quote currency in these other pairs.
USD/CHF
Another major currency pair in the world of forex is the Swiss franc - U.S. dollar currency pair. Known as "trading the swissie", the franc has long been thought of as a safehaven for forex traders in times of political unrest.
The USD/CHF currency pair tends to have a negative correlation with the EUR/USD and GBP/USD pairs. This is due to the strong positive correlation between the Swiss franc, pound and euro.
AUD/USD
Forex traders love the "down-under" cross of the Australian - U.S. dollar currency pair. Referred to as "trading the Aussie", forex traders trade this pair in large amounts.
The AUD/USD curency pair tends to have a negative correlation with the USD/CAD, USD/CHF and USD/JPY pairs due to the U.S. dollar being the quote currency. As well, the correlation with the USD/CAD is also due to the the fact that both the Canadian and Australian dollars share a positive correlation with each another as both currencies are considered commodity block currencies.
There is a need to read further like A Primer on the Forex Matter as well as Commodity Prices and Currency Movements in order to understand how the different currency pairs work and not the other way around.
Showing posts with label EUR. Show all posts
Showing posts with label EUR. Show all posts
Saturday, January 23, 2010
Friday, January 22, 2010
Break Into Forex In 12 Steps
I am a beginning investor. I am looking at the market where I can practice and learn to get started. One promising portfolio I want to venture in is the forex market. Being able to read this article on Investopedia on how to break into Forex in 12 steps make it easy to try. Let's read on.
Getting Started
Learning to trade in the Forex market can seem like a daunting task when you’re first starting out, but it is not impossible. Here we will cover the preliminary steps you need to take to find your footing in the FX market.
The Eight Majors
In no specific order, the eight currencies every currency trader should know are the U.S. Dollar (USD) or "greenback", British Pound (GBP) or "cable", Japanese Yen (JPY), European Euro (EUR), Swiss Franc (CHF), Canadian Dollar (CAD) or "loonie", and the Australian/New Zealand Dollar (AUD/NZD). Currencies must be traded in pairs, and there are 18 different currency pairs that are conventionally quoted by forex market makers, including USD/CAD, EUR/USD, USD/CHF, AUD/USD, GBP/USD, NZD/USD, and USD/JPY.
Yield Drives Return
In every fx transaction, you are simultaneously buying one currency and selling another. Since every currency in the world is attached with an interest rate set by the central bank of that currency’s country, you are obligated to pay the interest on the currency that you have sold, but you also have the privilege of earning interest on the currency that you have bought. For example, assume that New Zealand has an interest rate of 8% (800 basis points) and that Japan has an interest rate of 0.5% (50 basis points). If you decide to go long NZD/JPY, you will earn 800 basis points in annualized interest, but have to pay 50 basis points for a net return of 7.5% or 750 basis points.
Low Spreads Save Money
The difference between the price at which a currency can be purchased and the price at which it can be sold is called the spread. It is calculated in “pips”, and this difference is how Forex brokers make their money, since they don’t charge commission. In comparing brokers, you will find that the time spent shopping around is worth it, as the difference in spreads can by very large.
Look For A Reliable Institution
Forex brokers are usually tied to large banks or lending institutions because of the large amount of leverage they need to provide. Also, forex brokers should be registered with the Futures Commission Merchant (FCM) and regulated by the Commodity Futures Trading Commission (CFTC). You can find this and other financial information and statistics about a forex brokerage on its website or on the website of its parent company.
Proper Tools = Success
Forex brokers offer many different trading platforms for their clients - just like brokers in other markets. These trading platforms often feature real-time charts, technical analysis tools, real-time news and data, and even support for trading systems. Before committing to any broker, be sure to request free trials to test different trading platforms. Brokers usually also provide technical and fundamental commentaries, economic calendars and other research.
Keep Leverage Options Open
Leverage is necessary in forex because the price deviations (the sources of profit) are merely fractions of a cent. Leverage, expressed as a ratio between total capital available to actual capital, is the amount of money a broker will lend you for trading. For example, a ratio of 100:1 means your broker would lend you $100 for every $1 of actual capital. Many brokerages offer as much as 250:1. Remember, lower leverage means lower risk of a margin call, but also lower bang for your buck (and vice-versa).
Avoid Shady Brokers
Sniping and hunting – or prematurely buying and selling near preset points - is used by shady brokers to increase profits. Of course, no broker will admit to committing these acts, and there is no blacklist or organization that reports such activity. Secondly, when you are trading with borrowed money, your broker can buy or sell at its discretion, even if you had enough cash to cover. If your position takes a dive before rebounding to all-time highs, some brokers will liquidate your position on a margin call at that low. The only way to determine which brokers do this and which brokers don’t is to talk to fellow traders.
Fundamental Analysis Vs. Technical Analysis
Every Trader is different, but the best trading style is probably a combination of both technical and fundamental analysis. Smart traders will always be aware of the broader fundamental picture while using their technicals to pinpoint good entry and exit levels. Fundamental indicators include the consumer price index (CPI), retail sales, and durable goods. In addition, meetings held by the Federal Open Market Committee can cause market volatility. Technical analysis is most popular among forex traders, common forms include the Elliot Waves, Fibonacci studies and pivot points.
Define A Forex Strategy
The FX market offers multiple avenues to trading success, but in order to take advantage of these opportunities, you must first understand your strengths and weaknesses. Are you more comfortable with short-term or long-term time frames? How will you use fundamental and technical analysis? For more on devising a forex strategy, read Trade To Your Taste.
Practice Makes Perfect
Forex is a decentralized market in which dealers distribute their own price feeds through proprietary trading platforms. As such, it’s important to learn the features of each type of trading software before committing real funds to an account. Open a demo account and paper trade until you can make a consistent profit. Many people jump into the forex market and quickly lose a lot of money (because of leverage). It is important to take your time and learn to trade properly before committing capital. The best way to learn is by doing.
Trade Without Emotion
Don't keep "mental" stop-loss points if you don't have the ability to execute them on time. Always set your stop-loss and take-profit points to execute automatically, and don't change them unless absolutely necessary. Make your decisions and stick to them.
The Trend Is Your Friend
If you go against the trend, you had better have a good reason. Because the forex market tends to trend more than move sideways, you have a higher chance of success in trading with the trend.
Getting Started
Learning to trade in the Forex market can seem like a daunting task when you’re first starting out, but it is not impossible. Here we will cover the preliminary steps you need to take to find your footing in the FX market.
The Eight Majors
In no specific order, the eight currencies every currency trader should know are the U.S. Dollar (USD) or "greenback", British Pound (GBP) or "cable", Japanese Yen (JPY), European Euro (EUR), Swiss Franc (CHF), Canadian Dollar (CAD) or "loonie", and the Australian/New Zealand Dollar (AUD/NZD). Currencies must be traded in pairs, and there are 18 different currency pairs that are conventionally quoted by forex market makers, including USD/CAD, EUR/USD, USD/CHF, AUD/USD, GBP/USD, NZD/USD, and USD/JPY.
Yield Drives Return
In every fx transaction, you are simultaneously buying one currency and selling another. Since every currency in the world is attached with an interest rate set by the central bank of that currency’s country, you are obligated to pay the interest on the currency that you have sold, but you also have the privilege of earning interest on the currency that you have bought. For example, assume that New Zealand has an interest rate of 8% (800 basis points) and that Japan has an interest rate of 0.5% (50 basis points). If you decide to go long NZD/JPY, you will earn 800 basis points in annualized interest, but have to pay 50 basis points for a net return of 7.5% or 750 basis points.
Low Spreads Save Money
The difference between the price at which a currency can be purchased and the price at which it can be sold is called the spread. It is calculated in “pips”, and this difference is how Forex brokers make their money, since they don’t charge commission. In comparing brokers, you will find that the time spent shopping around is worth it, as the difference in spreads can by very large.
Look For A Reliable Institution
Forex brokers are usually tied to large banks or lending institutions because of the large amount of leverage they need to provide. Also, forex brokers should be registered with the Futures Commission Merchant (FCM) and regulated by the Commodity Futures Trading Commission (CFTC). You can find this and other financial information and statistics about a forex brokerage on its website or on the website of its parent company.
Proper Tools = Success
Forex brokers offer many different trading platforms for their clients - just like brokers in other markets. These trading platforms often feature real-time charts, technical analysis tools, real-time news and data, and even support for trading systems. Before committing to any broker, be sure to request free trials to test different trading platforms. Brokers usually also provide technical and fundamental commentaries, economic calendars and other research.
Keep Leverage Options Open
Leverage is necessary in forex because the price deviations (the sources of profit) are merely fractions of a cent. Leverage, expressed as a ratio between total capital available to actual capital, is the amount of money a broker will lend you for trading. For example, a ratio of 100:1 means your broker would lend you $100 for every $1 of actual capital. Many brokerages offer as much as 250:1. Remember, lower leverage means lower risk of a margin call, but also lower bang for your buck (and vice-versa).
Avoid Shady Brokers
Sniping and hunting – or prematurely buying and selling near preset points - is used by shady brokers to increase profits. Of course, no broker will admit to committing these acts, and there is no blacklist or organization that reports such activity. Secondly, when you are trading with borrowed money, your broker can buy or sell at its discretion, even if you had enough cash to cover. If your position takes a dive before rebounding to all-time highs, some brokers will liquidate your position on a margin call at that low. The only way to determine which brokers do this and which brokers don’t is to talk to fellow traders.
Fundamental Analysis Vs. Technical Analysis
Every Trader is different, but the best trading style is probably a combination of both technical and fundamental analysis. Smart traders will always be aware of the broader fundamental picture while using their technicals to pinpoint good entry and exit levels. Fundamental indicators include the consumer price index (CPI), retail sales, and durable goods. In addition, meetings held by the Federal Open Market Committee can cause market volatility. Technical analysis is most popular among forex traders, common forms include the Elliot Waves, Fibonacci studies and pivot points.
Define A Forex Strategy
The FX market offers multiple avenues to trading success, but in order to take advantage of these opportunities, you must first understand your strengths and weaknesses. Are you more comfortable with short-term or long-term time frames? How will you use fundamental and technical analysis? For more on devising a forex strategy, read Trade To Your Taste.
Practice Makes Perfect
Forex is a decentralized market in which dealers distribute their own price feeds through proprietary trading platforms. As such, it’s important to learn the features of each type of trading software before committing real funds to an account. Open a demo account and paper trade until you can make a consistent profit. Many people jump into the forex market and quickly lose a lot of money (because of leverage). It is important to take your time and learn to trade properly before committing capital. The best way to learn is by doing.
Trade Without Emotion
Don't keep "mental" stop-loss points if you don't have the ability to execute them on time. Always set your stop-loss and take-profit points to execute automatically, and don't change them unless absolutely necessary. Make your decisions and stick to them.
The Trend Is Your Friend
If you go against the trend, you had better have a good reason. Because the forex market tends to trend more than move sideways, you have a higher chance of success in trading with the trend.
Subscribe to:
Comments (Atom)