CMS’s trading academy will open your horizon to the knowhow of trading and provides the means to embark on a life style change for the better!
Before we get in to it, you need to understand the few basics!
The financial markets have many names such as the stock market, capital markets, and even just the markets. In layman’s term, the financial markets are where buyers and sellers can participate in the trading of assets or financial instruments such as, Bonds (Debt), Equity (Stock), Currencies (Foreign Exchange, FX, (FOREX), Energy (Oil and Gas) Commodities (Grains, Metals, Softs).
There are different types of markets, different participants, different products and even different types of investors. To understand the markets fully, it’s important to understand all the players involved.
The financial markets are an International exchange of flow of money in the economy affected by valuation of a Company, Business assets, Currencies and other instruments either by the means of stock or other contracts.
There are 3 Main Global Centers (Exchanges) located across the world in Tokyo, London, New York and others in all major cities across the globe.
One of the most well known exchanges for example is the LSE – London Stock Exchange or TSE – Tokyo Stock Exchange.
Commercial Banks – Retail and Investment Banks
Brokers – Electronic and Voice Brokers
Institutional Investors – Corporate and Investment Institutions e.g. Pension Funds / Hedge Funds
Central Banks – such as the BoE (Bank of England)
Lets explore and see what is actually traded on the financial markets. There are essentially two different methods of Trading;
The first is Exchange Traded Products Trading, which is conducted on a centralized, highly regulated exchange
- CME – Chicago Mercantile Exchange
- CBOT – Chicago Board of Trade
- IPE – International Petroleum Exchange
- NYSE – New York Stock Exchange
- LSE – London Stock Exchange
- LME – London Metal Exchange
- NYMEX-COMEX – New York Mercantile Exchange – Commodity Exchange
The second is Over the Counter trading (OTC) A security traded off an exchange, usually directly between banks through a dealer network.
Example: The Inter Bank Currency Market (FOREX or FX), The Derivatives & Bond Markets.
There are several different styles of trading which will more often than not categorized a trader into one of the two below;
Hedger – A person whose motivation is not taking profits, but instead to reduce the risk of adverse price movements of a financial instrument.
Speculator – Trader is looking to gain large profits in return for large risks by trying to anticipate price movements.
FOREX is the largest financial market in the world in terms of both size and liquidity, around $3 trillion is traded globally daily. Non of the stock markets in the world trades at such levels.
FOREX is the value or price of exchange of one country’s currency for the currency of another country. With FX you’re essentially buying one currency, and selling the other and so naturally FX is traded in pairs such as the pound and the US Dollar [GBP/USD].
There are some “FX pairs” that are more popular than others, Euro vs. US Dollar [EUR/USD], British Pound vs. US Dollar [GBP/USD], US Dollar vs. Japanese yen [USD/JPY], and US Dollar vs. Swiss Franc [USD/CHF]. These four popular currency pairs are often referred to as “the Majors”
At almost any point during the day there is always a financial center somewhere in the world open for business.
The Foreign Exchange market is homeless; by that we mean that it has no set physical location. Homeless markets are known as OTC [Over-the-Counter] markets in which all trades are processed electronically 24 hours a day between banks around the world. Forex, unlike other financial markets, does not have an exchange center so you can pretty much trade FX anywhere in the world, at any point in time but there are some peak trading session times in each region.
In a nutshell: The foreign exchange market is unique because of the following characteristics:
- Its huge trading volume representing the largest asset class in the world leading to high liquidity;
- Its geographical dispersion;
- Its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
- The variety of factors that affect exchange rates;
- The low margins of relative profit compared with other markets of fixed income; and
- The use of leverage to enhance profit and loss margins and with respect to account size.
REGION CITYSession OPEN [GMT]Session CLOSE [GMT] Europe London
America New York
We mentioned above that currencies are always traded in pairs; this is because when you buy one you’re essentially selling the other and vise versa. So how do you read an FX quote?
E.g. EUR/USD = 1.2500 this means that 1 € = 1.25 $ EUR; in this quote EUR is known as the base currency. USD is known as the counter or quote currency. This quote is also referred to as a direct quote which is where US Dollar is the counter or quote currency
E.g. USD/JPY = 98.00 This means 1 $ = 98 ¥en; in this quote USD is known as the base currency. JPY is known as the counter or quote currency. This quote is also referred to as an indirect quote which is where US Dollar is the base currency
All forex quotes have two prices attached to them, one is a bid price, and the other an ask price.
The bid price – if you want to SELL the base currency, then you would click on the bid price.
The bid price is the price at which the other party is willing to buy the base currency you want to sell in exchange of the quote currency.
The ask price – if you want to BUY the base currency, then you would click on the ask price.
The ask price is the price at which the other party is willing to sell the base currency to you in exchange for the quote currency.
The BID price is always lower than the ASK price and the difference between the two is known as the SPREAD.
The spread is the difference in price between buying and selling the base currency – this difference is charged to the client and paid to the Market Maker
In financial language or world, LONG = BUY and SHORT = SELL
“Going long” in FX terms is buying the base currency and selling the quote currency. It is what you would do if you thought the base currency was going to rise.E.g. AED/GBP = 0.17 If you thought that AED was going to rise, you would “go long” meaning that you would buy AED with the hope that you would be able to sell it for a higher price once it has risen. You go long AED @ 0.17 AED rises in value; AED/GBP = 0.18 Your Dirhams is now worth GBP 0.18 instead of GBP 0.17
“Going short” in FX terms is selling the base currency and buying the quote currency. It is what you would do if you thought the base currency was going to fall. E.g. AED/GBP = 0.17 If you thought that AED was going to fall, you would “go short” meaning that you would sell AED with the hope that you would be able to buy it for a cheaper price once it has fallen. You go short AED @ 0.17 GBP falls in value; AED/GPB = 0.16 Your AED is now worth GBP 0.16 instead of GBP 0.17
PIP stands for “percentage in point” and is the smallest possible increment in a quote.
Example: USD/GBP has a rate of 1.2121 a PIP here would be 0.0001.USD/JPY has a rate of 119.69 a PIP here would be 0.01.
So a PIP is essentially the last decimal place of quotation, most currency pairs will have a PIP being equal to 0.0001 as they are usually quoted to 4 decimal places. This isn’t always the case however, as we can see from the example above.
One of the first concepts you need to understand as part of your Forex trading training are standard lots and micro lots; what are they and what’s the difference between them?
A standard forex lot is equal to 100,000 of the base currency so in the case of EUR/USD is EUR 100,000. The average pip size for a standard lot which is quoted to 4 Decimal Places (D.P) is 10 of the counter currency, so in this case $10.
If you are down 10 pips on a standard EUR/USD contract you have lost $100. Pip Movements
(e.g. EUR/USD @ 1.28205): 5th D.P (Micro pip movement) = 100,000 (1 Lot) x 0.00001 = $1.00 P&L 4th D.P
(1 pip movement) = 100,000 (1 Lot) x 0.00010 = $10.00 P&L3rd D.P
(10 pip movement) = 100,000 (1 Lot) x 0.00100 = $100.00 P&L2nd D.P
(100 pip movement (Big Figure)) = 100,000 (1 Lot) x 0.01000 = $1,000.00 P&L 1st Decimal Place (1,000 pip movement) = 100,000 (1 Lot) x 0.10000 = $10,000.00 P&L
Pip Movements (e.g. USD/JPY @ 76.850): 3rd Decimal Place (Micro pip movement) = 100,000 (1 Lot) 00.001 = Y100 2nd Decimal Place (1 pip movement) = 100,000 (1 Lot) x 00.010 = Y1,000 1st Decimal Place (10 pip movement) = 100,000 (1 Lot) x 00.100 = Y10,000 Big Figure move = 100,000 (1 Lot) x 01.000 = Y100,000
Let’s take another example in the form of USD/JPY. The standard lot size is USD 100,000 as USD is the base currency. As USD/JPY is quoted only to 2 decimal places then a pip is equivalent to JPY 1,000 so if you are up 10 pips on a standard USD/JPY contract you have made JPY 10,000. Standard lots in forex are usually for institutional sized accounts; we’re talking big rollers, who should have $25,000 or more to make trades using standard lots.
So let’s get real, if you’re thinking of starting Forex Trading, you have to start small and work your way up. Micro lots are good for beginners who need to get to grips with Forex trading. Unlike standard forex lots, which are worth 100,000 of the base currency, a micro lot is the equivalent to 1,000 worth of the base currency you want to trade. Similarly, unlike standard lots, [where 1pip=10 of the counter currency on pairs quoted to 4 decimal places and 1pip=1,000 of pairs quoted to 2 decimal places] 1 of a pip in a micro lot is only worth 0.10 (4 decimals) or 10 (2 decimals) of the counter currency. To summarize:
Quoted Decimal Places
USD 0.1 (10 cents)
|USD||JPY||2||USD 100,000||USD 1,000||JPY 1,000||JPY 10|
Now that we have defined what a Pip is, a small difference or amount, therefore in order to make noticeable profit your will not to trade lots of these PIPs!
‘Leveraging lets you magnify your profit potential, at the risk of greater losses, through allowing you to control a relatively large asset for a fraction of its cost’
Example: 0.25% margin deposit means you are trading 400 times leverage, for example;
Buying 1 lot of GBP/USD @ 1.5700 with a margin requirement of 0.25% will cost you $250. The margin requirement means that you can trade a volume of $100,000 in the market.
Through leverage trading you can take advantage of very small pip movements in the market by trading very large volumes. Don’t worry if you do not fully understand “Leverage” yet, we’ll go into more detail about it in some of the later modules.
- Now that you understand what a pip is and what a lot is, you need to know why you learnt about them in the first place.
We need pips and lots to work out our profit and loss; so here are the basics of your Profits and Losses.
There are two rules for calculating your profit and loss in forex:
- Direct quote prices
- Indirect quote prices
Whenever you have a direct quote [where the quote currency is USD] you can calculate your profit and loss by using the following formula
P/L = (SELL PRICE – BUY PRICE) x STANDARD LOT SIZE x NUMBER OF LOTS
Remember that the standard lot size is $100,000 and for mini lots the standard size will be $10,000 – Example: You buy 2 lots of EUR/USD at 1.5554 and sell at 1.5559 P/L = (1.5559 – 1.5554) x 100,000 x 2 = $100
Whenever you have an indirect quote [where the quote currency is NOT USD] you can calculate your profit and loss by using the same formula.
Example: You buy 1 lot of USD/AUD at 1.0456 and sell at 1.0471 P/L = (1.0471 – 1.0456) x 100,000 x 1 = 150 AUD
Note: the profit figure stated here is in AUD, not USD. It is important to remember that with indirect quotes (where USD is not the quote currency) you need to convert the profit and loss figure to USD by dividing by the relevant exchange rate.
You have 150 AUD; divide by the sell price [because you’re selling AUD and buying USD] 150 AUD/1.0471 = 143.25 USD
- Technical and Fundamental Analysis are both tools used by traders to help determine a trading strategy. Both fundamental and technical analysis helps traders to predict possible trends and future prices.Technical Analysis; “The process of analyzing a financial instrument’s historical prices and other statistics generated by market activity, in an effort to determine probable future prices”Fundamental Analysis; “’The determination of price based on future earnings – it focuses predominantly on factors such as the overall state of the economy, interest rates, production, earnings, and management”
Technical analysis looks at past prices of an asset to predict future prices, and Fundamental Analysis believes that market movement is determined by macro and micro economic factors including interest rates, war, political unrest, recession, global economic depression etc.
Essentially the fundamentalist studies the cause of market movement, while the technician studies the effect
There are probably a million questions running through your mind;
- “Which one is better?”
- “What’s the difference between the two?”
- “Can I use them both?”
- “How do I analyze?”
- “What do I analyze?”