Currency trading pdf download

France, the United Kingdom, Germany, and Japan all agreed to raise interest rates. The United States in particular did not follow through with its initial promise to cut the budget deficit. Japan was severely hurt by the sharp rise in the yen, as its exporters were unable to remain competitive overseas, and it is argued that this eventually triggered a year recession in Japan. The United States, in contrast, enjoyed considerable growth and price stability as a result of the agreement.

The effects of the multilateral intervention were seen immediately, and within two years the dollar had fallen 46 percent and 50 percent against the deutsche mark DEM and the Japanese yen JPY , respectively. Figure 2. This gradually resolved the current account deficits for the time being, and also ensured that protectionist policies were minimal and nonthreatening.

But perhaps most importantly, the Plaza Accord cemented the role of the central banks in regulating exchange rate movement: yes, the rates would not be fixed, and hence would be determined primarily by supply and de- mand; but ultimately, such an invisible hand is insufficient, and it was the FIGURE 2.

Participants initially France, Germany, Italy, the Netherlands, Bel- gium, Denmark, Ireland, and Luxembourg were then required to maintain their exchange rates within a 2.

The ERM was an adjustable-peg system, and nine realignments would occur between and While the United Kingdom was not one of the original members, it would eventually join in at a rate of 2. Until mid, the ERM appeared to be a success, as a disciplinary ef- fect had reduced inflation throughout Europe under the leadership of the German Bundesbank.

This led to higher inflation and left the German central bank with little choice but to increase interest rates. But the rate hike had additional repercussions—because it placed upward pres- sure on the German mark. Soros Bets Against Success of U. Thanks to the progressive removal of capital con- trols during the EMS years, international investors at the time had more freedom than ever to take advantage of perceived disequilibriums, so Soros established short positions in pounds and long positions in marks by bor- rowing pounds and investing in mark-denominated assets.

He also made great use of options and futures. Soros was not the only one; many other investors soon fol- lowed suit. Everyone was selling pounds, placing tremendous downward pressure on the currency. At first, the Bank of England tried to defend the pegged rates by buying 15 billion pounds with its large reserve assets, but its sterilized interven- tions whereby the monetary base is held constant thanks to open market interventions were limited in their effectiveness.

The pound was trading dangerously close to the lower levels of its fixed band. A few hours later, it promised to raise rates again, to 15 percent, but international investors such as Soros could not be swayed, knowing that huge profits were right around the corner. Traders kept selling pounds in huge volumes, and the Bank of England kept buying them until, finally, at p.

Whether the return to a floating currency was due to the Soros-led at- tack on the pound or because of simple fundamental analysis is still de- bated today. Based on several fundamental breakdowns, the cause of the contagion stemmed largely from shrouded lending practices, inflated trade deficits, and immature capital markets. With adverse effects easily seen in the equities markets, currency market fluctuations were negatively impacted in much the same manner during this time period.

The Bubble Leading up to , investors had become increasingly attracted to Asian investment prospects, focusing on real estate development and domestic equities. As a result, foreign investment capital flowed into the region as economic growth rates climbed on improved production in countries like Malaysia, the Philippines, Indonesia, and South Korea. Thailand, home of the baht, experienced a 13 percent growth rate in falling to 6.

Additional lending support for a stronger economy came from the enactment of a fixed currency peg to the more formidable U. Ballooning Current Account Deficits and Nonperforming Loans However, in early , a shift in sentiment had begun to occur as inter- national account deficits became increasingly difficult for respective gov- ernments to handle and lending practices were revealed to be detrimen- tal to the economic infrastructure.

Although comparatively smaller than the U. Additional evidence of these practices could be observed in financial institutions throughout Japan.

Coupled with a then crippled stock market, cooling real estate values, and dramatic slowdowns in the economy, investors saw opportunity in a depreciating yen, subsequently adding selling pressure to neighbor currencies. This fall in asset prices sparked the banking crisis in Japan. It began in the early s and then developed into a full-blown systemic crisis in following the failure of a number of high-profile financial institutions.

In response, Japanese monetary authori- ties warned of potentially increasing benchmark interest rates in hopes of defending the domestic currency valuation. Unfortunately, these consid- erations never materialized and a shortfall ensued. Sparked mainly by an announcement of a managed float of the Thai baht, the slide snowballed as central bank reserves evaporated and currency price levels became unsus- tainable in light of downside selling pressure.

Currency Crisis Following mass short speculation and attempted intervention, the afore- mentioned Asian economies were left ruined and momentarily incapaci- tated.

The Thailand baht, once a prized possession, was devalued by as much as 48 percent, even slumping closer to a percent fall at the turn of the New Year. The most adversely affected was the Indonesian rupiah. These particularly volatile price actions are reflected in Figure 2. Among the majors, the Japanese yen fell approximately 23 percent from its high to its low against the U.

The financial crisis of — revealed the interconnectivity of economies and their effects on the global currency markets. Addition- ally, it showed the inability of central banks to successfully intervene in currency valuations when confronted with overwhelming market forces along with the absence of secure economic fundamentals. The euro was officially launched as an electronic trading currency on January 1, Greece joined two years later. Each country fixed its currency to a specific conversion rate against the euro, and a common monetary policy governed by the European Central Bank ECB was adopted.

To many economists, the system would ideally include all of the original 15 European Union EU nations, but the United Kingdom, Sweden, and Den- mark decided to keep their own currencies for the time being.

Euro notes and coins did not begin circulation until the first two months of In deciding whether to adopt the euro, EU members all had to weigh the pros and cons of such an important decision. While ease of traveling is perhaps the most salient issue to EMU citi- zens, the euro also brings about numerous other benefits: r It eliminates exchange rate fluctuations, thereby providing a more sta- ble environment to trade within the euro area.

This, in turn, increases competition. Yet the euro is not without its limitations. Leaving aside political sovereignty issues, the main problem is that, by adopting the euro, a nation essentially forfeits any independent monetary policy. This is espe- cially true for many of the smaller nations. As a result, countries try to rely more heavily on fiscal policy, but the efficiency of fiscal policy is limited when it is not effectively combined with monetary policy.

This inefficiency is only further exacerbated by the 3 percent of GDP limit on budget deficits, as stipulated by the Stability and Growth Pact. Con- sequently, the three largest accession countries, Poland, Hungary, and the Czech Republic—which comprise 79 percent of new member combined GDP—are not likely to adopt the euro anytime soon. While euro members are mandated to cap fiscal deficits at 3 percent of GDP, each of these three countries currently runs a projected deficit at or near 6 percent.

In a prob- able scenario, euro entry for Poland, Hungary, and the Czech Republic are likely to be delayed until at the earliest. Even smaller states whose economies at present meet EU requirements face a long process in replac- ing their national currencies.

States that already maintain a fixed euro ex- change rate—Estonia and Lithuania—could participate in the ERM earlier, but even on this relatively fast track, they would not be able to adopt the euro until Maastricht Treaty: Convergence Criteria 1. Fundamental analysis is based on un- derlying economic conditions, while technical analysis uses historical prices in an effort to predict future movements. Ever since technical analysis first surfaced, there has been an ongoing debate as to which methodology is more successful.

Before implementing successful trading strategies, it is important to understand what drives the movements of currencies in the foreign ex- change market.

The best strategies tend to be the ones that combine both fundamental and technical analysis. Too often perfect technical formations have failed because of major fundamental events. The same occurs with fundamentals; there may be sharp gyrations in price action one day on the back of no economic news released, which suggests that the price action is random or based on nothing more than pattern formations. Therefore, it is very important for technical traders to be aware of the key economic data or events that are scheduled for release and, in turn, for fundamen- tal traders to be aware of important technical levels on which the general market may be focusing.

Those using fundamental analysis as a trad- ing tool look at various macroeconomic indicators such as growth rates, interest rates, inflation, and unemployment. We list the most important eco- nomic releases in Chapter 12 as well as the most market-moving pieces of data for the U. Fundamental analysts will combine all of this information to assess current and future performance. This re- quires a great deal of work and thorough analysis, as there is no single set of beliefs that guides fundamental analysis.

Traders employing fundamen- tal analysis need to continually keep abreast of news and announcements that can indicate potential changes to the economic, social, and political environment.

All traders should have some awareness of the broad eco- nomic conditions before placing trades. Taking a step back, currency prices move primarily based on supply and demand. That is, on the most fundamental level, a currency rallies be- cause there is demand for that currency.

Regardless of whether the de- mand is for hedging, speculative, or conversion purposes, true movements are based on the need for the currency. Currency values decrease when there is excess supply. Supply and demand should be the real determinants for predicting future movements. However, how to predict supply and de- mand is not as simple as many would think.

There are many factors that contribute to the net supply and demand for a currency, such as capital flows, trade flows, speculative needs, and hedging needs. For example, the U. Internet and equity market boom and the desire for foreign investors to participate in these elevated returns.

This demand for U. Since the end of , when geopolitical uncertainty rose, the United States started cutting interest rates and foreign investors began to sell U. This required foreign investors to sell U. The availability of funding or interest in buying a cur- rency is a major factor that can impact the direction that a currency trades. It has been a primary determinant for the U. Foreign official purchases of U.

Theoretically, a balance of payments equal to zero is required for a currency to maintain its current valuation. A negative balance of payments number indicates that capital is leaving the economy at a more rapid rate than it is entering, and hence theoretically the currency should fall in value.

The Japanese yen is another good example. Therefore, despite a zero interest rate policy that prevents capital flows from increasing, the yen has a natural tendency to trade higher based on trade flows, which is the other side of the equation. To be more specific, here is a detailed explanation of what capital and trade flows encompass.

Capital Flows: Measuring Currency Bought and Sold Capital flows measure the net amount of a currency that is being purchased or sold due to capital investments. A positive capital flow balance implies that foreign inflows of physical or portfolio investments into a country exceed outflows. A negative capital flow balance indicates that there are more physical or portfolio investments bought by domestic investors than foreign investors.

Physical Flows Physical flows encompass actual foreign direct invest- ments by corporations such as investments in real estate, manufacturing, and local acquisitions. All of these require that a foreign corporation sell the local currency and buy the foreign currency, which leads to movements in the FX market.

This is particularly important for global corporate acqui- sitions that involve more cash than stock. Physical flows are important to watch, as they represent the under- lying changes in actual physical investment activity. Changes in local laws that encourage foreign investment also serve to promote physical flows.

As a result of its cheap labor and attractive revenue opportunities popu- lation of over 1 billion , corporations globally have flooded China with in- vestments. From an FX perspective, in order to fund investments in China, foreign corporations need to sell their local currency and buy Chinese ren- minbi RMB. Portfolio Flows Portfolio flows involve measuring capital inflows and outflows in equity markets and fixed income markets. Equity Markets As technology has enabled greater ease with respect to transportation of capital, investing in global equity markets has become far more feasible.

Accordingly, a rallying stock market in any part of the world serves as an ideal opportunity for all, regardless of geographic loca- tion. Alternatively, falling eq- uity markets could prompt domestic investors to sell their shares of local publicly traded firms to capture investment opportunities abroad.

The attraction of equity markets compared to fixed income markets has increased across the years. Since the early s, the ratio of foreign transactions in U. As indicated in Figure 3. In addition, from to the Dow increased percent, while the U. As a result, currency traders closely followed the global equity markets in an effort to predict short-term and intermediate-term equity- based capital flows.

However, this relationship has shifted since the tech bubble burst in the United States, as foreign investors remained relatively risk-averse, causing a lower correlation between the performance of the U. Nevertheless, a relationship does still exist, making it important for all traders to keep an eye on global market performances in search of intermarket opportunities.

Fixed Income Markets Just as the equity market is correlated to ex- change rate movement, so too is the fixed income market. In times of global uncertainty, fixed income investments can become particularly appealing, due to the inherent safety they possess. A good gauge of fixed income capital flows are the short- and long- term yields of international government bonds. It is useful to monitor the spread differentials between the yield on the year U.

Treasury note and the yields on foreign bonds. The reason is that international investors tend to place their funds in countries with the highest-yielding assets. Investors can also use short-term yields such as the spreads on two-year government notes to gauge short-term flow of international funds. Aside from government bond yields, federal funds futures can also be used to es- timate movement of U.

We cover using fixed income products to trade FX further in Chapter Trade Flows: Measuring Exports versus Imports Trade flows are the basis of all international transactions. Countries that are net exporters—meaning they export more to interna- tional clients than they import from international producers—will experi- ence a net trade surplus. Countries that are net importers—meaning they make more interna- tional purchases than international sales—experience what is known as a trade deficit, which in turn has the potential to drive the value of the cur- rency down.

In order to engage in international purchases, importers must sell their currency to purchase that of the retailer of the good or service; ac- cordingly, on a large scale this could have the effect of driving the currency down. This concept is important because it is a primary reason why many economists say that the dollar needs to continue to fall over the next few years to stop the United States from repeatedly hitting record high trade deficits. To clarify this further, suppose, for example, that the U.

Meanwhile, in the United States, a lackluster economy is creating a shortage of investment opportunities. In such a scenario, the natural result would be for U. This would result in capital outflow from the United States and capital inflow for the United Kingdom.

For day and swing traders, a tip for keeping on top of the broader eco- nomic picture is to figure out how economic data for a particular country stacks up.

Trading Tip: Charting Economic Surprises A good tip for traders is to stack up economic data surprises against price action to help explain and forecast the future movement in currencies. Figure 3. The bar graph shows the percentages of surprise that economic indicators have compared to consensus forecasts, while the dark line traces price action for the period during which the data was released; the white line is a simple price regres- sion line.

This charting can be done for all of the major currency pairs, providing a visual guide to understanding whether price action has been in line with economic fundamentals and helping to forecast future price ac- tion.

This data is provided on a monthly basis on www. Although this methodology is inexact, the analysis is simple and past charts have yielded some extremely useful clues to future price action. While these charts rarely offer such clear-cut signals, their analytical value may also lie in spotting and interpreting the outlier data. Very large positive and negative surprises of particular economic statistics can often yield clues to future price action. Economic fundamentals matter perhaps more in the foreign exchange market than in any other market, and charts such as these could provide valuable clues to price direction.

Generally, the 15 most important economic indicators are chosen for each region and then a price regression line is superimposed over the past 20 days of price data. However, with the rising popularity of technical analysis and the advent of new technologies, the influence of technical trading on the FX market has increased significantly.

The availability of high lever- age has led to an increased number of momentum or model funds, which have become important participants in the FX market with the ability to influence currency prices. Technical analysis focuses on the study of price movements. Techni- cal analysts use historical currency data to forecast the direction of future prices. In addition, technical analysis works under the assumption that history tends to repeat itself.

Technical analysis is a very popular tool for short-term to medium-term traders. It works especially well in the currency markets because short- term currency price fluctuations are primarily driven by human emotions or market perceptions.

The primary tool in technical analysis is charts. Charts are used to identify trends and patterns in order to find profit op- portunities. The most basic concept of technical analysis is that markets have a tendency to trend. Being able to identify trends in their earliest stage of development is the key to technical analysis.

Technical analysis integrates price action and momentum to construct a pictorial representa- tion of past currency price action to predict future performance. Techni- cal analysis tools such as Fibonacci retracement levels, moving averages, oscillators, candlestick charts, and Bollinger bands provide further infor- mation on the value of emotional extremes of buyers and sellers to direct traders to levels where greed and fear are the strongest.

There are basically two types of markets, trending and range-bound; in the trade parameters section Chapter 8 , we attempt to identify rules that would help traders determine what type of market they are currently trading in and what sort of trading opportunities they should be looking for. Technical versus fundamental analysis is a longtime battle, and after many years there is still no winner or loser.

Most traders abide by technical anal- ysis because it does not require as many hours of study. Technical analysts can follow many currencies at one time. Fundamental analysts, in contrast, tend to specialize due to the overwhelming amount of data in the market. Technical analysis works well because the currency market tends to de- velop strong trends.

Once technical analysis is mastered, it can be applied with equal ease to any time frame or currency traded. However, it is important to take into consideration both strategies, as fundamentals can trigger technical movements such as breakouts or trend reversals, while technical analysis can explain moves that fundamentals cannot, especially in quiet markets, such as resistance in trends.

For ex- ample, as you can see in Figure 3. There are seven major models for forecasting cur- rencies: the balance of payments BOP theory, purchasing power parity PPP , interest rate parity, the monetary model, the real interest rate differ- ential model, the asset market model, and the currency substitution model.

Balance of Payments Theory The balance of payments theory states that exchange rates should be at their equilibrium level, which is the rate that produces a stable current account balance.

The balance of payments ac- count is divided into two parts: the current account and the capital ac- count. The current account measures trade in tangible, visible items such as cars and manufactured goods; the surplus or deficit between exports and imports is called the trade balance. The capital account measures flows of money, such as investments for stocks or bonds.

Balance of payments data can be found on the web site of the Bureau of Economic Analysis www. When a coun- try imports more than it exports the trade balance is negative or is in a deficit.

If the country exports more than it imports the trade balance is positive or is in a surplus. The trade balance indicates the redistribution of wealth among countries and is a major channel through which the macroe- conomic policies of a country may affect another country. A positive trade balance, in comparison, will affect the dollar by causing it to appreciate against the other currencies.

Capital Flows In addition to trade flows, there are also capital flows that occur among countries. The capital flows are influenced by many factors, including the financial and economic cli- mate of other countries.

Capital flows can be in the form of physical or portfolio investments. In general, in developing countries, the composition of capital flows tends to be skewed toward foreign direct investment FDI and bank loans.

For developed countries, due to the strength of the equity and fixed income markets, stocks and bonds appear to be more important than bank loans and FDI.

Equity Markets Equity markets have a significant impact on exchange rate movements because they are a major place for high-volume cur- rency movements. Their importance is considerable for the currencies of countries with developed capital markets where great amounts of capital inflows and outflows occur, and where foreign investors are major participants. The amount of the foreign investment flows in the equity markets is dependent on the general health and growth of the market, re- flecting the well-being of companies and particular sectors.

Thus they convert their capital in a domestic currency and push the demand for it higher, making the currency appreciate. When the equity markets are experiencing recessions, however, foreign investors tend to flee, thus converting back to their home currency and pushing the domestic currency down. Fixed Income Bond Markets The effect the fixed income markets have on currencies is similar to that of the equity markets and is a result of capital movements.

Any international transaction gives rise to two offsetting entries, trade flow balance current account and capital flow balance capital account. If the trade flow bal- ance is a negative outflow, the country is buying more from foreigners than it sells imports exceed exports. When it is a positive inflow, the country is selling more than it buys exports exceed imports. A capital flow is negative when a country buys more physical or portfolio investments than are sold to foreign investors. In general, countries might experience positive or negative trade, as well as positive or negative capital flow balances.

In order to minimize the net effect of the two on the exchange rates, a country should try to maintain a balance between the two. For example, in the United States there is a substantial trade deficit, as more is imported than is exported.

When the trade balance is negative, the country is buying more from foreigners than it sells and therefore it needs to finance its deficit. This negative trade flow might be offset by a positive capital flow into the country, as foreigners buy either physical or portfolio investments. Therefore, the United States seeks to minimize its trade deficit and maximize its capital inflows to the extent that the two balance out.

Clearly a change in the balance of payments carries a direct effect for currency levels. It is therefore possible for any investor to observe eco- nomic data relating to this balance and interpret the results that will occur. Data relating to capital and trade flows should be followed most closely. For instance, if an analyst observes an increase in the U. Limitations of Balance of Payments Model The BOP model fo- cuses on traded goods and services while ignoring international capital flows.

Indeed, international capital flows often dwarfed trade flows in the currency markets toward the end of the s, though, and this often bal- anced the current accounts of debtor nations like the United States. For example, in , , and the United States maintained a large current account deficit while the Japanese ran a large current account surplus. However, during this same period the U. Indeed, the increase in capital flows has given rise to the asset market model.

Note: It is probably a misnomer to call this approach the balance of payments theory since it takes into account only the current account bal- ance, not the actual balance of payments. However, until the s capital flows played a very small role in the world economy so the trade balance made up the bulk of the balance of payments for most nations. Purchasing Power Parity The purchasing power parity theory is based on the belief that foreign ex- change rates should be determined by the relative prices of a similar bas- ket of goods between two countries.

It includes consumer goods and services, government services, equipment goods, and construction projects. More specifically, consumer items include food, beverages, tobacco, clothing, footwear, rents, water supply, gas, electricity, medical goods and services, furniture and furnishings, household appliances, personal transport equip- ment, fuel, transport services, recreational equipment, recreational and cultural services, telephone services, education services, goods and ser- vices for personal care and household operation, and repair and mainte- nance services.

The Big Mac PPP is the exchange rate that would leave hamburgers costing the same in the United States as else- where, comparing these with actual rates signals if a currency is under- or overvalued.

For example, in April the exchange rate between the United States and Canada was 1. This latest information on which currencies are under- or overvalued against the U.

The OECD publishes a table that shows the price levels for the major industrialized countries. Each column states the number of specified monetary units needed in each of the countries listed to buy the same representative basket of consumer goods and services.

In each case the representative basket costs units in the country whose currency is specified. The chart that is then created compares the PPP of a currency with its actual exchange rate. The chart is updated weekly to reflect the current exchange rate. It is also updated about twice a year to reflect new estimates of PPP. Different methods of calculation will arrive at different PPP rates. The economic forces behind PPP will eventually equalize the purchasing power of currencies.

However, this can take many years. A time horizon of 5 to 10 years is typical. For example, when the United States announces new tariffs on imports the cost of do- mestic manufactured goods goes up; but those increases will not be re- flected in the U. PPP tables. Indeed, PPP is just one of several theories traders should use when determining exchange rates. Interest Rate Parity The interest rate parity theory states that if two different currencies have different interest rates then that difference will be reflected in the pre- mium or discount for the forward exchange rate in order to prevent riskless arbitrage.

This future exchange rate is reflected into the forward exchange rate stated today. In our example, the forward exchange rate of the dollar is said to be at dis- count because it buys fewer Japanese yen in the forward rate than it does in the spot rate. The yen is said to be at a premium. Interest rate parity has shown very little proof of working in recent years. Often currencies with higher interest rates rise due to the determina- tion of central bankers trying to slow down a booming economy by hiking rates and have nothing to do with riskless arbitrage.

Countries that follow a stable monetary policy over time usually have appreciating currencies according to the monetary model. Countries that have erratic monetary policies or excessively expan- sionist policies should see the value of their currency depreciate.

All of these factors are key to understanding and spotting a monetary trend that may force a change in exchange rates. For example, the Japanese economy has been slipping in and out of recession for over a decade. In- terest rates are near zero, and annual budget deficits prevent the Japanese from spending their way out of recession, which leaves only one tool left at the disposal of Japanese officials determined to revive their economy: printing more money. The example in Figure 3.

Indeed, it is in the area of excessive expansionary monetary policy that the monetary model is most successful. One of the few ways a country can keep its currency from sharply devaluing is by pursuing a tight monetary policy.

For example, during the Asian currency crisis the Hong Kong dollar came under attack from speculators. Hong Kong officials raised interest rates to percent to halt the Hong Kong dollar from being dislodged from its peg to the U.

The tactic worked perfectly as speculators were cleared out by such sky-high interest rates. The downside was the danger that the Hong Kong economy would slide into recession. But in the end the peg held and the monetary model worked. Limitations of Monetary Model Very few economists solely stand by this model anymore since it does not take into account trade flows and cap- ital flows.

For example, throughout the United Kingdom had higher interest rates, growth rates, and inflation rates than both the United States and the European Union, yet the pound appreciated in value against both FIGURE 3. Indeed, the monetary model has greatly struggled since the dawn of freely floating currencies. The model holds that high in- terest rates signal growing inflation, which they often do, followed by a depreciating currency.

But this does not take into account the capital in- flows that would take effect as a result of higher interest yields or of an equity market that may be thriving in a booming economy—thus causing the currency to possibly appreciate. In any case, the monetary model is one of several useful fundamental tools that can be employed in tandem with other models to determine the direction an exchange rate is heading.

Countries that have high interest rates should see their currencies appreciate in value, while countries with low interest rates should see their currencies depreciate in value. The data from this graph shows a mixed result.

The Australian dollar had the largest basis point spread and also had the highest return against the U. The same can be said for the New Zealand dollar, which also had a higher yield than the U.

Yet the model becomes less convincing when compar- ing the euro, which gained 20 percent against the dollar more than every currency except NZD even though its basis point differential was only points. The model then comes under serious question when compar- ing the British pound and the Japanese yen. The yen differential is — and yet it appreciates almost 12 percent against the dollar. Meanwhile, the British pound gained only 11 percent against the dollar even though it had a whopping point interest rate differential.

Simply put, a rise in interest rates that is expected to last for five years will have a much larger impact on the exchange rate than if that rise were expected to last for only one year. Indeed, the model tends to overemphasize capital flows at the expense of numerous other factors: political stability, inflation, economic growth, and so on. Absent these types of factors, the model can be very useful since it is quite logical to conclude that an investor will naturally gravitate toward the investment vehicle that pays a higher reward.

As proof, advocates point out that the amount of funds that are placed in investment products such as stocks and bonds now dwarf the amount of funds that are exchanged as a result of the transactions in goods and services for import and export purposes. A Dollar-Driven Theory Throughout , many experts argued that the dollar would fall against the euro on the grounds of the expanding U. That was based on the rationale that non-U.

Yet such fears have lingered since the early s when the U. This theory continues to hold the most sway over pundits due to the enormity of U. In May and June of the dollar plummeted more than a thousand points versus the yen at the same time equity investors fled U. As the scandals subsided toward the end of the dollar rose basis points from a low of Limitations to Asset Market Theory The main limitation of the as- set market theory is that it is untested and fairly new.

See Figure 3. Dollar Index had a correlation of only 25 percent. That was the scenario in the United States for much of , and currency traders found themselves going back to older moneymaking models, such as inter- est rate arbitrage, as a result. Only time will tell whether the asset market model will hold up or merely be a short-term blip on the currency forecast- ing radar. You can actually see each move the traders make.

This method works nicely for us. Since we started trading at this broker we noticed an increase of our successful trades and profits when compared to our former platforms. You should consider whether you can afford to take the high risk of losing your money.

The purpose of this book is to show you how to make money trading Currencies. 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. Please note that when trading Forex your capital is at risk. 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.

Currency Forex allows even beginners the opportunity to succeed with financial trading. Actually people that have minimum financial track record can easily make money by learning how to trade currencies online. This book features the in and outs of currency trading as well as strategies needed to achieve success in the trading. Table of Contents: 1. Introduction to Forex Trading 2. What is Forex Trading 3.

How to Control Losses with "Stop Loss" 4. How to Use Forex for Hedging 5. The Basic Forex Trading Strategy 7. Forex Trading Risk Management 8. What You Need to Succeed in Forex 9. A Few Trading Tips for Dessert. Click Here! 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. The forex market is a place to buy or sell against each other a variety of national currencies, globally.

Wherever two foreign currencies are being traded, you can be sure that a forex market exists regardless of the timezone. In this section of our forex trading PDF, we are going to run through some of the most commonly used forex trading terminologies in the industry. The pip represents the smallest amount possible a currency quote can alter.

For instance, 0. The differentiation between the sale price and the purchase price of a currency pair is known as the spread.

The least popular least commonly used currency pairs usually have a low spread. In some cases, this can be even less than a pip. When trading the most commonly used currency pairs the spread is often at its lowest.

The total value of the currency pair needs to surpass the spread in order for the forex trade to become profitable. In order for forex brokers to increase the number of trades available to its customers, they need to provide capital in the way of leverage. Before you can trade using leverage, you must sign up to a forex broker and open a margin account. Contingent on the broker and the size of the position, leverage is usually capped at if you are a retail client non-professional trader.

Some offshore forex brokers will offer much more than this if you are seeking higher limits. It is because of the aforementioned example that you should exercise caution when using leverage.

Should the worst possible scenario happen and your account falls below 0, you should contact your forex broker and ask for its policy on negative balance protection. The good news is that all forex brokers which are regulated by ESMA the European Securities and Markets Authority will be able to provide you with this extra level of protection, ensuring that you never become in debt with your broker.

Margins are a good way for traders to build up their exposure. Put simply, in order for a trader to maintain position and place a trade, the trader needs to put forward a specific amount of money first — this is the margin. Rather than being a transaction cost, the margin can be compared to a security deposit.

This will be held by the broker during an open forex trade. It is commonplace for forex brokers to give their customers access to leverage see above. In order for you to lower your risk of exposure and offset your balance, you might consider hedging.

This is a procedure which involves traders selling and buying financial instruments. 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. 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.