euro economy

8/13/2019 euro economy

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LESSON 1WHAT EXACTLY IS FOREX?

1. What Exactly Is Forex?With a daily trade volume of up to 4 trillion USD, forex is the largest financial market in the

world. In comparison, the daily trade volume of the New York Stock Exchange is only USD 25

billion. There is an evident disparity in the trade volumes between forex and stock markets. Its

actual trade volume is more than 3 times the total trade volume of the stock and futures market!

The exchange of one currency for another, or the conversion of one currency into another

currency. Foreign exchange also refers to the global market where currencies are traded virtually

around-the-clock. The term foreign exchange is usually abbreviated as "forex" and occasionally

as "FX."

Foreign exchange transactions encompass everything from the conversion of currencies by a

traveler at an airport kiosk to billion-dollar payments made by corporate giants and governments

for goods and services purchased overseas. Increasing globalization has led to a massive increase

in the number of foreign exchange transactions in recent decades. The global foreign exchange

market is by far the largest financial market, with average daily volumes in the trillions of

dollars.

2. What is Traded in the Forex Market?The answer is simple, money. Forex trading is the buying of one currency and the selling of

another simultaneously. Forex trades can be carried out through foreign exchange brokers or

dealers. Trading of foreign currency is done in pairs, e.g. Euro against US Dollars (EUR/USD)

or British Pounds against Japanese Yen (GBP/JPY). Buying and selling foreign currencies is like

investing in a countrys stock. When you buy Japanese Yen, for example, you are actually

acquiring a stake in Japanese economy. The pricing of the currency is a direct reflection of theimmediate and future outcome of the Japanese economy.

Margin

Margin addition.


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When you open a forex trading account, you will need to inject capital into this account. Thiswill be your trading capital.

The dealer will use a leverage ratio to determine the margin required. Your trades will be carried out based on this margin requirement. In summary, forex refers to various means of payments in the settlement of international

claims and liabilities with foreign currencies.

Initial Margin

Another major difference between stocks and forex. Unlike in general stock trading, the balance in your trading account need not be greater than

the nominal amount you invest in the foreign currency.

Using stocks as an example, if the share price for Bank of China is HKD 4, you must have atleast HKD 8,000 in your trading account in order to buy 1 lot (2,000 shares) of shares.

Leverage

This is the main reason why forex is attractive. Similar to futures trading, the trader can trade with a pre-determined proportion of the

margin.

This is the leverage ratio. In forex trading, many brokers provide traders with a leverage ratio of 200:1. If the price of 1 standard contract is USD 100,000, and the leverage ratio is 200:1, then one

can trade with only USD 500 in his account (100,000/200).

Some brokers also refer to the initial margin as the required margin.Brokers Policyon Insufficient Fund

Different brokers have different policies on insufficient margin balance in the tradersaccount.

Some brokers will square your open position when the unrealized profit and loss falls belowthe required margin, resulting in a zero balance in your account.

Other brokers may open a corresponding opposite position on your behalf to lock in yourlosses. In this way, your account balance will not be reduced to zero.


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Most brokers will require clients to top up the margin in their trading accounts within aspecific deadline. If the margin is not topped up by the deadline, the broker will square the

clients open position, even if the clients realized profit and loss may be lower than the

current balance.

Understanding PIP

In forex trading, pip is the smallest unit in the fluctuation of currencies. 1 pip is 1% or 1/100. Most currencies are quoted with 4 decimal places, e.g. EUR/USD. If the EUR/USD rises

from 1.3514 to 1.3515, the difference of 0.0001 is called 1 pip.

If trading is done in the standard unit of USD 100,000 per contract, then 1 pip would beworth USD 10.

Pip in Currency Pairs

Refers to the last digit in the quote.

EUR/USD @ 1.3512

GBP/USD @ 1.5085

USD/JPY @ 89.14

USD/CHF @ 1.0810


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LESSON 2FOREIGN EXCHANGE RATES AND QUOTATION

METHODS

1. Concept of Foreign Exchange RateWhen you are in Germany and you buy rice from a shop, you will naturally pay in Euros, and of

course, the shop will be willing to accept Euros. This trade can be conducted in Euros. Trading

of goods within a country is relatively simple.

However, things get complicated if you want to buy a US-made computer. You might have paid

in Euros at the shop. However, through transactions in banks and financial institutions, the final

payment will be made in US dollars and not Euros. Similarly, when Americans want to buy

German products, they will have to eventually pay in Euros.

From this example of international trading, we introduce the concept of foreign exchange rate.

Foreign exchange rate is the value at which a countrys currency unit is exchanged for another

countrys currency unit. For example, the current foreign exchangerate for Euros is: 100 EUR =

USD 130.

2. World Currency SymbolsUSD : US Dollar

HKD : Hong Kong Dollar

EUR : Euro

JPY : Japanese Yen

GBP : British Pound

CHF : Swiss Franc

CAD : Canadian Dollar

SGD : Singapore Dollar


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AUD : Australian Dollar

RMB : Chinese Renminbi

3. Methods of Quoting Foreign Exchange RatesCurrently, domestic banks will determine their exchange rates based on international financial

markets. There are two common ways to quote exchange rates, direct and indirect quotation.

Direct quotation: This is also known as price quotation. The exchange rate of the domestic

currency is expressed as equivalent to a certain number of units of a foreign currency. It is

usually expressed as the amount of domestic currency that can be exchanged for 1 unit or 100

units of a foreign currency. The more valuable the domestic currency, the smaller the amount of

domestic currency needed to exchange for a foreign currency unit and this gives a lower

exchange rate. When the domestic currency becomes less valuable, a greater amount is needed to

exchange for a foreign currency unit and the exchange rate becomes higher.

Under the direct quotation, the variation of the exchange rates are inversely related to the

changes in the value of the domestic currency. When the value of the domestic currency rises,

the exchange rates fall; and when the value of the domestic currency falls, the exchange rates

rise. Most countries uses direct quotation. Most of the exchange rates in the market such as

USD/JPY, USD/HKD and USD/RMD are also quoted using direct quotation.

Indirect quotation: This is also known as the quantity quotation. The exchange rate of a foreign

currency is expressed as equivalent to a certain number of units of the domestic currency. This is

usually expressed as the amount of foreign currency needed to exchange for 1 unit or 100 units

of domestic currency. The more valuable the domestic currency, the greater the amount of

foreign currency it can exchange for and the lower the exchange rate. When the domestic

currency becomes less valuable, it can exchange for a smaller amount of foreign currency and

the exchange rate drops.

Under indirect quotation, the rise and fall of exchange rates are directly related to the changes in

value of the domestic currency. When the value of the domestic currency rises, the exchange

rates also rise; and when the value of the domestic currency falls, the exchange rates fall as well.


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Most Commonwealth countries such as the United Kingdom, Australia and New Zealand use

indirect quotation. Exchange rates such as GBP/USD and AUD/USD are quoted indirectly.

Direct Quotation Indirect Quotation

USD/JPY = 134.56/61 EUR/USD = 0.8750/55

USD/HKD = 7.7940/50 GBP/USD = 1.4143/50

USD/CHF = 1.1580/90 AUD/USD = 0.5102/09

There are two implications for the above quotations:

Currency A/Currency B means the units of Currency B needed to exchange for 1 unit ofCurrency A.

Value A/Value B refers to the quoted buy price and sell price. Since the difference betweenthe buy price and sell price is not large, only the last 2 digits of the sell price are shown. The

two digits in front are the same as the buy price.

4. Defintion of pip in foreign exchange rates quotationBased on the market practice, foreign exchange rates quotation normally consists of 5 significant

figures. Starting from right to left, the first digit, is known as the pip. This is the smallest unit

of movement in the exchange rate. The second digit is known as 10 pips, so on and so forth.

For example: 1 EUR = 1.1011 USD; 1 USD = JPY 120.55

If EUR/USD changes from 1.1010 to 1.1015, we say that the EUR/USD has risen by 5 pips.

If USD/JPY changes from 120.50 to 120.00, we say that USD/JPY has dropped by 50 pips.


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LESSON 3CHARACTERISTICS OF THE FOREX MARKET

1. 24-Hour MarketOther than the weekends when it is closed, the forex market is open 24 hours a day. There is no

need to wait for the market to open and you can trade anytime you like. This flexibility has

enabled many working professionals to take on forex trading as a side job. They can trade in the

morning, afternoon, night or whenever they are free. The best thing is that this also means that no

one can monopolize the market!

The forex market is so huge that no single entity, be it an organization, a group, a central bank or

even the government can control the market trend.

2. LeverageIn forex trading, only a small margin is needed to purchase a contract of a much higher value.

Leverage enables you to earn high returns while minimizing capital risks. For example, a

leverage of 200:1 granted by a forex broker would allow a trader to buy or sell USD 10,000

worth of currency with a margin of USD 50. Similarly, you would be able to trade USD 100,000

with just USD 500. However, leverage can be a double-edged sword. Without proper riskmanagement, such high leverage trading may result in huge losses or profits.

3. High liquidityIn view of the huge trading volume in the forex market, under normal conditions, you can buy or

sell currency at your desired price in a mere matter of seconds with just a simple click of the

mouse. You can even setup an online trading platform to buy and sell (place order) at the right

price so that you can control your profit margin and cut losses. The trading platform will execute

everything for you automatically. It is fast and simple.


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LESSON 4PLAYERS IN THE FOREX MARKET

In general, anyone who carries out a transaction in the forex market can be considered as a

player. However, the key players in the forex market largely include the following groups:

foreign exchange banks, government or central banks, forex brokers and clients.

Unlike the stock market - where investors often only trade with institutional investors (such as

mutual funds) or other individual investors - there are more parties that trade on the forex market

for completely different reasons than those in the stock market. Therefore, it is very important to

identify and understand the functions and motivations of these main players in the forex market.

1. Governments and Central BanksProbably the most influential participants involved in the forex market are the central banks and

federal governments. In most countries, the central bank is an extension of the government and

conducts its policy in unison with the government. However, some governments feel that a more

independent central bank is more effective in balancing the goals of managing inflation and

keeping interest rates low, which usually increases economic growth. No matter the degree of

independence that a central bank may have, government representatives usually have regular

meetings with central bank representatives to discuss monetary policy. Thus, central banks and

governments are usually on the same page when it comes to monetary policy.

Central banks are often involved in maintaining foreign reserve volumes in order to meet certain

economic goals. For example, ever since pegging its currency (the yuan) to the U.S. dollar,

China has been buying up millions of dollars worth of U.S. Treasury bills in order to keep the

yuan at its target exchange rate. Central banks use the foreign exchange market to adjust their

reserve volumes. They have extremely deep pockets, which allow them to have a significant

impact on the currency markets.

2. Banks and Other Financial InstitutionsAlong with central banks and governments, some of the largest participants involved with forex

transactions are banks. Most people who need foreign currency for small-scale transactions, like


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money for travelling, deal with neighborhood banks. However, individual transactions pale in

comparison to the dollars that are traded between banks, better known as the interbank market.

Banks make currency transactions with each other on electronic brokering systems that are based

on credit. Only banks that have credit relationships with each other can engage in transactions.

The larger banks tend to have more credit relationships, which allow those banks to receive

better foreign exchange prices. The smaller the bank, the fewer credit relationships it has and the

lower the priority it has on the pricing scale.

Banks, in general, act as dealers in the sense that they are willing to buy/sell a currency at the

bid/ask price. One way that banks make money on the forex market is by exchanging currency at

a higher price than they paid to obtain it. Since the forex market is a world-wide market, it is

common to see different banks with slightly different exchange rates for the same currency.

3. HedgersSome of the biggest clients of these banks are international businesses. Whether a business is

selling to an international client or buying from an international supplier, it will inevitably need

to deal with the volatility of fluctuating currencies.

If there is one thing that management (and shareholders) hates, it's uncertainty. Having to deal

with foreign-exchange risk is a big problem for many multinational corporations. For example,

suppose that a German company orders some equipment from a Japanese manufacturer that

needs to be paid in yen one year from now. Since the exchange rate can fluctuate in any direction

over the course of a year, the German company has no way of knowing whether it will end up

paying more or less euros at the time of delivery.

One choice that a business can make to reduce the uncertainty of foreign-exchange risk is to go

into the spot market and make an immediate transaction for the foreign currency that they need.

Unfortunately, businesses may not have enough cash on hand to make such transactions in the

spot market or may not want to hold large amounts of foreign currency for long periods of time.

Therefore, businesses quite often employ hedging strategies in order to lock in a specific

exchange rate for the future, or to simply remove all exchange-rate risk for a transaction.


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For example, if a European company wants to import steel from the U.S., it would have to pay

for this steel in U.S. dollars. If the price of the euro falls against the dollar before the payment is

made, the European company will end up paying more than the original agreement had specified.

As such, the European company could enter into a contract to lock in the current exchange rate to

eliminate the risk of dealing in U.S. dollars. These contracts could be either forwards or futures

contracts.

4. SpeculatorsAnother class of participants in forex is speculators. Instead of hedging against changes in

exchange rates or exchanging currency to fund international transactions, speculators attempt to

make money by taking advantage of fluctuating exchange-rate levels.

George Soros is one of the most famous currency speculators. The billionaire hedge fund

manager is most famous for speculating on the decline of the British pound, a move that earned

$1.1 billion in less than a month. On the other hand, Nick Leeson, a trader with England's

Barings Bank, took speculative positions on futures contracts in yen that resulted in losses

amounting to more than $1.4 billion, which led to the collapse of the entire company. (For more

on these investors, see George Soros: The Philosophy Of An Elite Investor and The Greatest

Currency Trades Ever Made.)

The largest and most controversial speculators on the forex market are hedge funds, which are

essentially unregulated funds that use unconventional and often very risky investment strategies

to make very large returns. Think of them as mutual funds on steroids. Given that they can take

such large positions, they can have a major effect on a country's currency and economy. Some

critics blamed hedge funds for the Asian currency crisis of the late 1990s, while others have

pointed to the ineptness of Asian central bankers. Either way, speculators can have a big impact

on the forex market.


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MAJOR FOREX MARKETS OF THE WORLD

Currently, forex markets with global influence are generally from the western industrialized

countries. The major forex markets of the world include London, New York, Zurich, Frankfurt,

Paris, Tokyo, Hong Kong and Singapore. In addition to these 8 locations, the forex markets in

Bahrain, Milan, Amsterdam and Montreal also have considerable influence.

The table below sets out the trading hours of major forex markets and their corresponding time in

GMT

Forex Market Local Time GMT

NZ Wellington 9:0017:00 20:0004:00

AU Sydney 9:0017:00 21:0005:00

JP Tokyo 9:0015:30 23:000530

Singapore 9:0016:00 01:0009:00

GM Frankfurt 8:3017:30 07:3016:30

UK London 08:3017:30 8:3017:30

US New York 9:0016:00 13:0020:00


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LESSON 5KEY FACTORS AFFECTING EXCHANGE RATE

All forex trading involves the exchange of one currency with another. At any one time, the actual

exchange rate is determined by the supply and demand of the corresponding currencies. Keep in

mind that the demand of a certain currency is directly linked to the supply of another. Likewise,

when you supply a certain currency, it would mean that you have the demand for another

currency. The following factors affect the supply and demand of currencies and would therefore

influence their exchange rates.

1. Monetary Policy

When a central bank believes that intervention in the forex market is effective and the results

would be consistent with the governments monetary policy, it will participate in forex trading

and influence the exchange rates. A central bank generally participates by buying or selling the

domestic currency so as to stabilize it at a level that it deems realistic and ideal. Judgment on the

possible impact of governments monetary policy and prediction on future policy by other

market players will affect the exchange rates as well.

2. Political Situation

Growing global tension will result in instability in the forex market. Irregular inflow or outflow

of currencies may result in significant fluctuations in exchange rates.

The stability of a foreign currency is closely related to the political situation of that place. In

general, the more stable the country is, the more stable its currency will be.

At the end of 1987, the US Dollar was suffering from continuous depreciation. In order to

stabilize the US Dollar, the G7 Finance Ministers and central bank governors released a joint

statement on 23 December 1987 announcing plans for a large-scale intervention in the forex

market. On 4 January 1988, the group started to dump Japanese Yen and Deutsche Mark in huge


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volumes while buying US Dollars. This resulted in a rebound of the US Dollar and maintained

its exchange rate at a stable level.

The Euro, you would have noticed that for three consecutive months during the Kosovo War, the

Euro fell by about 10% against the US Dollar. One of the reasons was the downward pressure on

the Euro caused by the Kosovo War.

3. Balance of Payments

Balance of payments of a country will cause the exchange rate of its domestic currency to

fluctuate. The balance of payments is a summary of all economic and financial transactions

between the country and the rest of the world. It reflects the countrys international economic

standing and influences its macroeconomic and microeconomic operations.

The balance of payments can affect the supply and demand for foreign currencies as well as their

exchange rates.

An economic transaction, such as export, or capital transaction, such as inflow of foreign

investment, will result in foreign revenue. Since foreign currencies are normally not allowed to

circulate in the domestic market, there is a need to exchange these currencies into the domestic

currency before circulation. This in turn creates a supply of foreign currencies in the forex

market. On the other hand, an economic transaction, such as import, or capital transaction, such

as outflow of investment to a foreign country, will result in foreign payments. In order to meet a

countrys economic needs, it is necessary to convert the domestic currency into foreign

currencies. This creates a demand for foreign currencies in the forex market. When all these

transactions are consolidated into a table of international balance of payments, this would

become the countrys foreign exchange balance of payments. If the foreign revenue is larger than

payment, there will be a larger supply of foreign currencies. If the foreign payment is larger than

revenue, then the demand for foreign currencies will be higher. When the supply of a foreigncurrency increases but its demand remains constant, it will directly drive the price of that foreign

currency down and increase the value of the domestic currency. On the other hand, when the

demand for a foreign currency increases but its supply remains constant, it will drive the price of

the foreign currency up and decrease the value of the domestic currency.


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4. Interest Rates

When a countrys key interest rate rises higher or falls lower than that of another country, the

currency of the nation with lower interest rate will be sold and the other currency will be bought

so as to achieve higher returns. Given this increase in demand for the currency with higher

interest rate, the value of that currency will rise against other currencies.

Let us use an example to illustrate how interest rates affect exchange rates. Assume there are two

countries, A and B. Both countries do not exercise foreign exchange control and capital funds

can flow freely between them. As part of its monetary policy, Country A raises its interest rate

by 1% while the interest rate of Country B remains unchanged. There is a huge volume of liquid

capital in the market that flows freely between these two countries, seeking out the best possible

interest rate. With all other conditions remaining unchanged, as Country As key interest rate

rises, a large portion of the liquid capital will flow into Country A. When the liquid capital flows

out from Country B to Country A, a large amount of Country Bs currency will be sold in

exchange for Country As currency. In this way, the demand for Country As currency will

increase, strengthening it against Country Bs currency.

In fact, in todays globalized market, this scenario applies to the whole world. Over the years, the

market trend has been shifting towards free capital mobility and elimination of foreign exchange

restrictions.

This enables liquid capitals(also known as hot money) to flow freely in the international

market. A point to note though is that such capital will only be moved to a region or country with

higher interest rate if their investors believe that the change in exchange rate will not nullify the

returns gained with higher interest rate.

5. Market JudgmentThe forex market does not always follow a logical pattern of change. Exchange rates are also

influenced by intangible factors such as emotions, judgments as well as analysis and

comprehension of political and economic events. Market operators must be able to interpret

reports and data such as balance of payments, inflation indicators and economic growth rates

accurately.


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In reality, before these reports and data become available to the public, the market would have

already made its own predictions and judgments, and these will be reflected in the prices. In the

event that the actual reports and data deviate too much from the predictions and judgments of the

market, huge fluctuations in exchange rates will occur.

Accurate interpretation of reports and data alone is not adequate, a good forex trader must also

be able to determine market reactions before the information becomes publicly available.

6. SpeculationSpeculation by major market operators is another crucial factor that influences exchange rates. In

the forex market, the proportion of transactions that are directly related to international trade

activities is relatively low. Most of the transactions are actually speculative tradings which cause

currency movement and influence exchange rates. When the market predicts that a certain

currency will rise in value, it may spark a buying frenzy that pushes the currency up and fulfill

the prediction. Conversely, if the market expects a drop in value of a certain currency, people

will start selling it away and the currency will depreciate.

For example, after World War II, the United States enjoyed a period of political stability, well-

managed economy, low inflation rate and an average annual economic growth of about 5% in the

early 1960s. At that time, all the other countries in the world were willing to use US Dollar as the

mode of payment to safeguard their wealth. This causes acontinuous rise in value of the US

Dollar. However, from the end of 1960s to early 1970s, the Vietnam War, Watergate scandal,

serious inflation, increased tax burden, trade deficit and declining economic growth caused the

US Dollar to plunge in value.


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LESSON 6CONCEPT OF POSITIONING IN FOREX

Short Position:

Holding a position in which a currency is sold. In forex, when you sell a certain currency, you

are going short on the currency. Hence, it is known as short position. A short position is

maintained when a currency is sold in anticipation that it will depreciate in value so as to make a

profit out of it.

Long Position:

Holding a position in which a currency is bought. In forex, when you buy a certain currency, you

are going long on the currency. Hence, it is known as long position. A long position is

maintained when a currency is bought in anticipation that it will appreciate in value so as to

make a profit out of it.

Stop loss:

In forex trading, when the currency trend of the market goes against your expectation and your

assets begin to lose value, you may want to close the position to limit your losses. This is called

stop loss.

For example, if you buy USD 10,000 worth of USD/EUR, you are long on USD and short on

EUR. You have a short position on Euro and long position on US Dollar.


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LESSON 7TYPES OF TRADINGSHORT-TERM

Regardless of your trading style, knowing how to trade is the pre-requisite to trading in the

futures market. Without actual trading, all forecasts, computations and analyses are meaningless.

Therefore, making a trading transaction is a fundamental skill in any type of futures trading.

Short-term trading is the best way for you to hone your trading skills. Even if you eventually

adopt another trading style, it will still be beneficial to you.

Unlike other types of trading that rely on analyses and forecasts, short-term trading focuses

mainly on your ability to trade. For a short-term trader, accurate judgment of market trend as

well as amplitude of currency movements is not that crucial; rather, the ability to carry out a

trading transaction efficiently is more important.

Regardless of your trading style, you must know the type of strategy to adopt in any given

situation, the right speed and frequency of trading, the most favorable position and timing to buy

and sell, the right time to enter the market, the right time to exit, how to limit losses, safeguard

and maximize profits effectively, how to place orders to secure the best advantage as well as how

to quickly recover yourself physically and psychologically when hit by losses.

Compared to other trading styles, short-term trading is the closest to market reality. It is an

ability to react in real-time and does not require any other complementary or supplementary

skills. Short-term trading is based on immediate situations of the market. There is no analysis to

set trading zones and key trading positions, and waiting for the market to attain them before you

start to trade. You do not wait for the market in short-term trading and there are trading

opportunities any time.

Undeniably, short-term traders do sometimes define trading zones and positions and adjust their

trades based on market observations. However, these settings are all secondary and can be

modified or abandoned any time.


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In terms of skill requirements, short-term trading requires the least amount of skill and is the

simplest. You do not need to equip yourself with tons of knowledge (you do not even need to

know or care about what you are trading) or rely on those traders who conduct trades based on

forecasts. There is also no need for you to be equipped with the impossibly high skills of

information gathering, analyses and consolidation (unfortunately these people always over-

estimate their own capabilities, and willfully or unwittingly believe that they know so much

more than others). In addition, you do not have to acquire in-depth knowledge of the products

and possess insider information required of professional traders.

Short-term traders conduct trading based on immediate market situation.

They grasp the present moment and respond to current actions, rather than digest the

overwhelming amount of information or try to predict how other people feel. All they do is to

identify market reality, ride along closely and resonate with it. Recognizing market reality and

trading accordingly are critical skills. Unfortunately, most traders (perhaps all traders) tend to

trade with their own set of ideas rather than in line with the actual market situation. It may seem

that they are watching the market, but in their minds they have already created another market of

their own. They hope (and they are really just being hopeful) that the real market will move the

same way as the market in their heads. We all know that this is impossible! However, many

traders have this kind of wishful thinking and what follows is the same failure pattern that befalls

these traders each day.

There is only one real type of trading trading according to actual market situation. This is the

essence of short-term trading.

Without the fundamental skill (also the most important skill) of recognizing real market

situation, all the other skills are like building sand castles. Devoid of a strong foundation,

everything will topple sooner or later. Traders who possess this skill normally do not require any

other skills. However, there are exceptions. For example, traders with huge capital or large

trading firms will need to go beyond such skill. They must build upon it to develop more

techniques and comprehensive skills to play a trading game that is different from that of

independent traders.

Their success is more likely attributed to other reasons rather than their powerful trading skills.


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However, there are exceptions. There are people who succeed without this fundamental skill.

Warren Buffett is a very good example. Buffett is not really a trader, but an expert in value

judgment. He predetermines value deviations and enter the market in advance. This allows him

to profit from contrarian trades before the mood of the market swings in the opposite direction.

Most of us should not aspire to become an expert analyst like Warren Buffett. This would require

an in-depth understanding of the economic structure, detailed analysis and collective judgment of

economic cycles and market maturity, as well as strong corporate evaluation, assessment and

administration. Putting these demanding requirements into consideration, it would be much

easier and practical to be just a trader.

As an independent trader, the most practical way to enhance yourself is to conduct trading based

on real market situation. This is not as challenging as you might think. Everyone is born with this

potential.

TYPES OF TRADINGLONG-TERM

If we say that a short-term trader is an artist, then a long-term trader would be an engineer.

Artists always brim with excitement and passion when they create art pieces, whereas engineers

often have to contend with hardships and challenges, as engineering projects require consistent

hard work and no one can predict what will happen along the way. A long-term trader must act

on logic and not on sentiments.

Theoretically, long-term trading is more suitable for common investors because it focuses on

rational thinking. However, this rationality and objectivity also take away the excitement of daily

trading. It is a lonely process that requires a lot of patience, much like a monk on a pilgrimage.

This is the reason why so many are driven back to short-term trading. Long-term traders pursue

market trends, as they believe the latter are their only true friends as well as source of income.

They are not concerned about daily price fluctuations because they think these fluctuations are

irrelevant. Such indifference make others think that they are fools. Long-term traders do not care

about how the market will move the next day, their only concern is whether the trend has ended.


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Their perseverance is not something a common investor can understand or accept

There is a common misconception that long-term traders hold their positions for so long because

they are very confident of their forecasts on market trends and know when these trends will end.

This is a huge misconception! Long-term traders, just like you, have no idea how the market will

swing. They merely track the trends in a disciplined manner.

Holding a position for such a long time and with such discipline is an agony others will not

understand. You can even say that the prolonged period of suffering is an opportunity cost for

the returns at the end! Huge market fluctuations can easily erode most of the profits held by the

positions. What makes things worse is that most of the time you would have expected such

retracements. In other words, you are staring at your profits while they are being nicked away. It

is as though someone managed to rob you of your money even though you are well-prepared.

Can you understand and endure such agony? Long-term traders have to forgo several sure win

opportunities in order to hold out for long-term gains. Moreover, there are fewer opportunities

for long-term trading due to high market volatility, during which the positions held by long-term

traders suffer continuous depreciation. Very often, this is enough to turn initial profits into

losses. Such torment is surely enough to crush anyone!

Sometimes, a market may experience drastic retracement which indicates the end of a trend,

forcing you to close your positions even though you have lost a good chunk of your profits. After

which, you realized that it was just an instantaneous phenomenon and the market continues to

move according to its earlier trend. It will take a lot of courage and perseverance to enter the

market once more. This may sound easy now, but it is a lot harder than you imagine.

The most important attributes of long-term trading are objectivity and discipline. Many a times,

you will be forced to forgo your creative thinking and judgment. However, successful closure of

a long-term position can reap huge rewards. This is what makes long-term trading attractive. The

key characteristic of long-term trading is that you can keep your losses small while making huge

profits. It is not about the number of gains or losses, but the amount. This is where it differs

fundamentally from short-term trading.


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TYPES OF INTERNATIONAL FOREX

The best time to trade Forex

Having a 24-hour market does not mean that you have to trade 24 hours a day.

For example, if you are trading in Japanese Yen, the currencys volatility typically peaks during

the first hour the Japanese market opens.

From 1pm to 5pm (GMT), the London and New York markets will be running concurrently.

Therefore, this is the period of time when the volatility of the market and trading volume are the

highest, making it the best time to trade.

24-hour Market


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LESSON 8 - EXCHANGE RATE DYNAMICS & CURRENCY FACTORS:

Exchange rates change by the second. Currency changes affect you, whether you are activelytrading in the foreign exchange market, planning your next vacation, shopping online for goods

from another countryor just buying food and staples imported from abroad.

Like any commodity, the value of a currency rises and falls in response to the forces of supply

and demand. Everyone needs to spend, and consumer spending directly affects the money supply

(and vice versa). The supply and demand of a countrys money is reflected in its foreign

exchange rate.

When a countrys economy falters, consumer spending declines and trading sentiment for its

currency turns sour, leading to a decline in that countrys currency against other currencies with

stronger economies. On the other hand, a booming economy will lift the value of its currency, if

there is no government intervention to restrain it.

Consumer spending is influenced by a number of factors: the price of goods and services

(inflation), employment, interest rates, government initiatives, and so on. Here are some

economic factors you can follow to identify economic trends and their effect on currencies.

1. Interest Rates

"Benchmark" interest rates from central banks influence the retail rates financial institutions

charge customers to borrow money. For instance, if the economy is under-performing, central

banks may lower interest rates to make it cheaper to borrow; this often boosts consumer

spending, which may help expand the economy. To slow the rate of inflation in an overheated

economy, central banks raise the benchmark so borrowing is more expensive.

Interest rates are of particular concern to investors seeking a balance between yield returns and

safety of funds. When interest rates go up, so do yields for assets denominated in that currency;

this leads to increased demand by investors and causes an increase in the value of the currency in

question. If interest rates go down, this may lead to a flight from that currency to another.


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Interest rates, inflation and exchange rates are all highly correlated. By manipulating interest

rates, central banks exert influence over both inflation and exchange rates, and changing interest

rates impact inflation and currency values. Higher interest rates offer lenders in an economy a

higher return relative to other countries. Therefore, higher interest rates attract foreign capital

and cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if

inflation in the country is much higher than in others, or if additional factors serve to drive the

currency down. The opposite relationship exists for decreasing interest rates - that is, lower

interest rates tend to decrease exchange rates.

2. Employment Outlook

Employment levels have an immediate impact on economic growth. As unemployment

increases, consumer spending falls because jobless workers have less money to spend on non-

essentials. Those still employed worry for the future and also tend to reduce spending and save

more of their income.

An increase in unemployment signals a slowdown in the economy and possible devaluation of a

country's currency because of declining confidence and lower demand. If demand continues to

decline, the currency supply builds and further exchange rate depreciation is likely. One of the

most anticipated employment reports is the U.S. Non-Farm Payroll (NFP), a reliable indicator ofU.S. employment issued the first Friday of every month.

3. Economic Growth Expectations

To meet the needs of a growing population, an economy must expand. However, if growth

occurs too rapidly, price increases will outpace wage advances so that even if workers earn more

on average, their actual buying power decreases. Most countries target economic growth at a rate

of about 2% per year. With higher growth comes higher inflation, and in this situation central

banks typically raise interest rates to increase the cost of borrowing in an attempt to slow

spending within the economy. A change in interest rates may signal a change in currency rates.


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Deflation is the opposite of inflation; it occurs during times of recession and is a sign of

economic stagnation. Central banks often lower interest rates to boost consumer spending in

hopes of reversing this trend.

4. Trade Balance

A country's balance of trade is the total value of its exports, minus the total value of its imports.

If this number is positive, the country is said to have a favorable balance of trade. If the

difference is negative, the country has a trade gap, or trade deficit.

Trade balance impacts supply and demand for a currency. When a country has a trade surplus,

demand for its currency increases because foreign buyers must exchange more of their home

currency in order to buy its goods. A trade deficit, on the other hand, increases the supply of a

countrys currency and could lead to devaluation if supply greatly exceeds demand.

A ratio comparing export prices to import prices, the terms of trade is related to current accounts

and the balance of payments. If the price of a country's exports rises by a greater rate than that of

its imports, its terms of trade have favorably improved. Increasing terms of trade shows greater

demand for the country's exports. This, in turn, results in rising revenues from exports, which

provides increased demand for the country's currency (and an increase in the currency's value). If

the price of exports rises by a smaller rate than that of its imports, the currency's value will

decrease in relation to its trading partners.

5. Central Bank Actions

With interest rates in several major economies already very low (and set to stay that way for the

time being), central bank and government officials are now resorting to other, less commonly

used measures to directly intervene in the market and influence economic growth.

For example, quantitative easing is being used to increase the money supply within an economy.

It involves the purchase of government bonds and other assets from financial institutions to

provide the banking system with additional liquidity. Quantitative easing is considered a last

resort when the more typical responselowering interest ratesfails to boost the economy. It


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comes with some risk: increasing the supply of a currency could result in a devaluation of the

currency.

6. Political Stability and Economic Performance

Foreign investors inevitably seek out stable countries with strong economic performance in

which to invest their capital. A country with such positive attributes will draw investment funds

away from other countries perceived to have more political and economic risk. Political turmoil,

for example, can cause a loss of confidence in a currency and a movement of capital to the

currencies of more stable countries.

7. Public Debt

Countries will engage in large-scale deficit financing to pay for public sector projects and

governmental funding. While such activity stimulates the domestic economy, nations with large

public deficits and debts are less attractive to foreign investors. The reason? A large debt

encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off

with cheaper real dollars in the future.

In the worst case scenario, a government may print money to pay part of a large debt, but

increasing the money supply inevitably causes inflation. Moreover, if a government is not able to

service its deficit through domestic means (selling domestic bonds, increasing the money

supply), then it must increase the supply of securities for sale to foreigners, thereby lowering

their prices. Finally, a large debt may prove worrisome to foreigners if they believe the country

risks defaulting on its obligations. Foreigners will be less willing to own securities denominated

in that currency if the risk of default is great. For this reason, the country's debt rating (as

determined by Moody's or Standard & Poor's, for example) is a crucial determinant of its

exchange rate.

The exchange rate of the currency in which a portfolio holds the bulk of its investments

determines that portfolio's real return. A declining exchange rate obviously decreases the

purchasing power of income and capital gains derived from any returns. Moreover, the exchange

rate influences other income factors such as interest rates, inflation and even capital gains from

domestic securities. While exchange rates are determined by numerous complex factors that


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often leave even the most experienced economists flummoxed, investors should still have some

understanding of how currency values and exchange rates play an important role in the rate of

return on their investments.

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