Simple Forex System Trading

The Forex Market

The most traded currency pairs by Forex traders and investors are:

EUR/USD: Euro against Dollar

GBP/USD: British Pound against Dollar

USD/JPY: Dollar against Japanese Yen

USD/CHF: Dollar against Swiss franc

AUD/USD: Australian Dollar against Dollar

USD/CAD: Dollar against Canadian dollar

When a trader buys, also known as goes long, the Euro, he or she is buying the Euro (EUR) and selling the Dollar (USD).  When a trader sells, also known as goes short, the Australian Dollar (AUD), he or she is selling the Australian Dollar (AUD) and buying the Dollar (USD).

How to Read Quotes

When the EUR/USD quote is 1.3545, it means that 1 Euro can buy $1.3545 US dollars.

When the USD/CAD quote is 1.0700, it means that 1 US Dollar can buy 1.0700 Canadian Dollars.

When the USD/JPY quote is 93.55, it means that 1 US Dollar can buy 93.55 Japanese Yens.

Bid/Ask Spread

Currencies pairs are usually quoted with a bid and ask price.  Banks and brokers are profiting from the difference between the bid and the ask prices.  The bid is the price you are willing to sell to a bank or a broker.  The ask is the price you are willing to buy from a bank or a broker.

When the EUR/USD quote is 1.3610 /12

The bid price is 1.3610.  This is the price you sell to a bank or a broker.

The ask price is 1.3612.  This is the price you buy from a bank or a broker.

A Pip

A pip is the minimum incremental move a currency pair can make.

When EUR/USD moves from 1.3610 to 1.3655, it means that the pair moves 45 pips (13655 - 13610 = 45).

When USD/JPY moves from 90.05 to 93.10, the pair moves 305 pips (9310 - 9005 = 305).

Margin Trading

Currency trading does not require the full deposit of the amount traded.  You are only required a percentage of the deposit for the amount you would like to trade.  This required amount is known as margin.

When the leverage is 400:1, it means that you require only 1/400 or .25% in balance to open a position.  When the leverage is 100:1, the amount needed to open a position is 1/100 or 1 %.

Trading Sizes

A standard lot size in the Forex market is $100,000 USD.

When the leverage is 100:1, the required margin to open a standard lot is $1,000 ($100,000 x 1%).

A mini lot size is $10,000 USD.

When the leverage is 400:1, the required margin to open a mini lot is $25 ($10,000 x .25%).

Margin Call

A margin call occurs when the balance of the trading account falls below the maintenance margin.

For example, a trader has $1000 in the account.  The leverage he uses is 100:1.  The required margin to maintain a open position is 1/100 or 1%.

He buys a mini lot of USD / CAD.  The amount of money needed to maintain this open trade is $100 ($10,000 x 1%).  He will receive a margin call when the trade goes against him and the loss exceeds $900.  Normally, when the account balance gets close to the minimum required margin, the broker will send out alerts to the trader about the possible margin call.  Once the account balance falls below the minimum required margin, the broker can liquidate all trades to stop the account from going into negative balance.

If it passes, I think I’ll move my accounts to UK then.  10 to 1 leverage seems absurd.

More details @ fxstreet blog

I recently responded to a question about how to convert the London open to a local time zone.  Interestingly, the trader who posted the question lives in New Zealand and that adds the complexity.  Below is my response to the question:

So, New Zealand is GMT+13 now (daylight saving). London opens at 8:00 GMT (non daylight saving). Remember New Zealand and the Northern Hemisphere are the opposite. It will be 8 + 13 = 21 local New Zealand time, which is 9 PM local when London opens.

During non daylight saving, New Zealand is GMT + 12. London opens at 7:00 GMT (daylight savings). It will be 7 + 12 = 19 local New Zealand time, which is 7 PM local when London opens.

Oanda has a tool called FX Market Hours.  The tool detects the local time on your PC and displays when the major markets, e.g. London, New York, Tokyo, open and close.

If you like to figure out when a major market opens and closes in your local time zone, here is how I do it.

1. First, figure out your local time in relation to GMT.  For example, my local time in terms of GMT is GMT-8 in Standard Time.  When in day light savings, it is GMT-7.
2. Second, take the major market open time and add to or subtract from the number you obtain from the step above.  For example:
   • London opens at 8 GMT in Standard Time.  My local time in terms of GMT is GMT-8 in Standard Time.  So, 8 - 8 = 0.  When London opens, it is midnight at my local time.
   • London opens at 7 GMT in Day Light Savings.  My local time in terms of GMT is GMT-7 in day light savings.  So 7 - 7 = 0.  When London opens, it is midnight at my local time.
3. If you live in a place where you don’t have day light savings, here is an example.  Let’s use Singapore as an example.  Singapore is GMT+8.  Singapore does not have day light savings.
   • London opens at 8 GMT in Standard Time.  Singapore local time in terms of GMT is GMT+8 in Standard Time.  So, 8 + 8 = 16.  When London opens, it is 4 PM at Singapore local time.
   • London opens at 7 GMT in Day Light Savings.  Singapore local time in terms of GMT is GMT+8 in Standard Time.  So 7 + 8 = 15.  When London opens, it is 3 PM at Singapore local time.

Also, this world clock page helps figure out when day light savings is in effect.

All it takes is some crook in a company to make unauthorized trades and bring the company down.

Oct. 21 (Bloomberg) — Citic Pacific Ltd.tumbled the most in 18 years in Hong Kong trading after predicting HK$15.5 billion ($2 billion) in losses from unauthorized currency bets…  The losses are based on an exchange rate of 70 cents to the Australian dollar, $1.35 to the euro and 6.84 yuan to the dollar, it said. The outstanding Australian contracts have a weighted average strike price of 87 U.S. cents to the Australian dollar, it said.

On bloomberg.com

For those who like to look at the big picture and trade currencies in a larger time frame, this is a very good read on PFX Global.  The articles talk about whether fundamental trading systems can be profitable, how to manage risks, how to back-test, and lots more information.

Check out Forex Blog.org.  I just found this article which I think is the most comprehensive list of resources for all Forex traders.  Whether you are so new and you don’t even know what Forex is all about, or you are a seasoned pro and are just looking for a new trading idea, the list may just have what you are looking for.  Some of my favorites on the list are:

Baby pips:  You simply have to visit this website.  It has everything.  It is like a school for heaven’s sake.  And if you like to trade British Pound, you definitely have to read the Cowabunga System.

Money Tec:  Another one you simply must visit.  This site is a forum.  Whether you need Forex 101 or are looking for a trading system, you will find something.  Have patience.  I spent lots of time there digging into who knows how many posts, but I certainly learned a lot.

The U.S. mortgage rate as of February 27, 2008With Bernanke’s comments on the current condition of the US economy and hints of another rate cut, the bond market does not seem to agree with the Fed.  Just about a month ago, the 10-year note was hitting 3.5% which brought the 30-year mortgage rate down to 5.4%.  After the Fed’s aggressive rate cut by 125 points, the bond market price has been falling.  The 10-year note is now pushing towards 4%, and the 30-year mortgage rate is standing at 6.10%.

This is a question everyone’s asking.  We are seeing more layoffs.  Companies are cutting back IT spending and travel budgets.  Are we really facing a full-scale recession?

Saxo Bank’s Head of Strategy, David Karsbøl, believes recession is already upon us.  He used 13 key indicators to gauge the economy.  Here’s why.