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Everything You Need to Know about Forex .pdf



Nom original: Everything You Need to Know about Forex.pdf
Titre: Everything You Need to Know about Forex™ √PDF √eBook ✔Download
Auteur: How Forex Trading Works

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Everything You Need to Know
about Forex
from How Forex Trading Works

1

Contents
Introduction.............................................................................................................................4
The Basics of Forex...............................................................................................................5
The Size of the Forex Market.................................................................................................7
Where Forex Market Currencies Are Traded.........................................................................9
How Forex Market Currencies Are Traded..........................................................................10
The Advantages of Forex Trading........................................................................................12
Currency Pairs Explained....................................................................................................13
Forex Spreads Explained.....................................................................................................15
The Costs of Forex Trading.................................................................................................16
Types of Forex Orders.........................................................................................................18
Forex Margin Trading Explained..........................................................................................20
Forex Micro Accounts and Lots Explained...........................................................................22
Comparing Forex Trading to Stock Trading.........................................................................23
Comparing Forex Trading to Futures Trading......................................................................25
Forex Trading Rollovers Explained......................................................................................27
When the Forex Market Is Most Active................................................................................28
Fundamental Analysis Explained.........................................................................................30
The Movers of the Forex Market..........................................................................................32
Nonfarm Payrolls Explained.................................................................................................34
Consumer Price Index Explained.........................................................................................35
Consumer Confidence Index Explained..............................................................................36
Gross Domestic Product Explained.....................................................................................38
Trade Balances Explained...................................................................................................39
Interest Rates and the US Dollar.........................................................................................40
Nonfarm Payrolls and the US Dollar....................................................................................41
Comparing Fundamental Analysis with Technical Analysis.................................................42
Types of Forex Charts..........................................................................................................44
The Best Types of Forex Charts..........................................................................................46
Time Frames in Forex Trading.............................................................................................48
Technical Charting Indicators in Forex Trading....................................................................50
Support and Resistance in Forex Trading...........................................................................52
Price Channels in Forex Trading..........................................................................................54
Fibonacci Retracements in Forex Trading...........................................................................56
Moving Averages in Forex Trading......................................................................................58
Bollinger Bands Explained...................................................................................................59
Candlestick Chart Information, History and Patterns...........................................................61
Using Candlesticks and Candlestick Patterns.....................................................................63
Important Forex Trading Charting Patterns.........................................................................65
Strong Bullish Reversal Candlestick Patterns.....................................................................67
Moderate Bullish Reversal Candlestick Patterns.................................................................68
Weak Bullish Reversal Candlestick Patterns.......................................................................70
Strong Bearish Reversal Candlestick Patterns....................................................................71
Moderate Bearish Reversal Candlestick Patterns...............................................................73
Weak Bearish Reversal Candlestick Patterns.....................................................................75
Continuation Candlestick Patterns.......................................................................................77
The Head and Shoulders Charting Pattern..........................................................................79
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Getting Started

2

Commodity Currencies Explained........................................................................................80
Trading Cross Currencies....................................................................................................81
Trading Synthetic Crosses...................................................................................................82
The Basics of Forex Options................................................................................................83
Money Management in Forex Trading.................................................................................85
Using a Risk/Reward Ratio..................................................................................................87
Using a Forex Trading Plan.................................................................................................88
Choosing a Forex Broker.....................................................................................................89
Trusting Your Forex Broker..................................................................................................91
Choosing a Money Manager................................................................................................92
Forex Trading and Taxes in the US......................................................................................94
Scalping the Forex Market...................................................................................................96
Trading with News Announcements.....................................................................................97
Using a News Trading Strategy...........................................................................................99
Using a Range Trading Strategy........................................................................................100
Using a Swing Trading Strategy.........................................................................................101
Using a Trend Trading Strategy.........................................................................................102
Using a Carry Trading Strategy..........................................................................................104
Creating Your Own Forex Trading System........................................................................106
Conclusion.........................................................................................................................107
Getting Started...................................................................................................................108

Copyright © 2012 How Forex Trading Works
Getting Started

3

Introduction
Anyone can get rich Forex trading, but if you really want to be successful at trading
currencies, you will need to work hard. If you are just starting out, you will have a lot to
learn. However, Forex trading can be extremely rewarding, so you should keep at it and
never give up.
You will need to have both knowledge and experience to succeed in the Forex market. In
order to gain knowledge, you will need to study and in order to gain experience, you will
need to practice by applying your knowledge to the actual markets.
This eBook should help to increase your knowledge of Forex trading. You should really
open a Forex trading account of your own as soon as possible though, preferably a demo
account to begin with so that you can trade risk-free, as this will allow you to practice as
you study. This way you will be able to gain some valuable experience early on. Click here
to get started.
Success can never be guaranteed, but by reading this eBook and practicing alongside it,
you will definitely be able to increase your chances of success in the Forex market.

Copyright © 2012 How Forex Trading Works
Getting Started

4

The Basics of Forex
Whilst you might not yet have heard of Forex, you will most likely have heard of the foreign
exchange. Forex and the foreign exchange however, are actually both the same thing. The
Forex market itself, can be referred to as the foreign exchange market, the currency
market or the FX market. The market first established itself in the 1970s and has been
lively ever since.
Currencies began fluctuating in the 1970s, due to President Nixon's policy of taking the US
off of the gold standard. The "gold standard" refers to the system in which values of
currencies are defined in terms of gold. With the gold standard system, currencies could
be bought and sold in exchange for gold. This system is of course nowadays very
outdated and old-fashioned. So we can say that US currency was in fact once backed by
gold, however now it is simply backed by the belief that people have in the US government
and its ability to back the currency itself.
The market, despite it being around for quite some time, has actually only been a publicly
accessible market since the 1990s. It is thought that many of the main market makers
didn't in fact establish themselves completely, until the 2000s. The market was originally
reserved, mostly to banks and larger institutions. The big traders were the only ones that
could play with the currency market and they tended to invest millions of dollars into it generally no less than $10 million.
The Forex market is unique for many reasons:
- It bears a huge trading volume, leading to high liquidity (due to the fact that the market
represents the largest asset class in the world)
- It is very geographically dispersed
- It is very continuous (the market operates 24 hours a day, excluding weekends)
- It can be affected by a wide variety of factors
- It provides low margins of relative profit (when compared to other markets of fixed
income)
- It, with respect to account size, can provide leverage that can be utilized to enhance both
profit and loss margins.
Although the market can experience currency intervention by central banks, the foreign
exchange market has been referred to as the closest market to the ideal of "perfect
competition". Perfect competition is an economic theory that describes markets whereby
no participants are large enough to have full (or the majority of) market power to set the
price of a homogeneous product. Although the FX market is in fact quite new and has only
been open to the public since the 1990s, it has since been opened up to the retail public
online due to the Internet, meaning that just about anyone can now open a currency
trading account in the currency market within a matter of seconds. It is also possible to
start an account with very little money nowadays, meaning that you can trade with almost
as little as you want, as online Forex brokers only require very small minimum deposits.

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In conclusion, the currency market is actually a relatively new market, though it is very
unique and has many advantages. The market is also accessible by both small-timers and
so-called big boys.

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The Size of the Forex
Market
The largest financial market in the entire world is in fact the Spot Forex market. The
market itself bears a daily trading volume of $4 trillion on average. The New York Stock
Exchange (NYSE) trades around $20 to $30 billion per day, putting this into true
perspective - the size of the Forex market is huge. The Forex market dwarfs the largest
stock exchange in America, however even if you totaled the volume of every single stock
market around the world, the Forex market's daily trading volume would still come out on
top.
The market is actually very simple though, in essence. The currency market merely
involves the trading (AKA exchanging) of money itself. Usually you would exchange money
for goods and services in the real world, but in the Forex world, you exchange money for
money. When you buy a good or a service, it will be valued and you will have to pay that
value in your chosen currency. This is similar in currency trading: a currency is valued in
terms of another currency, and you pay for the value of that currency with the other
currency!
What you will usually see quoted is the exchange rate. The exchange rate simply
determines how much currency another currency can buy. This can sometimes sound
quite complicated, but it is very simple and you will soon get your head around how the
Forex market works.
There are plenty of factors that affect exchange rates and these factors can cause an
exchange rate to go up or down. You could write a very long list, in fact the list would
probably be endless, of all the factors that determine an exchange rate. However
ultimately, an exchange rate is primarily determined by the belief that people have in a
particular currency, collectively. The Forex market is just like any other financial market in
the sense that it is all about mass psychology more than anything. People will collectively
look at how different economies are doing, the political stability of a country, consumer
sentiment, exchange rate trends etc - the list, of course, goes on!
Traders and investors in the FX market include both large and central banks,
governments, corporations, institutional investors, currency speculators, other financial
institutions and retail investors. The foreign exchange market's (and other related
markets') average daily turnover is consistently growing over time too as more and more
people are taking advantage of this unique financial market and the market is slowly
becoming more and more well-established. Currency trading has more than doubled since
2004, interestingly.
In conclusion, the Forex market is the largest financial market in the entire world, dwarfing
all other financial markets. It simply involves the exchange of currencies using exchange
rates - these exchange rates are determined by many factors, though primarily mass
psychology and the collective belief that people have in particular currencies. The Forex
market consists of very high volume traders and investors as well as very low volume

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ones. The market is consistently growing over time as it increases in popularity and
furthermore establishes itself.

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8

Where
Forex
Market
Currencies Are Traded
One of the main advantages of trading in the Forex market is that trading is very easy and
convenient. You can setup an online currency trading account within a few minutes
nowadays, with only a few dollars. You do not have to literally exchange your money in
cash form or setup some special kind of Forex bank account - you can simply start trading
currencies online from your own home. But you can't do this all yourself - you will need to
find an online Forex trading website.
These online Forex trading websites are often referred to as "brokers", though they aren't
technically brokers at all since they don't work with commissions - there aren't any
commissions when trading in the FX market online. You are dealing directly with the
market maker, when trading foreign exchange currencies. You might wonder why they
would even bother providing such a service if they don't make any money out of you and
your trades - well actually, they do, but not nearly as much as stock brokers do. Market
makers in Forex simply charge spreads (the spread is the difference between the buy and
sell quote - stock brokers though, will charge commissions.
When trading stocks inside your stock brokerage account, not only do you incur a spread
cost from the market maker, but also both a buy commission and a sell commission from
your stock broker. So, once you have bought and sold a stock, you have already paid for
three separate fees. In foreign exchange trading, you only have to simply pay for the single
fee of the spread, and no annoying commission fees which could cut into your marginal
profits/losses.
It gets even better too: You might also want to know, that even the spread cost is lower in
Forex trading than in stocks. This is because, when you consider the sheer volume and
amount of currency you are actually controlling, the spread cost will come out appearing a
lot less significant.
So, this is just another advantage of trading foreign exchange currencies online - you pay
a lot less in the Forex market than you do in other financial markets, which is just another
reason why it is so popular. You will not have to worry about any hefty commission fees
and you can take your entire profit or loss to yourself - you are your own trader!
In conclusion, Forex trading in the currency market is a lot more simple than trading in
other financial markets since you only need an online FX broker (though notably these
brokers will also be referred to as "brokers") and you can trade from home within a matter
of minutes. Forex brokers do not work with commissions, only spreads, making currency
trading a lot cheaper than trading in other financial markets, such as in stocks. You are
more responsible for yourself when trading Forex and you are your own trader, which if
you think about it, is more of a positive attribute to FX trading than a negative one.

Copyright © 2012 How Forex Trading Works
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How
Forex
Market
Currencies Are Traded
Forex market currencies are traded in pairs. This is because one currency could be strong
against one particular currency but weak against another. It's all about being relative when
trading in the foreign exchange market. Remember that these exchange rate pairs are
determined by a huge number of factors, but primarily by a collective belief in the
currencies by investors all around the world (including not only large banks and
corporations, but us too)!
Let's take an example of how foreign exchange currencies are paired:
Let's say that investors feel the US economy is doing relatively well when compared with
the UK economy. In the US, the currency is represented as USD (US dollar) and in the UK,
the currency is represented as GBP (British pound). Because investors feel the US is
doing relatively well when compared with the UK, the USD will gain strength over the GBP.
However the GBP, although losing to the USD, could in fact strengthen against another
country's currency simultaneously - so it's all about being relative and knowing your
exchange rates. One currency can look weak in terms of another currency, but strong in
terms of another.
Currency pairs usually look like the following: GBPUSD = 1.50
The pair above tells us that it will take 1.5 USD to purchase 1 GBP. So, if the USD gains
strength over the GBP, the value of this pair (the exchange rate) might decrease to say
1.4. If you think about it, it is extremely simple! These pairs are always moving and all day
too. The increases and decreases in the exchange rate are generally much more gradual
than the example given above and a lot more marginal.
All currencies are traded through the interbank market, through the many Forex market
makers. The market makers themselves set the quotes based on the pressures of the
buying and selling of the currencies that they see when looking at the demand for the
currencies vs. other currencies.
Currencies themselves are traded as OTC (Over The Counter) in the spot Forex market.
This means that Forex is not traded on a particular exchange around the world but it can
be traded anywhere. For e.g. the NYSE (New York Stock Exchange) is traded in a certain
physical location, but NASDAQ is not. They are both two different ways in which stocks are
traded, but one is OTC, like Forex!
This is just another advantage of trading in foreign exchange market. Market makers have
to compete with each other for your business more than for e.g. a stock broker would in
the stock market since they work on a physical exchange. This extra competition is healthy
and ends up in the favor of the currency traders.
In conclusion, FX currencies are traded in simple pairs that represent the exchange rate
and the price of one currency in terms of another. All currencies are traded through the
interbank market through market makers and currencies are traded as OTC (Over The

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Counter). Due to the OTC nature of Forex, there is more competition between the market
makers and this is positive for us.

Copyright © 2012 How Forex Trading Works
Getting Started

11

The Advantages of Forex
Trading
There are many reasons why the Forex market is such a unique financial market and
many of them are positive that also act as advantages of Forex trading.
The currency market is very large with a $4 trillion average daily trading volume. This acts
as an advantage to currency traders since greater volume means better fills on your trades
(meaning less slippage). Slippage simply refers to the difference between a market price
before and after placing an order - you could choose to buy at one price but actually end
up buying at another by the time the order has actually completed. This is due to slippage
(usually occurring in highly volatile markets). The greater the volume at each individual
price level, the better the fills are. Because of the very large trading volumes, the FX
market can provide less slippage than any other financial market, meaning less real
trading costs.
Not only are the fills better in the foreign exchange market, but the spreads are also less
costly. Also, you pay zero commissions since you technically go to a dealer and not a
broker. You trade with the market makers directly rather than through a broker, meaning
you can save a lot of money. However, do remember that many online Forex brokers will
call themselves brokers, but they technically are not brokers at all.
The Forex market is also very convenient as you can trade 24 hours a day, rather than 6.5
hours a day with the stock market, both excluding weekends. This means that you can
choose the best time to trade for you and you can really focus on your trading. Also if you
want to, you can trade currencies as the news and announcements are released, which
you cannot do when trading in the stock market.
In the FX market, there are also no restrictions on short selling. They tend to make it hard
to short sell in the stock market since they want stocks to rise and not fall. However, there
are no restrictions when it comes to short selling in the Forex market. You can short just as
easily as you can buy currencies in the currency market and the fills are just as quick. You
should also remember that when trading currencies, you are technically going long in one
currency and short in another since you trade with currency pairs.
The currency market is also highly liquid and can provide high leverage. This means that
currencies tend to be price stable and slip minimally with narrow spreads and high liquidity.
High leverage, starting at a minimum of 100:1, means that you can make larger profit/loss
margins with only a very small initial deposit - you should try to work this to your
advantage. Do bear in mind that different countries will have different limits on the amount
of leverage available to traders and investors.
In conclusion, there are many advantages to trading in the Forex market. Greater volume
means less slippage, you pay no commissions meaning less trading costs, you can trade
24 hours a day meaning more convenience, there are no restrictions on short selling
meaning more freedom, the market is highly liquid meaning again less slippage and more
stable prices and high leverage meaning larger margins.

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Currency Pairs Explained
Currency pairs are used frequently in Forex to show the relationship between one currency
and another. They can simply and clearly show the exchange rate between one currency
and another.
For e.g. GBPUSD = 1.5 means it will take 1.5 USD (US dollar) to buy 1 GBP (British
pound). If you click 'buy' on GBPUSD, you are buying into GBP (the first currency, AKA the
base currency) and you are selling up USD (the second currency, AKA the quote
currency).
There are actually three groups of currency pairs. There are the "majors", the "crosses"
and the "exotics".
The major currency pairs, are the ones that pair the major countries' currencies with the
USD. These majors also bear nicknames, given below:
- GBP/USD. Sterling, Cable (British pound vs. US dollar)
- EUR/USD. The Anti-Dollar (euro vs. US dollar)
- AUD/USD. Aussie (Australian dollar vs. US dollar)
- NZD/USD. Kiwi, AKA Kiwi Dollar (New Zealand dollar vs. US dollar)
- USD/JPY. The Yen (US dollar vs. Japanese yen)
- USD/CHF. Swissie (US dollar vs. Swiss franc)
- USD/CAD. Loonie (US dollar vs. Canadian dollar)
The cross currency pairs are simply the ones that pair any currencies with any other
currencies excluding the dollar. For e.g. GBP/EUR (British pound vs. euro).
The exotic currency pairs are slightly more interesting since they involve emerging
economies rather than developed ones. For e.g. USD/MXN (US dollar vs. Mexican peso).
These exotic currency pairs are interesting but it takes a little more research and
experience to do well trading exotic currencies. As a beginner trader you should start
trading with the major and cross currency pairs. When you become more experienced, you
could try your hand at trading with exotic currency pairs.
After understanding currency pairs, we should understand when each currency trades.
Although in currency trading you can trade 24 hours a day excluding weekends, the
different Foreign Exchange currencies trade in different sessions mostly:
- United States Session (8AM to 5PM EST)
- European Session (3AM to 11AM EST)
- Asian Session (5PM to 4AM EST)
Also take note that the trading week actually begins on Sunday evening at around 5PM
EST and ends at around 4PM Friday evening. Between those times, the FX market is
open to all.
The different sessions also carry different characteristics. The United States Session is
generally quite high volume and volatile, but it is in fact second to the European Session
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which actually carries the most volume and volatility. The Asian Session is a lot less heavy
in terms of volume and volatility. The Asian Session generally serves to form ranges whilst
the United States and European Sessions tend to form intraday trends.
If you want to focus on one particular currency (or on a few particular currencies) you
should work around the time zones and discover when each currency is most active
(currencies are more active when their banks are open during business days).
In conclusion, currency pairs are very simple but they can also be categorized and we
should understand the different types of currency pairs to get the most out of Forex
trading. We should also understand that different currencies belong in different sessions
and time zones and we should really understand the currencies that we focus on (how and
when they work) to benefit the most out of currency trading.

Copyright © 2012 How Forex Trading Works
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14

Forex Spreads Explained
In Forex trading, you will notice the term "spread" mentioned often. Spreads are relatively
simple, but you must take some time to understand what they actually are and how they
work. In Forex, a spread is simply the difference between the "ask" and "bid" price. The
ask price is the price at which brokers are willing to sell a currency at, and the bid price is
the price at which brokers are willing to buy a currency at.
The ask and bid prices change over time in every case, however they generally always
different from each other, meaning that the broker will always make a profit whatever the
situation may be. Of course, the broker's main priority is to buy low and sell high - this is
why, if the two prices are different, the ask price will always be higher than the bid price.
The spread in Forex, just like in every other financial market, is dependent on more than
factor e.g. the market demand and supply of a currency, currency liquidity. We, as
investors, should be aware of the spreads for different currencies in order to maximize
profits (or minimize losses) and minimize costs.
Generally, you will never receive the exact amount when you exchange one currency for
another in real-life. Many people have experienced currency exchanging, perhaps when
abroad. The supplier of the currency you are looking to exchange your currency for, will
always look to charge you a transaction fee for exchanging the currency. We have the
same situation when trading currencies. You cannot avoid the cost of these transaction
fees since they are embodied into the spreads, however you can go to better Forex
brokers and find ones with the lowest spreads, in order to lower the costs of trading. It is
not hard to find competitive spreads since the FX market is so large and competitive!
Remember, spreads work whether you gain money or lose money. Regardless of whether
you profit or make a loss, the broker will always profit. However although spreads sound
bad and costly to you, trading costs are actually very minimal in Forex when you compare
them to the trading costs that occur in the stock market. Stock brokers charge huge
commissions when buying and selling stocks, so currency trading is actually the cheapest
option when it comes to the financial markets.
In conclusion, spreads are simple and work simply also. They are simply the difference
between the buy and sell prices of a particular currency from a particular Forex broker.
Spreads differ with different brokers however regardless of what broker you go with, they
will always profit whether you win or lose: they are quite clever in this sense! However, you
should ideally find a broker that provides a lower spread so that you can minimize your
trading costs and maximize your profits (or minimize your losses, depending on whether
you win or lose). Also note that again, although spreads sound costly, Forex trading costs
are actually relatively low-cost (depending of course on which FX broker you go to)!

Copyright © 2012 How Forex Trading Works
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15

The Costs
Trading

of

Forex

In Forex, traders and investors don't typically have to worry at all about payable
commissions that can can increase trading costs. However, there are definitely costs
associated with currency trading that every trader and investor should understand and be
aware of.
There are two main types of trading costs associated with Forex trading, are "spreads"
(the differences between the buy and sell prices of currencies, which are charged instead
of commissions) and "rollovers" (which involve overnight holding of orders).
Bid/ask spreads are very common in Forex trading and brokers use these spreads to
make their money. The broker will make money whenever you buy or sell currencies. You
buy or sell currencies relative to the broker's spreads. The broker will make money by
selling you a currency at a higher price, this price being relative to the price at which the
same broker will be happy to buy back the same currency from you, for your original
currency. It might sound complicated at first, but it isn't in reality.
The second Forex trading cost, is known as the "rollover". This fee applies only a Forex
trader's position is enacted when all of the major markets have closed. Traders are
investors typically wait for a few hours before receiving their destination currency. This
means that they lose any interest that they could have made by having that currency safe
in their bank account. So, rollover fees simply take into account the differences in interest
rates of bought and sold currencies.
If you buy into a currency with a high interest rate, you will actually be paid the rollover
amount when the next trading session begins. Likewise, if you buy into a low interest rate
currency, you will be charged the rollover amount.
Margin trading in the stock market, essentially involves buying stocks with borrowed
money from Forex brokers. However, margin trading presents a cost that is even more
predominant in Forex than it is in stocks. Forex trading generally requires very high
amounts of leverage.
Leverage is when you use borrowed capital for an investment in the hope of making profits
greater than the payable interest on the borrowed capital. Forex trading requires high
leverage due to the size minimums placed on certain Forex trade types. So, traders and
investors that do not have enough money must trade via financing. Leverage ratios of up
to 100:1 are common in Forex trading, which means that you only have to own 1 single
dollar for every 100 dollars invested. Although this means you can make much profit from
a small investment, you can also make many losses, as it essentially increases the risk of
the trade. You must learn to try and work leverage to your advantage when currency
trading.
In conclusion, costs are actually kept to a minimum, since the FX market is very tough and
highly competitive - the trading costs reflect this tough competition, as Forex brokers
compete with each other a lot. There are only two real costs that you need to worry about,
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and if you go to a good broker, you won't have to worry at all as even the spreads tend to
be unnoticeable and insignificant. You can also avoid rollovers by only trading when the
market is open, however in general, rollovers are nothing to worry about anyway.

Copyright © 2012 How Forex Trading Works
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17

Types of Forex Orders
When you buy or a sell a currency in the Forex market, you are actually making an "order".
There is in fact more than one type of these that you can make in the currency market
market, but there are generally only a few types of them that you must take note of and
understand as a trader and investor.
The most common types of Forex orders are given below. Remember, you should try to
understand each one as best you can, if you want to make the most out of your currency
trading career. The most common types of Forex orders are:
1) The market order.
This is the most common type of Forex order. Market orders are orders that are placed by
traders and investors to buy a particular currency at the current market price. This is the
most simple type of Forex order.
2) The limit order.
This is an order that is placed to buy or sell a particular currency at a specific price.
3) The stop-loss order.
This is an order that is placed to sell a particular currency at a specific price, much like a
limit order, except it acts like a limit order for a particular currency that you already hold.
These stop-loss orders allow traders and investors to prevent extra losses, since it allows
you to sell a currency before it keeps on falling in price.
4) The limit entry order.
This is an order that is placed by traders and investors in order to buy below the market
price or likewise sell above the market price at a specific price.
5) The OCO (One Cancels Other) order.
This is an order that cancels out another order of the same amount.
6) The GTC (Good Till Cancelled) order.
This is an order that definitely stays in the market until it has been filled or if the trader or
investor decides to cancel the order.
In conclusion, there is more than one type of Forex order available, when trading
currencies. It really depends on the individual trader or investor and their individual
situation, as well as their expectations. Different order types are more appropriate for
different situations. For e.g. if you are looking to make more of a longer term investment
you may want to simply go for a market order, however if you are looking to make a
shorter term investment you might want to make a limit entry one. The majority of people
like to go with market orders as they are the most simplistic, but you do need to be careful.
It is recommended that you try and take advantage of the different order types in order to
get the most out of your investments. Different order types will present different
opportunities, but generally the concept is quite simple and you shouldn't worry too much
about the different Forex order types. You will learn to grow and work with them.
Occasionally, you might get the wrong order type for e.g. you may set a stop-loss order
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that causes you to sell a currency too soon, however you should not dwell on these
experiences as you will learn from your mistakes.

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19

Forex
Margin
Explained

Trading

Forex margin trading allows traders and investors to work with greater volumes of
currencies that they actually own themselves by borrowing. If a trader or an investor sees
a particular opportunity in the FX markets and wishes to take advantage of this opportunity
that other investors and traders potentially do not see, they will want to take advantage of
margin trading.
Generally, you are only able to trade what you have, but with margin trading you can trade
more than that. If a trader or an investor predicts that they will yield large returns after
taking advantage of a particular Forex opportunity (a certain shift in the exchange rates),
they will probably be happy to increase the risk of their trade or investment in order to yield
these large returns. They can add risk to the trade by borrowing and investing more money
into the trade.
Margin can be defined as the amount of money that is required to keep all of your active
orders open, in your Forex trading account. So margin trading is simply trading on margin
(trading on money that does not belong to your account).
Let's take a look at an example and demonstrate how margin trading actually works in
currency trading. Let's say that we have one Forex trader with 1,000 USD in their Forex
trading account, with a margin capacity of 5% (margin capacity being the minimum
percentage of equity that they are allowed to maintain). This will mean that the trader or
investor will be able to work with a whole 20,000 USD, being able to borrow 18,000 USD.
So, the margin capacity of 5% means that the they will be able to trade up to 20 times
more than they actually have in their Forex account. When using this borrowed money, the
money will usually come as short-term credit and is generally interest-free. The total
transaction of the trade is also used as collateral for this loan - collateral being the
borrower's pledge of specific property to a lender in order to secure the repayment of a
loan.
Of course, margin trading adds a huge amount of unnecessary risk to Forex trading and
can be an effective way to increase your losses, too. However, it can also be an effective
way to increase your profits, if used both effectively and in moderation. You should really
consider margin trading, until you have a good amount of Forex trading experience.
Let's return to the previous example, with the Forex trader who has 1,000 USD in their
account. Let's say they wish to buy 20,000 USD worth of JPY at an exchange rate of JPY
100/USD 1. This would put the trader or investor at JPY 2,000,000. Now, if the broker's
own loan horizon is only 1 month and Japan's economy takes a quick turn for the worse,
JPY will begin to devalue to an exchange rate of JPY 150/USD 1 and they must now pay
back the borrowed money (which will equate to 18,000 USD). However, their holdings are
only worth the value of 13,333.34 USD (since JPY 2,000,000 / JPY 3,000,000 = 0.666667
and 0.666667 x 20,000 USD = 13,333.34 USD).

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This sounds negative, however on the other hand there is also another opportunity to
make a lot of money if you flip the situation around. But the example is given simply to
address the amount of risk that margin trading actually brings to the table.
In conclusion, margin trading is a way in which Forex traders and investors can maximize
and really magnify both their profits and their losses, by exchanging greater volumes of
currencies than they actually hold themselves. It presents more opportunities to Forex
traders, however these opportunities also come with more risk. In the stock market, stock
brokers will usually only provide a 50% margin capacity and they will also provide
maintenance margin requirements, for e.g. if a trader or investor's stock value falls below
30% in equity, the broker will immediately demand payment from them. These
maintenance margin requirements are said to be positive for both brokers and traders,
because it means that the broker will get their money back and the investor will not be able
to accumulate unmanageable amounts of debt.

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Forex Micro Accounts and
Lots Explained
Forex micro accounts aren't extremely common though some Forex brokers do offer these
Forex micro accounts. These types of Forex accounts allow traders and investors to trade
and invest in currencies with much smaller increments.
To put these micro accounts into perspective, a standard lot is 100,000 units worth of the
base currency. A mini lot is 10,000 units worth of the base currency. A micro lot is 1,000
units worth of the base currency.
So, all you really need to know about micro accounts is that they allow you to trade with
much smaller increments, more specifically 1,000 units worth of the base currency you are
interested in trading. These micro lots also, regarding both trade and account sizes,
usually have an upwards limit.
Because you do not have to trade as much currency with micro lots as you would with mini
lots or standard lots, there will be a lot less risk involved and this means that it is perfect
for beginners or for traders and investors who want minimize risk. Micro lots are also
perfect for traders and investors who want to test the Forex market a little without having to
again risk as much of their money as usual - perhaps if the trader or investor was looking
into trading exotic currencies, they might use micro lots to begin with before moving onto
mini lots and standard lots.
Micro lot brokers also tend to offer lower minimum deposits meaning you do not have to
have as much money prior to trading to open an account with a Forex broker. Sometimes
brokers might have high minimum deposits and you might not want to risk this minimum
deposit or you simply cannot afford to lose the minimum deposit - in this case, micro lots
are a perfect alternative to start out in the FX markets.
Many Forex beginners will turn to demo accounts to start experimenting with the Forex
market and to get a feel for currency trading. Although demo accounts are a good way to
start and most brokers do offer them, some of the trading psychology is lost when trading
with demo accounts; traders and investors tend to be a lot more impulsive and take more
risk when trading with virtual money. With a Forex micro account, you can learn about the
currency market as well as keeping the emotions of trading active in your brain since you
are trading with real money!
In conclusion, Forex micro accounts allow traders and investors to trade with Forex micro
lots that are significantly smaller than Forex mini lots and Forex standard lots. You can
trade with as little as 1,000 units worth of the base currency that you are interested in and
these micro accounts allow you to trade with these micro lots that will minimize risk whilst
allowing you to experience the markets and the emotions of trading. They are more
popular among beginners though even experienced traders and investors sometimes take
advantage of micro lots since it allows them to test and experiment with the currency
market without having to risk as much money as they would usually.

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Comparing Forex Trading
to Stock Trading
Forex trading and stock trading can be compared with each other since they both have
their advantages and disadvantages. You do not need to know the differences between the
two in order to be a successful currency trader and investor, but it is a good idea to learn
as much as you can about trading in general.
Now, although both Forex trading and stock trading have their differences, Forex bears
many advantages that stocks simply cannot live up to. In fact, it is very common for traders
and investors in the stock market to switch to Forex later on.
One difference between Forex and stocks, is the way in which the two markets are
informationally affected. The currency markets are generally affected by geopolitical
events and/or important macroeconomic developments. Stocks are also affected by these,
however there are many more variables that can affect the value of stocks. These
variables can be large as well as very small. Some of the variables that affect the value of
company stocks can be extremely difficult to spot and judge at times, arguably making
stock trading more risky, even in an industry that you have relevant experience in.
We require a lot more information when trading company stocks than we do trading foreign
exchange currencies. This means that stock trading actually bears an advantage to larger
firms, since they have the money and contacts to surround themselves with this required
information. However, the majority of us do not have as much money and as many
contacts as the large firms and so Forex can present us with more realistic opportunities.
The information that moves the exchange rates of the currencies on the FX market is also
generally public so that each and every trader and investor has access to this information.
So, the currency market does not bear the same informational disadvantage that the stock
markets do. As long as you know the Forex market and you are keeping up-to-date with
the latest Forex news, you will never have to worry about losing to ignorance.
A fair observation to make also, would be that the stock markets are far more volatile than
the major currencies on the Forex market. Volatility is only a good thing when you can
control it, for e.g. in Forex, controlling your effective volatility with the use of leverage.
However, it is impossible to control the volatility of the market itself. This is why trading
stocks is also more risky since they are more volatile. This presents another problem:
because the stock markets are more volatile you will find yourself diversifying and having
to spread risk, which can cause traders and investors to experience both complication and
confusion.
The liquidity of money itself gives Forex trading an advantage too, going back to the
mention of leverage. Due to the high liquidity in FX trading, you can trade on margin for a
lot less and generally allows traders and investors to both enter and leave the market more
effectively than they could in stocks and bonds.

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One more advantage to Forex trading is the fact that you can trade 24 hours a day
(excluding weekends), which the stock market cannot match. This means that currency
trading is a lot more convenient and allows you to conduct overnight orders.
In conclusion, Forex trading comes out on top when you take into consideration all of the
differences, advantages and disadvantages that the Forex and stock markets have. In FX
trading, traders and investors require less information to be successful, the major foreign
exchange currencies are less volatile than stocks, currencies are more liquid than stocks
also allowing for more leverage and lower-cost margin trading - not to forget that the Forex
market is open 24 hours a day, and even if one does decide to stick with the stock market,
the Forex market is a great place to revisit in times of high stock volatility or economic
turmoil.

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Comparing Forex Trading
to Futures Trading
Traders and investors typically switch to Forex trading from stock trading and futures
trading, because of its many advantages that simply outweigh the advantages of stocks
and futures. All financial markets are volatile and it is hard to avoid volatility trading in any
market, however you can take advantage of volatility and really reap the reward.
First of all, futures trading presents an array of disadvantages to traders and investors
straight away, as traders and investors must:
- Work around opening and closing times
- Pay transaction fees
- Work with middlemen (intermediaries).
The main disadvantages of futures trading are not at all present in Forex trading. The FX
markets are open 24 hours a day meaning they are always open for trades (excluding
weekends). The futures market is only open between 9:30AM and 4PM EST. We can
conclude from this that futures trading really does limit your options as a trader and
investor. However with Forex, you really are open to many options and opportunities.
Unlike with futures trading, in currency trading you will not have to pay a single
commission to anyone, which means that you can keep all of your money to yourself
rather than having to regularly give away portions of your money out - this means that
Forex trading is cheaper and allows you to maximize your profits.
Forex order delays are much more minor than the order delays in futures trading. In
futures, you will typically experience a time delay between when you place an order and
when you actually get your order filled. These delays can get longer and worse during
volatile periods. The delays are a lot less shorter in Forex meaning the money you receive
will be much less affected by order delays - delays are shorted in the Forex market since
there is a very high volume of transactions.
Forex trading is also cheaper since you do not use intermediaries. Traders and investors in
the FX market can freely buy or sell currencies without having to use a middleman. Not
only does this make Forex trading cheaper, but also faster and more effective.
More options also typically means more confusion and complication. There are only so
many currencies to trade with in the Forex market and the majority of people only trade
with the main currencies (usually the top 4) meaning that you have less options to think
about and it means you can make quicker and easier decisions. It also takes less time to
know the Forex market because of this. In futures trading, there is a vast amount of
options and opportunities to trade or invest in, making the whole process slower and more
difficult.
Finally, Forex trading is less risky. This is because traders and investors can set margin
limits. Margin limits mean that traders and investors can receive margin calls when their

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available account capital is exceeded by their margin amount. This reduces the risk in
currency trading.
In conclusion, the advantages of trading Forex generally outweigh the advantages of
trading futures. With Forex, traders and investors can trade 24 hours a day (excluding
weekends), avoid commissions, avoid order delays, avoid middlemen (intermediaries),
avoid confusion and complication with less options and avoid risk with set margin limits all of which futures trading simply cannot match.

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Forex Trading Rollovers
Explained
Trading rollovers occur in Forex trading and they are quite common. A trading rollover
occurs when a broker switches a Forex trader's position in the market, extending the same
position's settlement date. This means that, instead of receiving your money and having
your position in the market closed, your market position is rolled over to the next day by
your broker.
Typically, you will receive a rollover whether you are want one or not, however you can
specify if you want one or not. However, generally brokers make rollovers automatic since
they like to assume that every trader and investor wants one.
Rollovers can cause a trader or an investor to have to pay a rollover fee, but on the other
hand trading rollovers can also cause a trader or an investor to receive a rollover fee. So,
with rollovers, you either win or lose - but really, you don't win or lose, because you either
pay back the interest you wouldn't have received without the rollover or you receive the
interest you would have received without the rollover.
Rollover fees are simply calculated by finding the difference between the interest rates of
two particular currencies that make up a currency pair.
Even over one night, money can earn interest and your Forex broker will credit your
account with the difference between the two currencies' interest rates that you are trading that's if you're making more interest on the base currency than you are on the quote
currency. However, if the interest rate is lower for the base currency than it is for the quote
currency, you will be charged the rollover fee and this fee will be deducted from your
account by your Forex broker.
Forex brokers typically offer a margin level of 1%, however occasionally some Forex
brokers may require a margin level slightly higher (perhaps of 2%) for a trader or an
investor take advantage of claiming rollover fees.
Although it is good to know about rollover fees and understand how they work, rollover
fees are generally very small and not very significant to the majority of Forex traders and
investors. On the other hand, both Forex banks and brokers work with many traders and
investors and all of their rollover fees would really add up if they account for them.
In conclusion, Forex trading rollovers and Forex trading rollover fees work in a simple
fashion. They allow traders and investors to benefit from their wise decisions in buying
high interest currencies and they also allow traders and investors to account for their
mistakes in buying low interest currencies fairly. However, it isn't always a mistake buy into
a low interest currency since the benefits may of course outweigh the costs when you look
at the actual values of the currencies. As mentioned before, interest rates and rollover fees
and generally insignificant in the eyes of the majority of traders and investors in the FX
market. Currency trading is focused on making money with currencies and not just with
interest rates.

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When the Forex Market Is
Most Active
There are certain trading times in the Forex market that allow you to arguably make more
money and profit. Despite the fact that the currency market is open 24 hours a day
(excluding weekends), there are specific times when the FX market is moving faster.
The main time zones for trading are EDT, GMT and JST (New York, London and Tokyo).
Although each main trading time zone bears a specific time bracket, there are always
typically two trading time zone brackets that are overlapping with each other.
The New York trading time zone bracket runs from 9AM to 5PM EST. The London trading
time zone bracket runs from 3AM to 12PM EST. The Tokyo trading time zone bracket runs
from 7PM to 4AM. The Forex market is quite obviously going to be more active during the
overlaps of the main trading time zone brackets. These brackets are generally known as
trading "sessions".
Also, in terms of trading, it is generally the best time to trade in the middle of the business
week as that is when the Forex market is the most active (more specifically between
Tuesday and Wednesday). The worst times to trade Forex (due to low activity and
movement) is typically on any Friday, Sunday or during a holiday.
"Pips" can be used to measure the minimum price movement of an exchange rate (in other
words, the minimum change an exchange rate can make). When you buy a product in a
store, you pay the price of the product to the nearest penny - this means that the pip
(percentages in point) is equal to 1 penny in ordinary transactions. However, in Forex, the
value of exchange rates are priced to 4 decimal places (for most major currency pairs).
The smallest change possible is that of the last decimal place, so 1 pip = $0.0001. It could
be said for most currency pairs that the smallest change possible is equal to 1/100th of 1
percent (AKA 1 basis point).
If you want to know how to calculate how much each pip will be worth to you as a trader
and investor, simply divide 1 pip in decimal form (0.0001) by the exchange rate of the
currency pair you are trading and then multiply it by the notional amount (AKA face
amount) of the trade you are making.
Going back to the Forex market, there are certain currency pairs that are the most active in
each trading session, with the highest amount of pips in each session.
The London session (running from 3AM to 12PM EST) and its main currency pairs (each
with their average level of activity, in pips):
- GBP/CHF (145 pips)
- GBP/JPY (140 pips)
- USD/CHF (115 pips)
- GBP/USD (110 pips)
- USD/CAD (90 pips)
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- EUR/USD (80 pips)
- USD/JPY (75 pips).
The New York session (running from 9AM to 5PM EST) and its main currency pairs (each
with their average level of activity, in pips):
- GBP/CHF (130 pips)
- GBP/JPY (120 pips)
- USD/CHF (110 pips)
- GBP/USD (90 pips)
- USD/CAD (80 pips)
- EUR/USD (75 pips).
The Tokyo session (running from 7PM to 4AM EST) and its main currency pairs (each with
their average level of activity, in pips):
- GBP/JPY (110 pips)
- GBP/CHF (90 pips)
- USD/JPY (75 pips)
- USD/CHF (65 pips)
- GBP/USD (60 pips)
- AUD/JPY (55 pips).
As you can see, the London session tends to be the most active, closely followed by the
New York session and then the Tokyo session.
In conclusion, although the Forex market is open 24 hours a day, there are certain times
during the day or week When The Forex market is most active and best to trade in. More
specifically, there three main trading sessions that run through each trading day. We can
use pips to measure the extent to which each session is active and we can choose optimal
times to trade Forex, by choosing a time that preferably coincides with the overlap of two
main trading sessions.

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Fundamental
Explained

Analysis

When Forex trading, you will commonly see the phrase "fundamental analysis" being
mentioned, but what is it? This type of analysis is simply used to determine a particular
investment's possible outcome or potential future.
Fundamental analysis serves to determine whether or not a particular security is capable
of deducing a profit by using a variety of both economic and political indicators, allowing
the trader or investor to determine whether or not it would be worth investing into the
particular security. Traders and investors use fundamental analysis to capitalize on (and
take advantage of) price levels before they move. Fundamentals help traders and
investors to predict outcomes and results before they happen, as market price levels in
Forex (just like in any other financial market) do not make immediate price adjustments.
Fundamental analysis is used in every financial market and it is generally used in different
ways. For e.g. in stock trading, rather than looking at economic and political indicators,
traders and investors may conduct this type of analysis through studying company profit
flow data or company ratings. Aundamental analysis can involve the study of any kind of
information related to economics or finance.
Although fundamental analysis is typically used to find potential investments that are solid
and safe, fundamentals are also occasionally used to seek out and avoid bad investments.
In fact, sometimes traders and investors accidentally come across bad investments using
this type of analysis.
When conducting fundamental analysis, traders and investors should not limit themselves
to one source and should explore economic indications as well as political indications both
online and offline preferably. They should also aim to avoid biased sources and look only
for reliable sources (or alternatively look for more than one source to make sure
information and data can be backed up). It really helps to keep up-to-date with the latest
international financial news when conducting fundamental analysis, as it will make the task
seem much more easier.
Fundamental analysis in Forex does not need to be difficult. For e.g. if you are considering
trading USD with GBP, you should take note of both America's economical and political
news as well as the UK's. You could take note of perhaps unemployment figures, inflation
rates and more as well as recent government announcements and the two economies'
GDP growth rates. If the US announced decreasing unemployment figures and high GDP
growth rates whilst the UK announced the opposite, you might want to buy USD and sell
GBP. However this is just an example, and fundamental analysis is generally a lot more
detailed and complex.
In conclusion, fundamentals are very important to all traders and investors and
fundamental analysis is an effective solution in determining whether or not a particular
investment is safe. This type of analysis can come in a variety of forms, but regardless, as
long as the information and data is accurate and reliable it can be deemed as useful. Many
online Forex brokers provide fundamental analysis for you for free and this can save you a
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lot of time and hard work. Of course though, it wouldn't hurt to do some analysis yourself
too.

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The Movers of the Forex
Market
The Forex market is typically moved by either macroeconomic events or otherwise
geopolitical events - however, the Forex market is usually affected by a combination of the
two and they both tend to arise with each other.
Because the Forex market deals with multiple currencies from multiple countries from
multiple continents across the world, changes and events in particular industries in
particular countries don't tend to have much effect on the overall Forex market. It is only
the events that affect the grand scheme of things - the major economies and the global
economy, that actually have a significant effect on the overall Forex market.
According the classic theory of the fluctuation of exchange rates, the export growth of a
country will most likely lead to an increase in demand for the country's currency in turn. It
is then thought that, due to the growth in the exports of a country, the country's currency
will also grow (in value). This will, in theory, lead to the country's home exports losing their
competitiveness. This will, in theory, lead to the country's export sector slowing in growth in fact, the sector could even move back and shrink. This, again in theory, lead to a
decrease in the demand for the country's currency, which would then lead to an increase in
the demand for the country's exports. As you can see, according to this classic theory of
exchange rate fluctuations, exports and exchange rates work in cycles.
But export and import levels of a country are not the only movers of the Forex market and
they generally only affect the demand for a country's currency in the long-run. However do
remember, that the balance of payments (the balance of exports and imports) between two
particular countries that together make up a particular currency pair, will often affect the
exchange between that currency pair.
The Forex market is also affected in other ways. When a central home bank to a country
decides to raise interest rates, traders and investors collectively see this as confidence in
the country's economy by the central home bank. Traders and investors also find
currencies with higher interest rates more appealing, since they will make more money
from the interest they will gain by holding the currencies. This will likely, in turn, lead to an
increase in demand for the currencies.
It is a very considerable event when central home banks decide to change their interest
rates, whether they decide to increase or decrease them. Traders and investors as well as
the media take note of such changes very carefully and changes in interest rates draw
much attention from traders and investors as well as from the media. In fact, the amount of
attention tends to dwarf the actual consequences that the changes in interest rates
actually have on an economy.
So, interest rates are very important in Forex trading. But changes in interest rates aren't
simply determined by the belief that central banks have in the growth rate of their country's
economy. If unexpected and unpredicted reports are released from a country regarding the
country's currency claiming high inflation, this could cause real interest rates (interest rates
taking into account inflation) to fall. This could then lead to a fall in demand for the
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currency since the currency is no longer as appealing to hold as before. On the other
hand, some traders and investors may believe that the higher-than-normal inflation rates
will pressure the central home bank into increasing interest rates - this could actually
increase the demand and value of the country's currency. Remember, anything is possible
in the Forex market.
So we can conclude that in the short-run, nothing can affect the currency as significantly
as interest rates can, other than unexpected economic news or geopolitical events.
In conclusion, there is more than one factor that will affect the Forex market. But, just like
any other financial market, the FX market is generally moved by psychology and mass
psychology. Traders and investors collectively move the market with their predictions and
beliefs. Speculation will typically rely on collectively-agreed and predicted (rather than
actual) effects that macroeconomic news, events and trends have on currencies. So,
traders and investors play more of a part in the Forex market than actual news, events and
trends do.

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Nonfarm
Explained

Payrolls

A nonfarm payroll (NFP), is a report that is published every month of the year in the United
States, on each month's first Friday. These so-called "nonfarm payrolls" are typically
referred to as "job reports". In the US, these job reports are seen to be extremely important
in determining the US economy's health and state.
"Nonfarm payroll employment" is a statistic used in the USA that is very influential,
particularly among the financial markets (more specifically the Forex market). The statistic
is also referred to as an economic indicator and merely shows us the current, up-to-date
state of the labor market. But it doesn't simply tell us about the labor market - as
mentioned before - the report allows us to conjure broader opinions regarding the health
and state of the US economy in general.
Generally, the United States of America requires the creation of 125,000 jobs per month in
order to keep up with its powerful population growth rates. This is quite a tough number of
jobs to create, especially in times of low economic growth. If the US fails to meet the
125,000 job mark each month, the job report is seen (including by traders and investors),
as negative news. The results of the job report affect the US dollar primarily, but it also
affects the Foreign Exchange market in general as well as the bond and stock markets.
However, the job reports are not kept as secrets until their release date on the first Friday
of each month. Traders and investors typically try to seek out large swings from expected
results and from the last month's job report results. They can make estimates on the job
reports' results by using and studying the movement of the Forex market itself prior to the
job report release. The job report is really more specifically released at 8:30 AM Eastern
Time. Traders and investors typically revise the previous job reports from the past 2
months and once they have come to a collective decision, this can lead to a major move in
the Forex market.
The actual figure that is released is, more specifically, a number. This number represents
the change in nonfarm payrolls. This number is compared to the previous month for e.g.
one month it might be +50,000 and the next it might be +55,000. Generally, the number is
between +10,000 and +250,000, but this is only the case when the US is not in recession.
The number does not include jobs relating to the industry of farming and is served to
represent the addition or loss of jobs over the previous month.
In conclusion, nonfarm payrolls accurately tell us the very latest employment figures for the
US. This helps us to conjure an opinion not only on America's labor market but also
general economy. The report moves multiple financial markets, but in the Forex market,
the report most notably affects the movement of the dollar. Every trader and investor
should take note of the jobs report, as it is probably the most important statistic used in
fundamental analysis.

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Consumer
Explained

Price

Index

The consumer price index (CPI) effectively measures fluctuations in value for a certain
group of goods and services purchased by households. In the US, the CPI measures this
against the US dollar and the currency's value.
There are two main categories that come under CPI: core CPI and non-core CPI. The
difference between the two, is that food and fuel prices are excluded from the former, the
core CPI. The core CPI also typically tends to be more important in the eyes of investors
and traders. This is because both food prices and fuel prices can fluctuate significantly
each month and so, it is more effective when using CPI for fundamental analysis, to
exclude these prices.
The consumer price index is important because it allows traders and investors to keep upto-date with the level of inflation in the US economy and inflation in the US is obviously
going to affect the US dollar and its value. If prices go up in the US so does US inflation:
that'll mean you're going to get less "bang for your buck", leading to the value of the US
dollar decreasing. In Forex trading, inflation is essentially the cost of holding a currency.
Inflation means that you lose money due to gradually growing prices in an economy as
mentioned before. So, traders and investors look primarily to trade and invest in currencies
with low inflation rates and preferably with higher interest rates. With low inflation rates and
high interest rates, a trader or investor loses the least amount of money and gains the
most amount of money, quite simply.
The CPI is typically published each month at around the end of each month. The data
released is for the previous month. The consumer price index is a lagging indicator,
however it still remains important to traders and investors when conducting fundamental
analysis - the CPI can be very useful.
In conclusion, the consumer price index is split into two different categories: core CPI and
non-core CPI. The core CPI is more important to traders and investors as it excludes
volatile food and fuel prices. In the US, the CPI serves to keep traders and investors up-todate with the US economy's inflation rate. This helps us all to determine whether or not it is
worth either buying or selling USD. Though it is important to remember that inflation as
well as interest rates are only blips on the radar for many traders and investors, especially
for those who only trade or invest in the short-run. But, when trading in the long-run, it
does all add up. For e.g. if the inflation rate is 4% and someone holds $1 million, they will
lose 4% of that due to inflation, which is a loss of $40,000 excluding interest made. As
mentioned before already, the CPI is published every month of the year towards the end of
each month - the CPI released represents the previous month's data. Finally, the CPI is
important to all traders and investors and is a necessary part of fundamental analysis.

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Consumer
Confidence
Index Explained
The consumer confidence index is used in Forex trading as part of fundamental analysis. It
is published every month of the year in the United States by "The Conference Board",
more specifically at 10:00AM EST on the reporting month's last Tuesday. The Conference
Board is an independent economic research organization - the Board is responsible for
both collecting the data for the CCI and also for issuing it to the general US population.
The consumer confidence index (CCI) is typically referred to as a leading indicator. It is
used to measure consumer confidence - consumer confidence defined simply as how
confident consumers are in the economy. Consumers express their confidence collectively
through their saving and spending activities - the index itself is measured by consumer
opinions and these are directly collected through short questionnaires.
The CCI is calculated uniquely through the use of questions and isn't as complicated or as
mathematical as you would think. Every month, it is calculated on a household survey
basis which includes the opinions of consumers on the US economy's present and future
state and condition.
The majority of the index, around 60%, is made up of consumer opinions on the future
state and condition of the US economy, whereas the remaining 40% is made up of
consumer opinions on the present state and condition of the US economy. Opinions are
formed by consumers on business, employment and family income. The questions are
simple, short and concise - and so are the answers, survey participants simply respond to
each question with either "positive", "negative" or "neutral".
The CCI is based on 5,000 different US households. The federal reserve will look at the
CCI regularly and use it in conjunction with other sources of data in order to determine
changes in interest rates when appropriate. The CCI not only affects interest rates but also
the financial markets including the Forex market. The CCI also tends to affect the stock
market.
The CCI is a major indicator because consumer spending is so important. Consumer
spending makes up around half of most economies and it makes up around two-thirds of
the US economy. The consumer confidence index should not be underestimated due to
the sheer importance of consumer spending itself. Consumer spending can be responsible
for the movement of a particular economy.
In conclusion, the consumer confidence index (CCI) is an important part of fundamental
analysis in Forex trading. Although the sample size of 5,000 is relatively small when
compared to the entire US population, traders and investors should take advantage of the
CCI every month to assess whether or not consumers are confident with the US economy.
The CCI can also help to form an opinion within traders and investors themselves, on
whether or not they should think twice about buying or selling the US dollar. Confidence is
essentially an emotion and the financial markets are all about mass psychology and
collective emotions of people including traders and investors. This is why we should not

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underestimate the CCI, as although the index only serves to measure confidence,
confidence is a big aspect of Forex trading.

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Gross Domestic Product
Explained
Not many people have heard of "gross domestic product" since the majority of people refer
to gross domestic product as GDP. GDP is calculated as all private consumption plus
gross investment plus government spending plus exports minus imports. GDP is studied
by many traders and investors in the financial markets, including in the Forex market, as
part of fundamental analysis. It allows traders and investors to assess how well a particular
economy is doing.
GDP is actually a lagging statistic and is released in three separate stages. First of all, the
advance numbers are released. In the second stage, the preliminary numbers are
released. In the third and final stage, the final numbers are released. The initial advance
numbers are released on the very last day of each quarter of the year (a quarter is 3
months long, it is 1 quarter of a year).
Gross domestic product essentially tells us whether or not an economy is growing or
shrinking - it tells us the actual growth rate of an economy. So, traders and investors and
even the general population can use GDP to form opinions on whether or not an economy
is doing well or as well as expected and whether or not an economy has a good or bad
future. Generally, the bigger the GDP is the better for an economy. However, with GDP
(just like with any other kind of fundamental analysis), it is more about comparing the
results to previous predictions and expectations. If results do not weigh up to previous
predictions and expectations, usually the results are seen as negative. An economy could
be in an awful state yet still look appealing as long as it is improving.
In conclusion, gross domestic product (GDP) is an important part of fundamental analysis,
as it allows traders and investors to assess where a particular economy is heading and
whether or not it is following its predicted and expected schedule. If it is, or surpassing
predictions and expectations, the economy's currency will look to be more appealing to
buy into. If an economy is failing to meet predictions and expectations, the economy's
currency will look less appealing to buy into. The formula used to calculate is simply (C + I
+ G + X - M, put into words above), however traders and investors only need to know the
actual result of the formula in order to work with GDP, for e.g. in 2010, the US nominal
GDP equated to $14.582 trillion as opposed to $14.044 trillion in 2009. You should
remember though, that there is really two types of GDP: there is "nominal GDP" and also
"real GDP". Nominal GDP is essentially the result that is deduced from the above
equation, however real GDP takes into account inflation. Real GDP is also known as
inflation-adjusted GDP and tends to be more useful to traders and investors as nominal
GDP could rise yet real GDP could fall. Real GDP allows us to assess whether or not a
particular economy is truly growing or not - traders and investors should consider real GDP
more than nominal GDP when conducting fundamental analysis.

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Trade Balances Explained
Trade balances, often referred to as the "balance of trade", is simply the difference
between an economy's monetary value of its exports and its imports over a certain period
of time. In other words, trades balances can tell us more about the relationship between an
economy's exports and imports. A "trade surplus" occurs when exports are greater than
imports and a "trade deficit" occurs when imports are greater than exports.
The balance of trade (similar to the "balance of payments") is an important part of
fundamental analysis. Classically, the balance of trade would be the only factor of the
Forex market, as the relationship of exports and imports used to define the demand and
therefore value of a particular currency. Generally, there is more demand for a currency
when a country's exports are greater. The more a country imports from another country,
the more demand there is for that other currency. In almost every country, including the
US, the balance of trade is still released in numbers fairly regularly. More specifically in the
US, the trade balances are released 8 times a year at 2PM ET.
The US trade balances are reported by Board of Governors of the Federal Reserve
System. They are actually released by Federal Open Market Committee (FOMC). The
FOMC meet 8 times a year to discuss the monetary policy of the US. The FOMC attempt
to discuss and set the US borrowing rate in order to artificially affect the US price levels,
which can in turn help to maintain economic growth in the US. The FOMC also aim to keep
inflation within an acceptable range. If the FOMC decide to set a higher interest rates,
traders and investors alike will see this as a positive move for the US dollar. Likewise, if
the FOMC decide to set lower interest rates, traders and investors alike will see this a
negative move for the US dollar.
Although many different countries release their own trade balances, typically, only the US
balance of trade statistics actually affect the major currencies.
Traders and investors in the currency market can use trade balances to help them form a
stronger opinion over the US dollar and over the major currency pairs. As mentioned
above, a currency will tend to have more demand for it if its country's exports exceed its
imports or if its exports are growing, so traders and investors might consider buying that
currency over another.
In conclusion, the balance of trade is an important part of fundamental analysis, though it
is only a part of fundamental analysis and traders and investors should not look at the
trade balances of a country solely, in order to determine whether or not they will buy or sell
that country's currency. This is because there are many other factors now that affect the
Forex market. The balance of trade is a lagging statistic and it is also not released
particularly often, when compared with other statistical data, such as the Nonfarm Payroll
(the job report) in the US. But having said that, the balance of trade can tell us more about
the relationship a country and its currency has with other countries and currencies. After
all, the FX market is all about relationships and comparisons - when trading and investing
in the currency market, you will always be buying one currency and selling another.

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Interest Rates and the US
Dollar
When interest rates are high for a particular currency, it will mean that you will benefit more
from saving that currency. If you spend this currency, you will experience an opportunity
cost, as if you had continued saving the currency you would have made more interest. So,
we can think of interest rates as the cost of spending money.
When they go up, they also go up for newly issued treasuries as well as for bank accounts.
This causes consumers to save more than they spend and banks to hold more than they
lend. This is because the cost of spending increases as well as the cost of borrowing.
If greater interest rates fail to attract consumers to save more than they spend, banks
continue to lend more than they hold and the money supply continues to grow, there will
an excess money supply. When there is a money supply surplus, the price of goods and
services rise as sellers can ask for more money from buyers. This will in turn cause the
demand for these goods and services to fall. These sudden, aggressive price increases
can cause people to suddenly feel afraid to spend and it is in this scenario where
recessions are more common.
In economics, people and their emotions are generally time-sensitive and although the two
are directly linked, governments still do not have control over people are their emotions.
Because of this, an economy will never remain at an equilibrium - an economy will always
fluctuate, leading to fluctuations in interest rates. Constant fluctuations in interest rates will
lead to constant changes in consumer spending and saving. This is the financial cycle and
this is why traders and investors can profit/lose on fluctuating values of currencies. The
price of currencies change with changes in interest rates, so traders and investors can bet
on whether or not a currency will rise or fall in value. Because people don't have time
machines, they must predict or make expectations and in the financial markets, these
predictions and expectations are not always accurate. Because of this, you should bear in
mind once again that the financial markets are ultimately dependent on mass psychology
and collective predictions and expectations.
In conclusion, interest rates are an important part of fundamental analysis and one of the
main factors of the Forex market. Currency prices change with interest rates. Traders and
investors can bet in advance, for e.g. they will want to take advantage of a predicted and
expected change in US interest rates by buying or selling the US dollar prior to the
predicted and expected change - so that they sell the US dollar before it decreases in price
and vice versa, so that they buy the US dollar before it increases in price. Of course there
are other factors that affect the currency market and other parts of fundamental analysis,
but interest rates are one of the most important factors: the FX market is directly affected
by changes in them.

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Nonfarm Payrolls and the
US Dollar
The nonfarm payroll (NFP), also known as "the job report", is one of the main movers of
the Forex market. The NFP numbers are released every month in the US. The NFP can
give us an accurate estimate of how many jobs were created and lost over the previous
month and the number is adjusted seasonally. The number can be either positive or
negative.
The NFP is important to traders and investors, especially for those who trade and invest in
the currency market. The NFP is the most accurate report on US jobs that we have. There
are alternatives to estimating the job count of the US, but the NFP is by far the most
accurate and reliable of them all.
Generally, a positive NFP number would suggest that the US economy is growing. Traders
and investors in the FX market would then feel more confident in the US dollar, creating
more demand for the US dollar. However, a negative NFP number would suggest that the
US economy is experiencing negative growth, creating less demand for the US dollar. You
should bear in mind though, that the NFP number is typically positive and rarely negative.
Usually, it is more about the height of the demand created rather than whether or not the
demand is positive or negative. It is thought that the US must create 125,000 jobs per
month minimum to keep up with immigration and the ever growing population. So, even if
the US created 100,000 jobs one month, unemployment would most likely rise (even if by
just a fraction)!
Quite simply, the higher the NFP number, the more demand there will be for the US dollar.
This will mean that the higher the NFP number is, the more confident Forex traders will be
in investing in the US dollar, in the market for currencies.
The NFP is constantly watched and with great attention. This means that any slight change
or movement away from the predicted and expected NFP numbers can have a multiplied
effect on the financial markets. This is important to remember, as the financial markets are
based heavily on mass psychology and collective opinions on events, rather than the
actual effects that the events have themselves. For e.g. if every trader and investor
predicted and expected that the NFP number would come to 200,000 one month but the
number only reached 150,000, although the number is still positive and promising, the
financial markets would treat this negatively.
In conclusion, the NFP is one of the most important parts of fundamental analysis. If you
trade and invest in the Forex market, you will definitely need to watch the NFP numbers
each month. You should also remember that the US economy is considered very important
to the economic health of the entire world, so radical changes in the US NFP numbers can
cause traders and investors all over the world to retreat to trading commodities and such.
The NFP is very important for this very reason and can affect Forex traders all over the
world.

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Comparing Fundamental
Analysis with Technical
Analysis
Traders and investors need to conduct adequate analysis on the currency pairs they are
looking to work with, before they trade and invest in them, so that they make more
informed trades and investments. There are two types of analysis that traders and
investors can conduct in the Forex market: "fundamental analysis" and "technical analysis"
- both of these types of analysis have their own set of advantages and disadvantages and
we can compare the two side-by-side. You should remember though, before comparing the
two, that the most successful traders and investors will conduct both fundamental
analysis and technical analysis to get the best out of both worlds.
Fundamental analysis can tell us why the price of a particular currency has changed and
why a particular exchange rate has changed. This type of analysis can explain Forex
market movements to us by describing established correlations or casual relationships in
the currency market.
Let's say one country mainly exports gold and silver. If gold and silver both shot up in
price, the country's currency will also rise in price. The price of the country's currency
could have increased due to a number of different factors, however using fundamental
analysis, we can see that justify the currency price increase by putting it down to the gold
and silver price increase. So, using fundamental analysis, we can understand why the
price of a particular currency changes and why a particular exchange rate changes. But
we don't just use fundamental to justify past events - traders and investors attempt to
predict the future with fundamental analysis - going to back to our previous example,
traders and investors may then look closely at the prices of gold and silver and predict
their future. This way, if they predict that gold and silver will fall back down in price, they
might decide to sell their main exporting country's currency, prior to the expected price fall.
Fundamental analysis is not as easy as it sounds to conduct though. Although there are
explanations in fundamental analysis for currency price and exchange rate changes, these
explanations can sometimes be difficult to find and understand. Also, it can sometimes be
challenging to interpret some information and it can be difficult to use the information to
forecast future currency price and exchange rate changes.
You should also note that, in foundation, there are two relationships that fundamental
analysis promotes: one is the relationship between US GDP and the US dollar and the
other is the relationship between the world economy and the US dollar. fundamental
analysis tells us that, generally, an increase in US GDP will lead to an increase in the price
of the US dollar. This is logical, as traders and investors see an increase in US GDP as an
indication that the US economy is growing (and strengthening). fundamental analysis also
tells us that, generally, if the world economy is collapsing then the price of the US dollar
will rise. This is also known as "risk aversion" and occurs because traders and investors all
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over the world feel that the US dollar is the "safest" currency to work with, in economicallybad times.
Remember that fundamental analysis is never as easy as it sounds, as mentioned above.
There is a lot of conflicting information in fundamental analysis, which can cause confusion
when trying to interpret the information. It is recommended that you surround yourself with
as much news and information as possible.
Technical analysis can tell us where the price of a particular currency has gone and where
a particular exchange rate has gone. This type of analysis can also present more of a
visual approach to the FX market through price charts.
Price charts in technical analysis are used by traders and investors to spot trends in
currency prices. Technical analysis allows us to try and predict future currency price
movements, however it is not perfect and it cannot guarantee anything. Technical analysis
can help us to to predict where the prices of currencies are going, but it cannot tell us why
they are going in certain directions.
This is why it is better to combine both types of analysis when Forex trading. The best and
most successful traders and investors of the FX market know how to combine and exploit
the best elements of both types of analysis. The two types of analysis are very different
from each other, but if they are combined and exploited together correctly, they can
compliment each other very well.
Many traders and investors will use fundamental analysis mainly to spot opportunities in
the Forex market, since this type of analysis is related more to psychology. The financial
markets are of course all about mass psychology and collective opinions, predictions and
expectations. But traders and investors will also use technical analysis to spot potential
entry and exit points of the opportunities they spotted through fundamental analysis, in
order to try and maximize their potential success.
In conclusion, both fundamental analysis and technical analysis bear their own
advantages. The most successful traders and investors have learned to effectively utilize
both types of analysis. You might discover that you are better working with one type on
analysis, though you should always try to take advantage of both for the best results. Also
remember that good online Forex brokers will often provide you with both fundamental and
technical analysis - though it is still recommended that you surround yourself with other
information and keep up-to-date with the latest currency market news.

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Types of Forex Charts
There are three types of charts that are predominantly used by the traders and investors of
the Forex market: the line chart, the bar chart and the candlestick chart. The line chart is
the most common type of chart. The other two chart types are similar in the sense that
they display the same information really, but through different visuals.
The line chart displays the day's average currency pair price and exchange rate for a
particular currency pair and sometimes it displays the closing price for a particular
currency pair. The line chart is most useful to traders and investors who wish to find longterm trends in currency pair prices and exchange rates. The line chart is also useful to
traders and investors who are looking to find correlations between currency pairs and
other variables such as commodities and trade defects. Typically, any good online Forex
broker will allow you to spot these correlations on their websites.
Line charts prove to be an effective tool when trading and investing in the Forex market.
Line charts bear the main advantage of being simple, easy to read and easy to spot
directional changes in currency pair prices and exchange rates. However, there is one
disadvantage to line charts, which is that they fail to provide daily price volatility.
The bar chart is another chart used in Forex trading. The chart itself, much like other
charts, has two notches on it. One of these notches represents opening costs and the
other notch represents closing costs. Quite simply, the left notch represents the opening
costs and the right notch represents the closing costs. The edges of each bar on a Forex
bar chart, represent the highs and the lows of the particular currency pair's price.
Bar charts do not bear many advantages, however new Forex traders and investors might
find these bar charts as more accessible to them. However, the bar chart can make
interpreting the data a slower process for the more experienced traders and investors.
Traders and investors who are more familiar with interpreting bar charts may want to use
candlestick charts.
The candlestick chart is evidently the more popular type of chart in Forex trading. They
provide a much faster and more effective way to find out what has happened each day in
the FX market.
Every good online Forex broker can provide each chart for you and these charts can be
simply and effectively manipulated with ease and according to your needs. Both
candlestick charts and bar charts can be switched around so that they represent different
units - from representing the past minute right up to the past year. You can also manipulate
line charts in a similar fashion.
In conclusion, all of the charts are different and you should really start working with them,
as soon as possible, once you start your trading career. You will learn a lot more about
them by directly working with them than by reading about them. Different Forex websites
and brokers will provide charts with different appearances, but you really just need to find
a good online broker that will provide them as standard, as charting services are one of an
online Forex broker's more important features. Although different websites will present
different levels of quality and different capabilities, it does not matter if you are just starting.
Your desire for complexity will grow as you become a stronger trader and investor. But first
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of all, you should find a good online Forex broker that can provide you with what you need
in the beginning, so that you can make the very best start to your trading career.

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The Best Types of Forex
Charts
When traders and investors look to make predictions on particular currency pair prices and
exchange rates, they will most likely turn to technical analysis at least once. Because
technical analysis majorly consists of charts and graphs, they will then need to choose an
appropriate chart or graph to work with. The problem is, there are multiple types of charts
and graphs available to them, so they must weigh up in their minds which chart or graph
will be the most appropriate and effective.
The Forex candlestick chart tends to be the more popular chart type in Forex trading. This
type of chart allows traders and investors to spot currency pair price and exchange rate
trends, as well as allowing them to see the limits on the daily currency pair price and
exchange rate variations. Candlestick charts are also effective producing a measure of
confidence in Forex traders and investors. Over each day of trading, a candlestick chart
will plot a new box-and-whiskers-type-figure. Each box will be shaded in a different way to
represent each day. If the box is shaded black, this means that the currency pair price and
exchange rate closed at a lower price than its opening price, that day - and vice versa, if
the box is filled with white. If the box is shaded black, the top of the box will represent the
opening price and the bottom of the box will represent the closing price - and again, vice
versa if the box is filled with white. Sometimes different colors are used, though the colors
of the boxes presented will always be either dark or light. The top of the whiskers
represents the daily highs and the bottom of the whiskers represents the daily lows,
respectively for the currency pair price and exchange rate.
The Forex bar chart does not present as much information as the candlestick chart does.
Bar charts do provide us with the daily highs and lows of a particular currency pair price
and exchange rate. However, when it comes to opening and closing prices, a bar chart will
only be able to tell us the closing price without the opening price - the closing price is
marked the whisker as a tick. Although the bar chart does bear a significant disadvantage,
it does allow us to work with the same financial information through an easier and more
appealing visual medium. Bar charts can also hold more data and in less space than
candlestick charts.
The Forex line chart tends to be the most popular type of chart in Forex trading, simply
because it is the easiest type of chart to work with. However, they do leave out a lot
information, as day-by-day line charts only provide us with each day's closing currency
pair price and exchange rate. Candlestick charts and bar charts on the other hand, can
provide us with each day's highs and lows as well as each day's closing rate. Candlestick
charts can even provide us with each day's opening rate too. Traders and investors can
use candlestick charts and bar charts to assess a currency pair's level of volatility and its
direction, however line charts fail to present this opportunity due to the lack of information
they bring.
In conclusion, there are three main types of Forex charts as listed in order of strength and
usefulness: candlestick charts, bar charts and line charts. Candlestick charts are the
strongest as they can provide us with each day's opening rate for a particular currency pair
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price and exchange rate whereas the other two cannot. The line chart is the weakest as it
provides us with the least information. However, each chart has its own unique
advantage(s) and it really depends on your situation as to which chart would be the most
appropriate to work with. You should also remember that the different charts can also differ
on different websites and sources. Line charts can be made more complex and informative
if the trader or investor has more data values to work with. Though, in general, line charts
simply serve to graphically-illustrate currency pair prices and exchange rates as functions
of time. Line charts, in relation to opening and closing prices, fail to organize the daily
highs and lows of currency pair prices and exchange rates as well as candlestick charts
can.

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Time Frames
Trading

in

Forex

There are many different time frames available to Forex traders, with different ones
presenting different opportunities. Traders and investors in the Forex market that expect to
take full advantage of technical analysis, must decide which one is the most appropriate
for them and the most useful.
A Forex trader's time zone will be important and will most likely affect their time frame
selections. Every trader and investor will have their own unique style of trading, however
they will most likely have to work within more than one time frame when making trades.
All good charting services and packages will allow any trader or investor to select their
own time frames. In fact, you could have a single 1 minute one if you wanted. However, if
you want to make more sense out of Forex trading, you should really aim to work within
the more popular and conventional time frames. The financial markets, including the Forex
market, are all based on mass psychology and collective opinions. This is why it is
recommended, that you work within the time frames that people are aware of and care
about, rather than your own. More popular and conventional ones might include: 5
minutes, 30 minutes, 1 hour, 1 day, 1 week, 1 month etc.
There are different terms and phrases used to describe different Forex traders that work
within different time frames. First of all, "investor horizon" refers to the duration of time that
a trader or an investor is planning on holding an open position. Different currency traders
will have different investor horizons. There are four main types of Forex traders: long-term
traders, swing traders, day traders and scalpers.
A long-term trader or investor will always plan to hold their open positions for longer than
others. Long-term traders may decide to hold an open position for up to a few weeks and
some may hold an open position for up to a few years! Long-term traders and investors will
limit the amount of open positions a lot more than the other Forex traders and may only
place between 1 and 10 orders per month. They will also mainly work with only weekly and
monthly charts, however they may refer to daily charts and even smaller time frame charts
to find the best entry points for their orders.
The swing trader or investor is similar to the long-term trader or investor, in the sense that
they will remain very selective over which orders they make, also referring mainly to
weekly and monthly charts. They will also similarly refer to daily charts and smaller time
frame charts to find the best entry points, but they will also use these to find the best exit
points, as they place more orders than long-term traders. These swing traders will usually
enter and exit all of their orders within each month - they are often referred to as "mediumterm" traders. They will hold open positions for a few days minimum and usually up to
around 2 weeks.
A day trader tends to both enter and exit their orders within the same day, though on some
occasions they may decide to leave certain orders for up to 2-3 days before exiting them.
These traders and investors may still refer to weekly and monthly charts, though they do
not bear as much importance as they do to long-term and swing traders. They will refer
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