Tested Forex Strategies

Wayne Walker

• Publisher: PublishDrive
• ISBN:
  9781386392293
• Topic: Business
• Subtopic: Foreign Exchange
• Index: Business

Learn the techniques that professional and successful traders use. These concepts have been tested and backed by clients from his classes.

Bonus Content: Forex News Trading Strategies, Delta Concepts, and Other Insider Tactics.

•Click the buy button to begin the journey toward greater profits!

What is Forex?

In this chapter we will examine the foreign exchange market, the participants, what makes the market move, and why you should want to trade it.

So what is Forex (Foreign Exchange) or FX as many people call it? , it is the world’s most liquid market. The average daily turnover is over 3 trillion US Dollars. This is a huge number, but to put it in perspective, one day of FX is roughly 2 to 3 months of trading volume on the New York Stock Exchange. This is powerful, it means a lot of liquidity and that a lot of people are involved in it.

It is OTC traded, meaning over the counter with no central exchange, in contrast to the equity or commodity markets where there are central exchanges that buyers and sellers meet. With FX, it is just you and your broker/dealer.

It is open for 24/5 trading, from Sydney 5 AM on Mondays to New York 5 PM on Fridays. Plenty of time, allowing for round the clock trading.

Centers and Participants

Who are the people that are involved in this FX phenomenon?

First we will take a look at the FX centers. The main centers of FX are the UK, US, and Japan. They are responsible for the bulk of the trading. Australia, Singapore and Switzerland are also important players in the market, but the main players remain US, UK and Japan.

Banks and Financial Institutions

It is primarily major banks and financial institutions, they account for roughly 50% of the transactions. They trade electronically amongst themselves.

The central banks are also involved and their role is to intervene in an attempt to influence the value of their currencies.

Let us take a closer look at this. Maybe the most famous of central banks, the Federal Reserve Board, they and also the Bank of Japan, are at times known to be active participants in the market in an attempt to influence the strength or weakness of their currencies. A FX trader must be aware of the roles that they play.

Additional Participants

There are now FX hedge funds, years ago if you mentioned FX hedge funds most people would not know what you were talking about, because they did not exist. There are funds that trade either one particular currency or regional currencies, and for those that have an interest they are available.

Other participants are the brokers, both voice and electronic, they serve as intermediaries between banks and dealers. Banks and dealers turn to them for assistance in finding the best deals, but the days of voice brokers are numbered, because most activity now is electronic. There are many firms today that have dealer free desks.

Corporations are also involved, especially the multinationals who have currency risk that needs to be hedged and also for their own speculation. Several international corporations have their own trading desks which they use for prop or proprietary trading.

A hedging example could be, an American company purchases goods from Japan and they receive an invoice that will be due in Yens. To hedge against a potential loss, where the amount due might increase in USD due to fluctuations in the currency, they open a position in the market.

A note on hedging, what we are discussing is removing the risk of holding a particular asset. The main focus is not necessarily on making a profit. For example, in the futures market we might have a wheat farmer and he is what we would say, long wheat. He is afraid of a price fall, so he sells wheat futures contracts to be hedged in case of a fall. If prices do fall, he would make up the loss on the down side. He does not make a profit, but he does remove the risk of holding the wheat.

Private Purposes

For most of us, international travel is a common activity, therefore most people when travelling will need the currency of their destination.

Our overseas purchases are also a factor. If you are sitting in New York and are looking to buy a pair of shoes in London over the internet, normally they will not accept USD, so you will need to convert to British Pounds.

There is also speculation, and this has been one of the main drivers in turning FX into a very hot market over the past few years where people are buying and selling just for speculative purposes.

What moves FX?

What is going on in the market? Why does it move? Several things, it could be rumors , it could be from government intervention, for example if the Bank of Japan enters the market in an attempt to shore up the Yen to prevent a slide, some traders might take it as a cue to start being long (buying) Yens and short (selling) the other crosses against it.

Data

Non-farm payroll is one of the major reports. Also whenever there is a rate decision from the Fed, Bank of England, ECB, or Bank of Japan etc., these are known market movers.

Wars, terrorist acts, whether it is events in the Middle East or other hot spots in the world, they can and do affect the market and in some cases quite drastically.

Central banks, as we touched on with their intervention, sometimes will do as we say “talk down” a currency. For example, bank governors without entering the market with direct intervention can influence it. It could be something where a central bank governor passes a remark at a news conference saying “I think the currency is getting overvalued and we might need to do something about it” or in some cases they might say “the strength of the currency is of concern to us and it’s affecting our competitiveness”. Depending on who is saying it, the results can be dramatic, and in some cases it is due to a total misunderstanding of what the person was trying to say.

Other Events

Political events and elections can also be major influencers. Someone who has a hawkish view of their currency, being elected to office could be a signal that the currency will appreciate.

Technical levels are also important with some currencies, especially with the round numbers that traders like to focus on. An example could be of a currency pair that is trading at 1.3995 and it has never been above 1.4000, then it begins moving even...