Forex for Beginners Part 3: Activities, Quotes

Factors causing the movement of the currency market Data release and waiting for data release

The concept of “data” includes the occurrence of the following events: the release (publication) of economic indicators of the host countries of traded currencies, reports on changes in interest rates in these countries, reviews of the state of economies, and other events that have a significant impact on the foreign exchange market.

The expectation of some event and the occurrence of this event are strong movers of exchange rates. It is difficult to say what has a more substantial influence on the market, the event itself, or its expectations. Still, we can say with confidence that the release of serious data can lead to significant and prolonged movements in exchange rates. Such vital data include nonfarm payrolls, GDP, industrial production, CPI, PPI, and others.

The date and time of the release of this or that indicator is known in advance. There are so-called calendars of economic indicators and the most critical events in the life of individual states. The market is preparing for these events. There are expectations and forecasts of what value of this or that indicator can come out and how it can be interpreted.

The release of data can lead to sharp fluctuations in exchange rates. Depending on how market participants interpret this or that indicator, the rate can go either way. This movement of the rate can lead to an increase in an existing trend, its correction, or the beginning of a new trend. This or that outcome depends on several factors: the situation on the market, the economic condition of the host countries of the currencies in question, preliminary expectations and sentiments, and, finally, the value of a particular indicator.

For example, after the release of a series of growing indicator values, GDP, Nonfarm payrolls, CPI, and PPI, there may be talk on the market about a possible increase in interest rates in the US. Even if this change occurs in a few months, they are actively beginning to buy US dollars against other currencies. Thus, an up-trend in the US dollar begins – a steady trend of the dollar strengthening against other currencies. After the release of the message about the change in the rate, a correction for this movement may begin.

The following sayings are associated with the release of specific data (or any information that affects the market): “sell when good data is released” (sell good news), and “buy on rumors, sell on facts” (buy on rumor, sell on fact). ). These sayings are suitable for situations where the market is waiting for an event to occur.

Even before the release of information about this event, the exchange rate moves in a specific direction (the direction of interpretation of the future event), i.e., the market is “setting up”. Therefore, often after the release of the data (if the information corresponds to expectations), the rate moves in the opposite direction. This is due to the fact that positions were opened on expectations, and when what was expected happened, these positions were closed. There is a so-called “profit taking” (profit taking). Situations when such events occur are characterized by the expression “priced in” (that is, the occurrence of this event is already included in the price – meaning the exchange rate of one currency against another).

Foundation activities

The first place in terms of the impact on long-term trends in the movement of exchange rates is occupied by funds (hedge, investment, insurance, pension). One of their activities is investing in certain currencies. Possessing huge funds, they are able to make the course move in a specific direction for a long time. Fund managers manage the funds. They are true professionals in their field.

Depending on the principles of work, they can open long-term, medium-term, and short-term positions. Fund managers make decisions based on sound analysis of the financial markets. They are armed with all sorts of types of analysis: fundamental, technical, computer, psychological, and analysis of interconnected markets. Based on the processed information, fund managers try to foresee the consequences of certain events in order to open positions in the right direction in time. Thus, one of the tasks of their activity is to play ahead of the curve.

Managers try to present the picture of the world of the currency market as a whole (so to speak, from the height of their flight), and when the picture is clear, the choice of tools for work and the direction of trade takes place. Of course, none of the types of analysis can give an ideal result. However, using a proven (and improving) trading system and having significant funds, funds are able to start, strengthen, and correct the most vital trends.

Activities of exporters and importers

Exporters and importers are pure market users of the foreign exchange market. Exporters have a constant interest in selling foreign currency, and importers – buy it. At reputable firms engaged in export-import operations, there are analytical departments that specialize in forecasting exchange rates in order to sell or buy foreign currency more or less profitably.

Significant influence of exporters and importers on the market is observed in the Japanese market of the dollar against the Yen. If there are no strong trends in the market, then exporters do not let the rate go up high, and importers – deep down. Thus, they are able to keep the rate in a specific range of levels for some time (create “range trading”). From time to time, in the analytical reviews of the dollar market against the Yen, the levels of possible entry into the market of exporters (resistance level) and importers (support level) are indicated.

It is also essential for exporters and importers to track trends in terms of hedging currency risks. By opening a position opposite to the future operation, this type of risk is minimized (currency risk hedging).

The impact of exporters and importers on the market is short-term. It is not the cause of global trends since the volume of foreign trade transactions is insignificant compared to the total volume of transactions in the foreign exchange market. Most often, their activity creates rollbacks (corrections) in the market since when certain levels are reached, it becomes profitable to sell or buy foreign currency.

Statements of politicians

Statements that can affect the movement of exchange rates appear during various reports, summits, meetings, press conferences, etc. (for example, meetings of the leaders of the G8 countries or a press conference after the following discussion of interest rates).

Journalists from news agencies (Reuters, Bloomberg, etc.) closely monitor such speeches and insert the hottest statements in real time into their agencies’ news columns. In terms of the strength of their impact on the market, these statements can be compared with economic indicators.

Most often, the date and time of a performance are known. The market is preparing for these events, so shortly before they occur, forecasts or rumors appear about what can be said and how it can be interpreted. However, there are situations when this happens unexpectedly for the market. Then, the market may begin strong movements in exchange rates, which are not always predictable.

Suppose certain statements carry long-term consequences (for example, the possibility of changing interest rates, the principles of forming the state budget, etc.). In that case, such movements can turn into long-term trends.

For example, twice a year (winter and summer), all markets closely follow the speeches of the head of the Federal Reserve, Alan Greenspan, before two banking committees of the US Congress (Humphrey Hawkins testimony). In the course of these speeches, market participants are trying to find, in his words, at least a hint of the future direction of interest rates in the United States; depending on how market participants interpret Greenspan’s words, one or another trend in the US dollar may be established.

In relation to politicians, there is such a thing as “talking a course.” This means that at specific points in time, when the rate of the national currency reaches levels that are unfavorable for a particular state, they begin to say that, in their opinion, the rate will not go any further, that they will not allow further movement, that intervention is possible, etc. P. And since these people are trusted (they already have established authority, and they have certain powers), their words begin to have a direct impact on the market.

Most often, this happens after a solid and long-term trend in one direction. Therefore, after such statements, traders may decide “not to tempt fate” and start “swearing” (closing existing positions). This, in turn, leads to a correction of this trend.

When the exchange rate is indeed at critical levels, then interventions by central banks may follow the statements. This is an extreme event in terms of its impact on the market – the rate can move more than one hundred points towards the direction of intervention in a short time (sometimes in a few minutes). In addition, intervention may make market participants wary of opening positions in the old direction. This, in turn, can lead to collapsed movements in the exchange rate.

Activities of central banks

The state exercises its influence on the foreign exchange market through central banks. Suppose the central bank of a particular state absolutely does not interfere in foreign exchange transactions by buying and selling foreign currency on the international foreign exchange market. In that case, the domestic currency is in a state of “free-floating”. In practice, this rarely happens. Countries that have floating rates from time to time try to influence the rate of their currency through foreign exchange transactions. This state of the currency is called “dirty floating”.

In the interests of the development of production and the growth of consumption, states should engage in the regulation of the exchange rate. Usually, direct and indirect regulation is used. Indirectly, regulation is carried out through the amount of money in circulation, the rate of inflation, etc. The direct ones include discount policy and foreign exchange interventions in foreign exchange markets.

Foreign exchange interventions are associated with a sharp release or equally sharp withdrawal of significant amounts of currency from the international market. The central bank enters the foreign exchange market through commercial banks. Since the volumes are enormous (billions of dollars), foreign exchange interventions lead to significant movements in exchange rates.

For example, in 1998, the Bank of Japan, the central bank of Japan, carried out several foreign exchange interventions, the purpose of which was to prevent further depreciation of the Yen against the US dollar. Several billion dollars were thrown into the market, which led to a significant fall in the dollar against the Yen.

Central banks of different countries can also carry out joint interventions in the foreign exchange market. During one of the interventions in the dollar market against the Yen in 1998, the FRS (US Federal Reserve System) participated in it.

If, at a particular stage of economic development, it is necessary to devalue (depreciate) the national currency, then the state increases the supply of its currency on the international market. Often, this is done through the additional issue of banknotes. If it is necessary to raise the price of a monetary unit, the central bank buys its currency on the international currency market. Such an acquisition of its currency occurs at the expense of the bank’s foreign currency.

For example, the Swiss National Bank (SNB) has recently adopted a cheap Swiss franc policy. Therefore, when there was a significant rise in its price, the National Bank of Switzerland “entered” the market and added liquidity (that is, increased the supply of francs on the market at a lower interest rate) and thereby lowered the national currency.

MARGIN TRADING Features of margin trading

Until the mid-1990s, only banks and other large financial organizations could carry out trading operations on the FOREX market since they had sufficient funds for this since the initial contract amount was at least $5 million. Involvement in foreign exchange transactions of a wide range of private investors with small capital contributed to the spread of margin trading or trading using leverage.

When trading on margin, an investor places a security deposit with a bank or a broker, after which he gets the opportunity to make transactions with currency amounts that are 100 times the size of the deposit, receiving from the bank the so-called “leverage”. Thus, with an initial deposit of $2,000, an investor can operate with amounts equivalent to $200,000 and make a profit 100 times greater than using only his funds.

Leverage allows an investor to control an investment much larger than the amount of margin. Its standard level is considered to be 20-50 times for banks. Most dealing desks for small investors provide leverage of 1:100. In general, this system was invented in order to attract small investors; otherwise, who would bother with 2-3 thousand US dollars? For a trader, “playing” directly with a small amount could not bring even a meager profit because the floating exchange rate is nevertheless quite firm. In other words, if an investor places a collateral capital of $10,000, then a credit line 100 times larger is opened for him, and he operates with an amount of $1,000,000 while risking only his own $10,000. But this loan is not free.

Despite such lending, the bank or dealer performing it does not participate in the Client’s profits – all profits and all losses from trading operations belong to the Client. Thus, in margin trading, the supply of currencies is replaced by an obligation to close the position with a reverse transaction. When the position is closed, only the Profit or loss received is credited to the Client’s account (actual delivery).

If the position is not closed by the end of the day, then the obligations (positions) are transferred to the next day using Swap Tom/Next, the essence of which will be discussed later.

CURRENCIES AND QUOTATIONS

1. Exchange rates

The exchange rate (quotation) is the price of the monetary unit of one country, expressed in the monetary units of another country, in purchase and sale transactions. Such a price may be set based on the ratio of supply and demand for a particular currency in a free market or strictly regulated by a decision of the government or its main financial body, usually the central bank.

Thus, two monetary units should participate in the calculation of the exchange rate, the ratio of which is called a currency pair.

In the FOREX company, trading is carried out in seven currency pairs based on the eight most liquid world currencies, such as

USD is the American dollar

EUR – European Euro

CHF – Swiss franc

JPY – Japanese Yen

GBP – English pound

SEK – Swedish krona

CAD – Canadian dollar

AUD – Australian dollar

In the designation of a traded pair of currencies (for example, USD / CHF), the base currency (traded currency) is written first, and the quoted (counter currency) – is the second.

Traded currency – the currency that comes first in a currency pair and is always taken as a unit for calculating the counter-currency rate (it comes in second place in a currency pair). In other words, the meaning of the given USD/SHF currency pair is how many Swiss francs are contained in one US dollar or how much a US dollar is worth in Swiss francs.

2. Types of exchange rates

1. Direct quotes

In most countries, foreign exchange rates are expressed in national currency. This is the so-called direct quotation system. For example, in Japan, one US dollar ($) will be equated to a certain number of Yen; in Ukraine, one US dollar is equated to a certain amount of hryvnia. In the FOREX market, such a concept as a national currency is somewhat ambiguous. Still, it is customary to consider a Direct Quote on how much of the national currency is contained in one US dollar. (USD/JPY, USD/CHF, USD/CAD, USD/SEK)

An indirect (reverse) quotation is a quotation that shows how many US dollars are contained in a unit of the national currency. (GBP/USD, EUR/USD, AUD/USD)

The quote consists of two digits. The first digit is Bid – the price at which the Client can sell the base currency- which is always in the first place, and the second is Ask – the price at which the Client can buy the base currency for the quoted one. The difference between these rates is called the spread. The size of the spread in the FOREX company is 5 points (the minimum change in quotes is called a point).

Different instruments (currency pairs) are quoted with extra accuracy, i.e., with a different number of decimal places in the quote. Most currencies are quoted with an accuracy of 0.0001, and some, such as the Yen, have an accuracy of 0.01.

Example Quote USD/JPY 118.65/118.70 means that the Client can sell dollars at 118.65 Japanese yen for 1 USD; the Client can buy dollars at a price of 118.70 Japanese yen for 1 USD; base currency – USD, quoted – JPY. Quote EUR/USD 1.1354/1.1359 means that the Client can sell euros at a price of 1.1354 dollars for 1 EUR; the Client can buy euros at a cost of 1.1359 dollars for 1 EUR; base currency – EUR, quoted – USD.

The term Point (pips) refers to the minimum possible price change for a particular currency pair. For most of the currency pairs presented in the trading terminal of the FOREX company, a pip is a price change in the fourth decimal place. The exceptions are USD/JPY, which is the second decimal place, and USD/SEK, which is the third decimal place.

Direction of appreciation/depreciation of currencies

The lack of uniformity in the quotes of different currencies causes certain inconveniences, especially for beginners. So, for the pound and the euro (direct quotation), an increase in the exchange rate (upward movement of the graph) means a rise in the price of these currencies and a depreciation of the dollar. For the franc yen (reverse quotation), an increase in the exchange rate (upward movement of the chart) means a reduction in the cost of these currencies and a rise in the dollar. In general, if the base currency goes up in price, the quote currency goes down.

The essence of speculative trading operations in the FOREX market is the execution of an operation to buy or sell foreign exchange contracts in order to make a profit due to changes in exchange rates. Any completed transaction, i.e., A purchase or sale, must necessarily end with a reverse transaction, the opposite transaction.

From this, we can conclude that there are 2 types of transactions in this market: buy – purchase, sell – sale of the traded currency.

Open – opening a position – buying or selling a traded currency.

Close – closing a position – selling or buying an equal amount of the traded currency previously bought or sold, respectively, when opening a position.

A transaction is a set of two trading operations in which funds are transferred from the base currency to the quote currency and vice versa.

To profit from the transaction, you need to buy cheaper (lower on the chart) and sell more expensive (higher on the chart) based on the appreciation of the currency. Also, based on further reduction in price, you can sell more expensive (higher on the schedule) and buy cheaper (lower on the schedule). At first glance, it may seem strange and not natural to open a position from a sell position. But if you remember that there is not one currency in a currency pair, but two, and when one is sold, the other is bought accordingly, then everything will fall into place.

In practice, the designation of a currency pair is often reduced to one symbol; the common component of the USD is omitted. For this reason, for example, a buy-JPY operation can be taken literally by beginners as actually buying JPY. In fact, the USD/JPY pair will have the US dollar for the Japanese Yen as the base and traded pair.

Transactions (Deals)

On the FOREX market, transactions are concluded in volumes not less than the accepted standard volume (lot) or a multiple of it.

Lot – the minimum amount of a traded currency with which trading operations can be performed. A lot in a FOREX company is equal to 100,000 units of the base currency, i.e., 100,000 units of the first currency in the currency pair. The number of lots is a characteristic of a position that reflects the volume of a deal.

Let’s look at an example of where income (losses) comes from when a trader conducts one transaction with one standard lot of 100,000 units of the base currency with a leverage of 1 to 100:

A trader with an account balance of 1300 USD opened a Buy position on EUR/USD in the expectation of a further increase in the rate at the Ask-1.1345 quote offered by the broker. As a result, the buying process can be schematically described as follows:

«+» EUR 100,000

“-” 113450 USD. Purchase of 100,000 EUR for 113450 USD. The involved margin amounted to 1,134.50 USD.

As a result of the rate growth, the trader, after some time, decided to close the position at the Bid 1.1410 quote offered by the broker. Similarly, this operation will be denoted as

«-» EUR 100,000

“+” 114100 USD. Sale of previously purchased 100,000 EUR for 114,100 USD.

The financial result from this transaction was “+” 114100 USD “-” 113450 USD=” +” 650 USD.

The final balance is 1300 USD«+»650 USD=1950 USD.

In a simplified form, the formula for calculating the financial result (in English, Profit and loss or simply profit/loss) is as follows:

Profit/Loss = N_lot*100000*(Sell – Buy)

where N _lots – the number of lots of 100,000 used by the trader,

Sell ​​- the price of selling the base currency

Buy – the purchase price of the base currency

A positive or negative result indicates, respectively, the profitability or unprofitability of the transaction.

The result of calculations using this formula is expressed in the quoted currency. Those. When calculating a reverse currency pair, the result will always be in USD. Suppose a direct currency quotation is involved in the calculations. In that case, the conversion of the result obtained from the national currency into the USD currency is carried out at the closing price of the transaction, divided by the exchange rate as a result. The settlement formula is universal, regardless of how the transaction was carried out: first, a purchase and then a sale, or vice versa.

Usually, a pre-calculated point value is used to calculate the financial result quickly. For a reverse currency quote, the cost of a pip will always be 10 USD (since the US dollar is a counter currency); for a direct currency pair, the cost of a pip will depend on the current exchange rate, and a simplified calculation is summarized in a table, where P_Close is the position closing price;

currency pair	Point value calculation
USDCHF	10 / P_Close
USDCAD	10 / P_Close
USDJPY	1000 / P_Close USD
USDSEK	100/ P_Close

You can see for yourself the correctness of such a calculation by simply calculating the financial result for currency pairs when the exchange rate changes by one point according to the above formula.

In order for the transaction to be carried out, a sufficient level of margin on your account is required. From the example, we see that the margin for the reverse currency pair will depend on the current rate. For direct currency pairs, the required margin will always be 1000 USD.

In the FOREX company, if the missing amount for the entire margin does not exceed 500 USD, then the Client, when opening a position, has the right to automatically use a credit for the missing amount and open a trading position.

In his trading activities on the FOREX market, a trader, when opening and closing positions, uses standard buy and sell orders, called orders; in other words, an Order is an order given by a client to open or close a position.

Orders are:

Market – Opening and closing a position at the current market quote offered by the broker.

In addition to orders to open and close a position, some orders allow you to minimize losses, maximize profits, and generally access the trader from continuous monitoring of market quotes in order to close or open a position.

Limit order (Take Profit) – specifying the maximum (minimum) price for closing buy-sell operations. For a buy position, the limit order must be 15 pips higher than the current price or GTC order price, and for sales, it must be lower by 15 points.

To prevent unnecessary losses, the trading terminal allows you to set stop orders.

Stop order – an indication of the price upon reaching which it is necessary to close the open position. For buy –
15 points less than the current price; for sales – 15 points more than the current one. Orders such as stop and limit
are valid either until execution or until the Client cancels the unexecuted order.
Pending order (GTC-Good Till Cancel) is an open order that is valid for an unlimited time until
canceled by the Client, allowing the Client to open a position upon reaching the price they set.
The price of such an order must differ from the current price by at least 15 points.
Capital management, expressed in the reasonable allocation of funds, minimizing
hedging risk, and the effectiveness of setting stop commands, are an integral part of the necessary and
sufficient conditions for survival and successful trading in the FOREX market.
Hedging is a policy of neutralizing the risk of gambling transactions through the use of
mutually canceling transactions, as a result of which potential gains and losses are compensated.
Hedging of open positions is carried out by opening new ones in the opposite direction and
with an equal number of lots for the same currency pair. In FOREX, hedging is allowed and does not require additional margin security to open hedging (opposite)
transaction.

Transfer of an open position (Swap Tom/Next)

In terms of time, a position can be open for as long as desired, from several minutes to several days.
Please note that if a position is available for several days, some
fees will be charged or accrued.
Depending on the direction of the position (Buy or Sell), the Client receives or pays a certain amount for
transferring the position (from a few tenths of a point to several points). When a position is moved from Wednesday to Thursday, this amount triples.

Why does the client pay or receive for the transfer of a position? When concluding a transaction, he received a loan in the currency he was selling and had to pay interest on it. At the same time, he placed
the purchased currency on deposit and must receive interest on this deposit. Interest rates differ between currencies, so there is a difference that is taken into account when transferring a position. If the Client sold a currency with a higher interest rate, then he will pay for the rollover of the position. If he buys a currency with a higher interest rate, the broker will pay him to transfer the position.
The fee for transferring an open position to the next day (including non-working days) is charged/deducted at 00:00 GMT+2 time, according to the table of swap points published on the company’s website. Moreover, The time the position was opened is not taken into account. For example, a position was opened at 23:59 and closed at 00:01. In this case, the bet will be credited/deducted. Conversely, if a position was opened at 00:01 and closed at 23:59, no accruals/deductions will be made.

Forced close of a position

If there is an open position, the current balance on the trading account (or asset, Equity – the amount of the deposit-taking into
account recent profit/loss) is constantly changing in accordance with changes in exchange rates. Your bank or dealer continually monitors the status of your account. This is done to prevent you from losing more than you deposited – otherwise, the dealer will have to take on
part of your loss.

The required margin is the portion of the deposit required to open and maintain
a position. The minimum level of margin requirement (Margin call) is the maximum deposit value (usually expressed as a percentage of the required collateral), upon reaching which the dealer is forced to close the Client’s position at the current rate. At FOREX, the minimum margin requirement is 30% of the required margin.

To prevent forced closure, you should not open positions that are too large for your
deposit, you should close unprofitable positions in a timely manner; it is recommended to place Stop orders or replenish the deposit in a timely manner.

Conditions for opening an account with FOREX Company

FOREX Company provides Clients with a choice, in accordance with their capabilities, to open a Test account, a Practice account, and a Business account. To open a Test account, the Client must deposit an amount of at least 1,000 (one thousand) hryvnia, which will be reflected in his account as 2,000 (two thousand) gaming (trading) dollars. Withdrawals and deposits of funds are made with a coefficient of 1 gaming dollar – 0.50 hryvnia.
To open a Practice account, the Client must deposit an amount of at least 3,000 (three thousand) hryvnia, which will be reflected in his account as 2,000 (two thousand) gaming (trading) dollars. Withdrawals and deposits of funds are made with a coefficient of 1 game dollar – 1.5 hryvnia.
To open a Business account, the Client must deposit a minimum amount in Ukrainian hryvnia equivalent to 2,000 (two thousand) US dollars (at the NBU rate), which will be reflected in his account as 2,000 (two thousand) gaming (trading) dollars. Withdrawals and deposits of funds are always made at the current rate of the National Bank of Ukraine.
The trading conditions of all three types of accounts are identical to each other and are served by one trading server with only one feature and difference for Business accounts. Namely, only for Business accounts is it possible to make gaming transactions with a fractional number of lots (1.1, 1.2, 1.3, 1.4, etc. lots), but the size of the transaction must be at least one whole lot.

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