My Journey Into Forex - Part 1 of 3 (Love At First Sight)

History

In 1876, gold exchange standard was implemented to stabilize world currencies. The gold standard was dropped at the beginning of World War 2 as major European countries did not have enough gold to support all the currency they were printing to pay for military projects. In 1944, the world decided to have fixed exchange rates which resulted in the U.S. dollar being the primary reserve currency back by gold aka the Bretton Woods System. In 1971, the U.S. declared that it would no longer exchange gold for U.S. dollars that were held in foreign reserves. The end of the Bretton Woods System ultimately led to a global acceptance of floating foreign exchange rates in 1976, better known as the foreign currency exchange market.

C.R.E.A.M. - Currencies Rule Everything Around Me

Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to travel aboard or conduct foreign trade and business.

The foreign exchange market is where currencies are traded. When investors trade foreign exchange (forex or FX for short) they’re buying and selling currencies over the foreign exchange market.

The forex market is the largest and most traded financial market in the world. The forex market has grown to a daily trade volume of over $5 trillion a day which is over 200 times bigger than the New York Stock Exchange.

Historically, the major players in the FX market were large central banks, multinational firms and big financial institutions. While these entities are still the major players in the market, the growth of online brokers and technology has made it possible for individuals such as you and me to access this market and trade on a level playing field with the “big boys”.

It should be noted that there is no central marketplace for the Forex market like the NYSE. Forex is a product quoted by all the major banks, and not all banks will have the exact same price. Now, the broker platforms take all these feeds from the different banks and the quotes we see from our broker are an approximate average of them. It’s the broker who is effectively transacting the trade and taking the other side of it…they ‘make the market’ for you.
When you buy a currency pair, your broker is selling it to you, not ‘another trader’.

The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo. This means that when the trading day in the U.S. ends, the forex market begins a new day in Tokyo.

The Players

Banks – The interbank market allows for both the majority of commercial forex transactions and large amounts of speculative trading each day. Some large banks will trade billions of dollars every day. Sometimes this trading is done on behalf of customers. However, much of the trading is done by traders who are trading for the bank’s own account.

Hedge funds – Somewhere around 70 to 90% of all foreign exchange transactions are speculative in nature. This means, the person or institutions that bought or sold the currency has no plan of actually taking delivery of the currency. Instead, the transaction was executed with the intention of speculating on the price movement of that particular currency. Retail speculators (you and I) are small fish….of (Steemit) minnows compared to the (Steemit Whales) big hedge funds that control and speculate with billions of dollars of equity each day in the currency markets.

Advantages of Trading Forex

• Liquidity
  The forex market has huge appeal for the retail trader because it is an extremely liquid market. A liquid market means that there are a huge number of buyers and sellers resulting in swift trade execution and at good prices.

• Continuous Operation
  The forex market is open 24 hours a day, 5 days a week, unlike other markets like commodities and stocks. There is no opening bell in the Forex market. You can enter or exit a trade whenever you want from Sunday, 5pm EST to Friday, 5 pm EST.

• Leverage
  Due to the high level of liquidity in the forex market, most brokers will offer a higher leverage than other markets. The basic concept is that a trader only requires a small percentage of the overall price of the position. For example, if we had leverage of 200:1 and have $500 to invest, we could take a position of $100,000.

• Low Entry Level
  Due to the high level of leverage it is possible to open accounts with forex brokers from as low as $100.

• Low Transaction Costs
  A forex broker mainly generates their revenue from the difference between the buy and sell prices. This is called the spread and due to the high trading volumes, it’s quite a small fee when compared to the fees charged by traditional stock brokers.

Terminology

Exchange Rate – The value of one currency expressed in terms of another. For example, if EUR/USD is 1.3200, 1 Euro is worth US$1.3200.

Pip – The smallest increment of price movement a currency can make. For example, 1 pip for the EUR/USD = 0.0001.

Leverage – Leverage is the ability to trade your account into a position that‘s greater than your total account margin. For instance, if a trader has $1,000 of margin in his/her account and he/she opens a $100,000 position, his/her leverage is 100 times, or 100:1.

Bid/Ask Spread – The spread of a currency pair varies between brokers and it is the difference between the bid and ask the price. For example, if EUR/USD quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread.

Margin – The deposit required to open or maintain a position. Margin can be either “free” or “used”. Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions.

The All Mighty Pip

In stock trading, you might hear or read that a stock’s share price went up a point, or $1. A pip is the unit of measurement to express the change in price between two currencies. Just like a pip is the smallest part of a fruit, a pip in forex refers to the smallest price unit related to a currency. The term ‘pip’ is actually an acronym for ‘percentage in point’. Forex traders often express their gains and losses in the number of pips their position rose or fell. For example, if the EUR/USD moves from 1.2712 to 1.2713, that 0.0001 rise in the exchange rate is one pip.

NOTE:
All major currency pairs go to the fourth decimal place to quantify a pip apart from the Japanese Yen which only goes to two.

Some brokers quote to the fifth decimal place of the currency to provide even greater accuracy when measuring gains and losses. This fifth decimal place is what we call a pipette – one tenth of a pip.

There are 3 standard lot sizes in forex:

Major & Minor Currencies

When trading forex, currencies are abbreviated into three letter symbols. For example, the euro is the EUR, the US Dollar is the USD, the Japanese Yen is the JPY, the UK pound is the GBP, etc.

Currencies are generally split into two categories – the major currencies and the minor currencies. The majors are the currencies of the major global economies – the US, Japan, UK, Euro Zone, Canada, Australia, Switzerland and New Zealand.

NOTE:

The Chinese Yuan as the Chinese government restricts trading of its currency.

• Majors

The “major” forex currency pairs are the major countries that are paired with the U.S. dollar (the nicknames of the majors are in parenthesis).

EUR/USD – Euro vs. the U.S. dollar
GBP/USD – British pound (Sterling or Cable) vs. the U.S. dollar
AUD/USD – Australia dollar (Aussie) vs. the U.S. dollar
NZD/USD – New Zealand dollar (Kiwi) vs. the U.S. dollar
USD/JPY – U.S. dollar vs. the Japanese yen (the Yen)
USD/CHF – U.S. dollar vs. the Swiss franc (Swissie)
USD/CAD – U.S. dollar vs. the Canadian dollar (Loonie)

Many of the major currency pairs are correlated. For example, the EURUSD and the GBPUSD tend to move in the same general direction (not exactly the same), the GPBUSD is typically a bit more volatile than the EURUSD. So, if you enter a long on the EURUSD and the GBPUSD, you are basically doubling your risk.

The USDCHF is negatively correlated to the EURUSD, so if the EURUSD is moving higher the USDCHF is most likely moving lower. I never trade the CHF after what I saw happen in 2015.

The Swiss franc is seen as safe haven, but when the Swiss unpegged the franc to the Euro, it came as a complete surprise. In January of 2015, Jean-Pierre Danthine, the vice-chairman of the SNB, went on television and said: "We are convinced that the minimum exchange rate must remain the cornerstone of our monetary policy." Three days later, the Swish National Bank (SNB) did the exact opposite, it was a complete surprise to the market. When the SNB pulled the peg, the CHF dropped of more than 30%...unheard of for a currency. Many firms and individuals either loss millions or went bankrupted.

The EURUSD the most widely traded pair and carries the highest volume of all currency pairs. The EURUSD makes up about 27% of forex trading volume, next is the USDJPY at 13%, followed by the GBPUSD at 12% of the total forex trading volume.

• Commodity currencies

A commodity currency is a name given to currencies of countries which depend on the export of certain raw materials for income. The major currencies that are considered “commodity currencies” are the Australian dollar, Canadian dollar, and New Zealand dollar.

I love trading the USDCAD on Wednesdays. The Energy Information Administration's (EIA) Crude Oil Inventories measures the weekly change in the number of barrels of commercial crude oil held by US firms and it they report these numbers of Wednesday at 10:30 am Eastern Time. The level of inventories influences the price of petroleum products, which can have an impact on inflation.

If the increase in crude inventories is more than expected, it implies weaker demand and is bearish for crude prices. The same can be said if a decline in inventories is less than expected. If the increase in crude is less than expected, it implies greater demand and is bullish for crude prices. The same can be said if a decline in inventories is more than expected.
If there are unexpected surprises, meaning if the results are way off from the estimates, at times, the USDCAD moves violently in one direction.

• Crosses

The “crosses” are those pairs that are not paired vs. the U.S. dollar such as:

AUD/CAD – Australian dollar vs. the Canadian dollar
AUD/JPY – Australian dollar vs. the Japanese yen
AUD/NZD – Aussie dollar vs. the New Zealand dollar
CAD/JPY – Canadian dollar vs. the Japanese yen
CHF/JPY – Swiss franc vs. the Japanese yen
EUR/AUD – Euro vs. the Australian dollar
EUR/CAD – Euro vs. the Canadian dollar
EUR/GBP – Euro vs. the British pound
EUR/JPY – Euro vs. the Japanese yen
EUR/NZD – Euro vs. the New Zealand dollar
GBP/AUD – British pound vs. the Australian dollar
GBP/JPY – British pound vs. the Japanese yen
NZD/JPY – New Zealand dollar vs. the Japanese yen

• Exotics

The “exotics” are those pairs that consist of developing / emerging economies. Here is a list of some of the more commonly traded exotics:
USD/TRY – U.S. dollar vs. the Turkish lira
EUR/TRY – Euro vs. the Turkish lira
USD/ZAR – U.S. dollar vs. the South African rand
USD/MXN – U.S. dollar vs. the Mexican peso
USD/BRL – U.S. dollar vs. the Brazilian real

The exotic currency pairs are much less liquid and more volatile than the majors and the crosses. This makes them more prone to “slippage” and it also means they have wider spreads than the majors and the crosses. The spread means you are negative on a trade from the beginning, so you must overcome the spread to get into profit. Exotics speads vary and can be as wide as 15 or 20 vs the majors at 1 or 3 pips negative.

NOTE: My favorite pairs to trade the Majors and the Pound pairs. The Majors have the most liquidity and the Pounds have the greatest avg. true ranges and present the greatest opportunity to make money…but also to lose money if you don’t know what you are doing.

NOTE: The GBP/NZD isn’t for the faint of heart and is only for experienced traders.

Times To Trade Forex

It is true that the forex market is open 24 hours a day, but the markets aren’t active the entire day. The idea is to trade when the markets are the most volatile, because volatility means the markets are moving and money is made when the markets are moving.

The 24-hour forex market trading day can be broken up into three major trading sessions:

• Asian trading session (including Australia and New Zealand): the Asian trading session opens at 6:00pm EST and closes at 4:00am EST

• London trading session: the London trading session opens at 3:00am EST and closes at 12:00pm EST.

• New York trading session: the New York trading session opens at 8:00am EST and closes at 5:00pm EST.

The over-lap of the London and New York trading sessions between 8am and 12pm EST is typically the best time to trade if day trading, because this is when the world’s two most active trading centers cross; as the London session is closing the New York session is opening. Many traders strictly trade this four hour time window because it is typically a very volatile and liquid time to trade the forex market.

The Asian trading session:

The Asian trading session begins at 6:00pm EST as trading gets underway in New Zealand and Australia, an hour later at 7pm EST Tokyo opens up. Tokyo is the financial capital of Asia; it is also worth noting that Japan is the third largest forex trading center in the world. The yen is the third most traded currency, involved in about 19.0% of all forex transactions; overall about 21% of all forex transactions take place during the Asian trading session.

Liquidity is thin during the Asian session. Major news releases for New Zealand, Australia, Japan, and China come out during the Asian session, so the NZD, AUD, and JPY currency pairs tend to move more than the others during the Asian session.

The London trading session:

As Asia comes to a close the London trading session gets underway. There are several major financial centers scattered around Europe, but London has historically been the center of all forex trading. About 30% of all forex transactions take place during the London trading session. Due to the fact that the London session over-laps with the Asian and New York sessions, it is typically the most active trading session and this leads to high liquidity/volume. Major European news releases mainly come out during the London trading session, this means the GBP, EUR, and CHF are all typically the most active during the London session.

One strategy to deploy during these hours is the London Breakout Forex Trading Strategy
The London breakout Forex trading strategy is used to trade the London Forex session during the first few hrs (1-3 hrs) when the Forex market opens in London. The London trading session is the biggest Forex market mover as much of the trading volume for currency trading is during this session.

Whatever the trend direction of GBPUSD during the first 1-3 hrs of London forex session in determines what the trend would be for the remainder of the London fx session. What this means also is that this trend may continue through to the US trading session.

The volumes of trades and the amount of money that moves during the first few hours of the London forex market opening hours are HUGE which creates some exciting trading opportunities.

Buy Setup:
Place buy stop order anywhere from 1-2 pips above the higher yellow line (which is the highest price point of the 3 last asian session trading candlesticks) and its stop loss would be the at least 5 pips below the lower horizontal line.

Sell setup:
Place sell stop order 1-2 pips below the lower yellow line and your stop loss at least 5 pips above the top horizontal line.

The volumes of trades and the amount of money that moves during the first few hours of the London forex market opening hours are HUGE which creates some exciting trading opportunities. Unfortunately, I live on the East Coast of the US, which would be 3 am for me, so I don’t trade the London Breakout, but have considered automating the strategy.

The New York trading session:

The New York trading session gets underway at 8:00am EST, this is just about the time traders in London are getting back from their lunch breaks, and it also signals the start of what is on average the most active time period for forex trading. Between 8am EST and 12pm EST there is high liquidity as the London and New York sessions overlap. The majority of all economic reports are released around the start of the New York trading session since both Europe and New York are open at this time. All USD and CAD economic news comes out during or near the New York trading session.

About 85% of all forex trades involve the U.S. dollar, so any currency pair involving the USD has the potential to make a big move during the New York trading session.

Sundays are typically not worth trading because movement is very low and nothing significant. The best days to trade are based on average daily trading ranges for the “majors” are Tuesday, Wednesday, and Thursday. Monday typically sees lower average trading ranges for the majors. Friday can be good to trade too up until about 12pm Eastern Time (which is when London closes).

NOTE:

If I’m up in any trade over 100 pips going into the weekend, I will leave the trade on going into the weekend. The only time the Forex markets gap are from the close on Friday to the open on Sunday. If you are in a trade that gaps against you when the Markets open on Sunday, you some if not most of your profits...and I’m speaking from experience.

Currency Pair Quote

Bid and Ask

When you are trading a currency pair there is a bid price (buy) and an ask price (sell). Again, these are in relation to the base currency. When buying a currency pair (going long), the ask price refers to the amount of quoted currency that has to be paid in order to buy one unit of the base currency, or how much the market will sell one unit of the base currency for in relation to the quoted currency.

The bid price is used when selling a currency pair (going short) and reflects how much of the quoted currency will be obtained when selling one unit of the base currency, or how much the market will pay for the quoted currency in relation to the base currency.

The quote before the slash is the bid price, and the two digits after the slash represent the ask price (only the last two digits of the full price are typically quoted). Note that the bid price is always smaller than the ask price. Example:

USD/CAD = 1.2000/05
Bid = 1.2000
Ask= 1.2005

If you want to buy this currency pair, this means that you intend to buy the base currency and are therefore looking at the ask price to see how much (in Canadian dollars) the market will charge for U.S. dollars. According to the ask price, you can buy one U.S. dollar with 1.2005 Canadian dollars.

However, in order to sell this currency pair, or sell the base currency in exchange for the quoted currency, you would look at the bid price. It tells you that the market will buy US$1 base currency (you will be selling the market the base currency) for a price equivalent to 1.2000 Canadian dollars, which is the quoted currency.

Whichever currency is quoted first (the base currency) is always the one in which the transaction is being conducted. You either buy or sell the base currency. Depending on what currency you want to use to buy or sell the base with, you refer to the corresponding currency pair spot exchange rate to determine the price.

Why I Love Forex

I feel in love with Forex in 2015. Prior to 2015, I just traded options. I still love option trading, but Forex, it opened your mind to what's going on in the rest of the world and how all these financial markets affect each other. In addition, I’m a swing trader by nature. When a trend develops in Forex it can continue for quite some time. Just look what the EURUSD has done over the last several weeks.

The Forex market trends more than any other market on the planet, which means you can jump on board a trend and ride it until it ends. With time and experience you realize that two to five favourable trade setups per month is all you need.

When I look back at my journal from 2015, I have to laugh. In my heart I was determined and persistent, but didn’t know what I was doing. Let me share some of those trades with you.

2nd and 3rd trade ever in forex was in January 2015:

The irony of these trades was I was trading a standard lot, each pip was $10...I had no business trading a standard lot. Probably should of traded in Simulation, but I didn't I was eager and determined. Needless to say, things didn't start of well.

Luckily, I was conscious enough to realize that I needed to protect my capital by any means necessary until I was able to hone my skills and develop a trading style/strategy that fit my personality.

After five months, I felt things were heading in the right direction based on my equity curve leveling off.

But then like a first love, I broke up with Forex, started dating the NQ futures. For the past 2 years I have admired my first love (Forex) from a far and now ready to get reacquainted and see if she wants to date me again.