01 Hist01 History of Forex Trading
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FOREX TRADING EXAMPLES
Compiled below are Forex trading examples. Please note that these are just examples; be aware that trading Forex is speculative and involves significant risk.
USD/CHF Trading Example
An investor deposits $10,000 in a Markets.com Trading Account. The account is set to 0.5% margin or 200:1 Leverage. This means that for every 5,000 lot opened, the investor must maintain at least $25 in Margin (= $5,000 x 0.5%). The investor expects the US dollar to rise against the Swiss franc and therefore decides to buy $ 100,000 of the USD/CHF pair.
Day 1 – USD/CHF Quotes = 1.0147-1.0150
The market quotes USDCHF 1.0147-1.0150. The investor buys USD at 1.0150 against CHF.
By doing this, he commits in the simultaneous buying of USD 100,000 (20 lots at $5,000) and the selling of CHF 101,500 (= $100,000 x 1.0150) by using $500 as a Margin (= $100,000 x 0.5%) and borrowing USD 99,500 from Markets.com (= $100,000-$500) Transaction Flows Report - Day 1
Account Name
Credit/Debi t C D
Day 1 USD +100,00 0 CHF -101,500
Comme
USD Account CHF Account
$100,000 Inve
# lots (20) x lot value ($5,000) x
Client Account Report – Day 1
Balance (USD) $10,000 (1)
Equity (USD) $10,000 (2)
Lots Open # 20 (3)
Used Margin (USD) $500 (4)
U
(1) Balance = Deposit ($10,000) + Sum of Realized Profit & Loss ($0) = $10,000 (2) Equity = Balance ($10,000) + Sum of Unrealized Profit & Loss ($0) = $10,000 (3) # Lots open = Investment ($100,000) / Value of one lot ($5,000) = 20 lots (4) Used Margin = # Lots open (20) x Value of one lot ($5,000) x Margin (0.5%) = $500 (5) Usable Margin = Equity ($10,000) – Used Margin ($500) = $9,500
Day 2-USD/CHF Quotes = 1.0300-1.0303
• The US dollar has risen and the USD/CHF quotes 1.0300-1.0303. The investor decides to take his profit and enters a sell market order in the Market trading platform. The order is executed instantaneously and the investor sells 20 lots of USDCHF at 1.0300. By doing this, he commits in the simultaneous selling of USD 100,000 (20 lots at $5,000) and the buying of CHF 103,000 (= $100,000 x 1.0300).
• Transaction Flows Report - Day 2
• Account Name • Credit/D ebit • D
• Day 1 • USD +100
• Day 2 • USD 100,
• Commen
• USD Account
• Sell # lots (20) x lot v
• CHF Account
•
• C
,000 • CHF 101, 500
000 • CHF +103 ,000
• Buy # lots (20) x lot value ($5 (1.030
• The dollar side of the transaction involves a credit and a debit of USD 100,000, the investor's USD account will show no change. The CHF account will show a debit of CHF 101,500 and a credit of CHF 103,000. This results in a profit of CHF 1,500 = approx. USD 1,456 (= CHF 1,500 / 1.0303) which represents a 14.56% profit on the deposit of USD 10,000. • Client Account Report– Day 2 (AFTER TRADE EXECUTION)
• Balance (USD) • $11,456 • (1)
• Equity (USD) • $11,456 • (2)
• Lots Open # • 0 • (3)
• Used Margin (USD) • $0 • (4)
• U
• (1) Balance = Deposit ($10,000) + Sum of Realized Profit & Loss ($ 1,456)= $11,456 (2) Equity = Balance ($11,456) + Sum of Unrealized Profit & Loss ($0) = $11,456 (3) All positions are closed, therefore # Lots open = 0 (4) Used Margin = # Lots open (0) x Value of one lot ($5,000) x Margin (0.5%) = $0 (5) Usable Margin = Equity ($11,456) – Used Margin ($0) = $11,456 Note: For simplicity's sake, we have disregarded the effect of difference in interest rate between USD and CHF over the 2-day period which would have marginally altered the profit calculation.
FOREX MARKET PLAYERS
Forex Market
The Forex market is an international over-the-counter market (OTC). It means that it is a decentralized, self-regulated market with no central exchange or clearing house, unlike stocks and futures markets. This structure eliminates fees for exchange and clearing, thereby reducing transaction costs. The Forex OTC market is formed by different participants – with varying needs and interests – that trade directly with each other. These participants can be divided in two groups: the interbank market and the retail market.
The Interbank Market
The interbank market designates Forex transactions that occur between central banks, commercial banks and financial institutions. Central Banks - National central banks (such as the US Fed and the ECB) play an important role in the Forex market. As principal monetary authority, their role consists in achieving price stability and economic growth. To do so, they regulate the entire money supply in the economy by setting interest rates and reserve requirements. They also manage the country's foreign exchange reserves that they can use in order to influence market conditions and exchange rates. Commercial Banks - Commercial banks (such as Deutsche Bank and Barclays) provide liquidity to the Forex market due to the trading volume they handle every day. Some of this trading represents foreign currency conversions on behalf of customers' needs while some is carried out by the banks' proprietary trading desk for speculative purpose. Financial Institutions - Financial institutions such as money managers, investment funds, pension funds and brokerage companies trade foreign currencies as part of their obligations to seek the best investment opportunities for their clients. For example, a manager of an international equity portfolio will have to engage in currency trading in order to buy and sell foreign stocks.
The Retail Market
The retail market designates transactions made by smaller speculators and investors. These transactions are executed through Forex brokers who act as a mediator between the retail market and the interbank market. The participants of the retail market are hedge funds, corporations and individuals. • Hedge Funds - Hedge funds are private investment funds that speculate in various assets classes using leverage. Macro Hedge Funds pursue trading opportunities in the Forex Market. They design and execute trades after conducting a macroeconomic analysis that reviews the challenges affecting a country and its currency. Due to their large amounts of liquidity and their aggressive strategies, they are a major contributor to the dynamic of Forex Market.
• Corporations - They represent the companies that are engaged in import/export activities with foreign counterparts. Their primary business requires them to purchase and sell foreign currencies in exchange for goods, exposing them to currency risks. Through the Forex market, they convert currencies and hedge themselves against future fluctuations. Individuals - Individual traders or investors trade Forex on their own capital in order to profit from speculation on future exchange rates. They mainly operate through Forex platforms that offer tight spreads, immediate execution and highly leveraged margin accounts.
WHAT IS FOREX?
History
Forex, or FX, is a shortened term that describes the Foreign Exchange Market, a marketplace where the world's various currencies are traded. It is an interbank market which was created in 1971 when international trade transitioned from fixed to floating exchange rates. As a result of its incredible volume and fluidity, the FX market has become the largest and most significant financial market in the world. Here are some unique characteristics that are the source of its success: Forex markets operate 24 hours a day Superior liquidity: the daily turnover of the FX market – over 4 Trillion Dollars – makes it easy to trade most currencies instantaneously You can profit from rising or falling markets You can benefit from leveraged trading with low margin requirements There are standard instruments available to help you control risk exposure Excellent Transparency: the Forex Market is transparent… you just need to keep yourself informed
The Exchange Rate
Forex plays the indispensable role of determining global exchange rates. The exchange rate is the number of units of one nation’s currency that must be exchanged in order to acquire one unit of another nation’s currency. A market exchange rate between two
currencies is determined by the interaction of the official and private participants in the foreign exchange rate market.
Market Participants
The main participants in the Forex market are: central banks, commercial banks, financial institutions, hedge funds, commercial companies and individual investors. The main reasons they participate in the Forex market are: • Profit from fluctuations in currency pairs (speculating) • Protection from fluctuating currency pairs which is derived from trading goods and services (Hedging) With technological development, the World Wide Web has become a great trading facilitator, as it can provide individual investors and traders with access to all the latest Forex news, technology and tools.
TRADING TERMS
FX & CFD Trading Terminology
Forex and CFD investing is just like any endeavor, where preparation is a valuable instrument. Understanding and familiarizing yourself with terminology is valuable asset for any trader. Quote An indicative market price, when used in Forex, refers to the prevailing exchange rate of the quoted currency at that moment. A quote will always be for a currency pair; for example EUR/USD, AUD/JPY or USD/JPY. The first currency in the pair is the quoted currency, while the second currency is referred to as the counterpart. A currency pair is usually quoted to a 1/10,000 degree of precision (i.e. until the 4th digit right of the decimal point); except for Japanese yen pairs, where quotes are usually made to 1/100 degree of precision (i.e. to the second digit right of the decimal point). A quote will always be provided in a form of two figures. The first figure is always the Bid or selling price, while the second is the Ask or buying price. For example:
• Bid/Ask The Bid or the selling price is the exchange rate at which a currency is offered for sale. The Ask or buying price is the exchange rate at which a currency can be bought. In the example above the EUR/USD pair (Euro vs. US dollar) is quoted at 1.5034/1.5037. In other words, the quote for the EUR/USD pair is 1.5034/1.5037, where 1.5034 is the Bid price and 1.5037 is the Ask price. Meaning if you wish to sell the quoted currency – in this case the Euro – then you would receive 1.5034 US Dollars per 1 Euro. On the other hand, if you were buying the quoted currency, then the quote tells you that to buy Euros for US dollars, you would need to pay 1.5037 dollars per 1 euro. • Lot A lot is the standard unit size of a transaction. It represents the minimum quantity which can be traded in any given instrument. For Forex Trading, Markets.com standard lot size is 1,000 units of the quoted currency. For CFD Trading, the standard lot size varies from 1 to 500 units of the quoted CFD. • Pip This is the smallest value in a currency quote and can be different for different currencies. For most currency pairs a pip is the 1/10,000 (0.0001) fraction of the quoted currency. However, in Japanese yen pairs, a pip refers to a 1/100 (0.01) fraction of the quoted currency. Profits on a trade can be expressed in pips, for example: Suppose you bought the EUR/USD at an exchange rate of 1.5016 and sold it at an exchange rate of 1.5037. 37-16=21. You made a 21 pip profit. • Pip Value The pip value can be either variable or fixed, depending on the currency pair it refers to and the base currency (i.e. measuring currency) of your account. The pip value is also a function of the amount traded. The simplest way to calculate the pip value is to divide 1 pip by the exchange rate and multiply it by the lot size. This gives you the pip value in terms of the quoted currency. If the base currency of your account is other than the quoted currency, then simply multiply this by the applicable exchange rate. For example: What is the pip value of a trade in GBP/JPY with a price of 128.92? The pip value of 1
standard lot (5,000) of GBP/JPY which is traded at 128.92 is: 0.01/128.92 = 0.00007756 GBP 0.00007756 x 5,000=0.387 GBP The base currency of your account is USD. If the exchange rate for GBP/USD is 2.0612, then the pip value for 1 standard lot in terms of the account's base currency is: 0.387x 2.0612 = $0.80. • Spread This is the difference between the bid price and the ask price. For example: If the quote for the EUR/USD pair is 1.5034/1.5037 (in other words the bid price is 1.5034 and the ask price is 1.5037), then the spread for the EUR/USD in this case is 3 pips. Low spreads ensure that traders can get in and out of their trades at very low slippage. • Margin The amount of funds required to open or maintain a position. It is usually expressed as a percentage of the open position. You may have a margin requirement of 0.5%, which would mean that in order to hold a position of 100,000 EUR/USD, an equity level of 500 euros or more must be maintained. • Leverage This is the use of borrowed capital to increase potential return. Trading on leveraged capital means that you can trade amounts significantly higher than the balance of your funds, which only serves as the margin. High leverage can significantly increase the potential return, but it can also significantly increase potential losses. The leverage is specified as a ratio, such as 200:1. This means that the trader can trade amounts 200 times higher than the sum in his or her margin account. If the trader has $1,000 in his account, it means that he can now open trades worth $200,000. • Interest In a sense, interest is the price of money. It is the amount paid on loans and received on deposits. • Long A trader going long expects the price to go up when buying a currency pair or a CFD. • Short A trader going short expects the price to go down when selling a currency pair or a CFD. • Value date The date on which counterparts to a financial transaction agree to settle their respective obligations, i.e., exchanging payments.
Rollover Process where the settlement of a deal is rolled forward to another value date and a charge is levied based on the difference in rates of interest of the two currencies. Every day, at 21:00GMT, open positions are rolled over to the next day and the positions gain or lose interest based on the interest differential between the bought and sold currencies. If you buy overnight a currency pair where the base currency has a higher interest rate than the terms currency, then you’ll receive interest and vice versa.
TRADING ORDERS
Forex and CFD Trading Orders
There are various types of orders which a trader can use to trade Forex and CFDs. Below we outline the different order types: Market Order, Stop-Loss / Limit Orders, Entry Orders, Trailing Stop-Loss Orders and One-Cancels-the-Other Orders.
Market Order A market order is an order to buy or sell at the current ask or bid price quoted on the market. The buy order may be to initiate a new position or liquidate a previous sell position. The sell order may be to initiate a new position or liquidate a previous buy position. Here is an example of a market order. The current market price – in this case, for buying US Dollars (Ask price) - is 1.0555 and for selling US Dollars (Bid price) is 1.0551.
Stop-Loss / Limit Orders Stop-Loss and Limit orders are protective orders that close an open position or future position under certain conditions, namely price. Stop-Loss Orders are used to limit trader's losses if the market moves against their position. The trader sets the maximum amount (in terms of pips) that he is willing to lose on a certain trade. When that specified price is reached, the trade is executed. Conversely, Limit Orders are used to lock in the trader's profit if the market moves favorably. The trader sets in advance the price at which he wants to close his position. In the example below, a trade was opened at the market price of 1.0561(buying order). According to the stop-loss order, the position will be closed if and when the price falls to 1.0553. According to the take-profit order, the position will be closed if and when the price hits 1.0565.
Entry Orders These types of orders open a new position only if the market reaches a price specified by the trader. Entry orders are divided into two varieties: Entry Limit Orders and Entry Stop Orders. Entry Limit Orders – Entry limit orders are orders that are placed by traders to enter the market at a more favorable price than the current price. When Buying a currency pair or a CFD, a Entry Limit order will be placed below the
current market price. When Selling, a limit entry order will be placed above the current market price. When placing Entry Limit Orders, the trader expects that the market price will bounce back after reaching the level at which the entry limit order was placed. For example:
The USD/CAD trades at 1.0547 / 1.0551. Here, you expect the pair to trend higher, but prefer going long at a better price – you expect the price to go down to 1.0525 before it continues going up. You then place an entry limit buy order of 1 lot (5,000 USD/CAD) at 1.0525. When the rate reaches 1.0525, the limit order will be executed and 1 lot of USD/CAD will be bought at 1.0525. Entry Stop Orders – Entry stop orders are orders that are being placed by traders to enter the market at a less favorable price than the current price. A BUY Entry Stop order will be placed above the current market price. When A SELL Entry Stop order will be placed below the current market price. When placing Entry Stop Orders, the trader
expects that once the market's momentum breaks through the specified price, the trend's movement is confirmed and will continue in that direction. For example:
The USD/CAD trades at 1.0553 / 1.0557. You estimate that the USD/CAD will continue trending higher. You also believe that should the pair break above 1.0600, it will rise by at least 50 pips. Thus, you place your BUY entry stop order of 20 lots (100,000) USD/CAD at 1.0600. Trailing Stop-Loss Orders A trailing stop-loss order is a stop-loss order that is set by the trader at a fixed number of pips from his entry rate. The stop loss order is automatically moved as the market price moves, but only in the direction of the investor's trade. For example: If you're Long on the USD/CAD pair at 1.0552 and you set the trailing stop at 30 pips, the stop will initially become active at 1.0522 (=1.0552-0.030). If the USD/CAD moves higher to 1.0565, the stop-loss order adjusts higher, pip by pip, with the market price and will then be active at 1.0535 (=1.0565-
0.030). If the USD/CAD ever goes down by 30 pips from 1.0565 to 1.0535, your stop will be triggered and your position closed. If the market goes up from 1.0565, your trailing stop will continue to move up in order to lock in additional profits.
One-Cancels-the-Other Orders (OCO) OCO orders are combined orders with both a stop price and a limit price. When one of the orders is executed, the other is automatically cancelled. OCO orders can be applied to open positions, or they can be used to open a new position. Say for example a trader believes that the USD/CAD, currently traded at 1.0548/1.0552, will continue trending higher; you believe that
should the pair break above 1.0560, it will rise to at least 50 pips. Nevertheless, you expect that prior to this major incline, the pair will retrace to 1.0544. You can place an entry limit at 1.0544, but in case the pair does not hit 1.0544 before climbing higher, you would miss the trade. You then place an OCO order to buy the USD/CAD if it reaches 1.0544 or 1.0560. Of the two, the first bid price to exist in the market will trigger the order:
Stop and limit orders entered on an existing position are also types of OCO orders. When either the stop or the limit is executed, the other is automatically canceled.
WHAT IS CFD? CFD Trading
CFD (Contracts for Difference) offers leveraged long/short trading on almost every financial instrument. It is a simple and inexpensive trading option to trade the change of price in multiple commodity and equity markets, with leverage and immediate execution.
Markets.com offers a wide range of CFDs giving you access to commodity markets - such as Oil, Agriculture and Precious Metals – and worldwide equity markets indices – such as FTSE 100, Dow Jones 30, S&P 500 and Hong Kong Hang Seng Index.
COMMODITIES Gold Oil Silver Sugar Corn Wheat Soybean
For a complete list of indices and commodities offered by Markets.com, please visit the CFD Trading Conditions page.
Why trade CFDs with Markets.com?
Product Diversity: Markets.com offers CFD trading on the world’s leading stock indices, as well as on Oil, Gold and other Commodities. Such a diverse array of products allows you to easily gain exposure to different markets and profit from multiple types of trading conditions. Low Margin Requirements: At Markets.com you are able to trade CFDs with margins between 1% - 2% (which means leverage of up to 100:1). This enables you to take gain bigger positions than you would be able to if you bought the actual underlying asset. High Liquidity: All Markets.com CFDs offer competitive spreads with bid/ask quotes that are filled on the spot – without delay. Lot Size: CFD trading enables you to trade in small and odd size lots. Normally, this is not possible when dealing with the underlying asset itself. No Commission: Markets.com offers commission-free CFD trading. Furthermore, Markets.com offers free intra-day trading – positions that are opened and closed on the same day incur no costs whatsoever. Ability to trade "Long" or "Short": With CFD Trading, you can profit no matter which way the market moves. You can use CFD to go “short” (when you believe markets will fall) as easily as to go "long" (when you expect prices to be on the rise).
To learn more about how market movement can potentially influence your CFD trading activities, please visit the CFD Trading Examples page.
CFD TRADING EXAMPLES
Compiled below are several CFD trading examples. Please note that these are just examples; be aware that trading Forex and Contracts for Difference (CFDs) – like online futures trading – is speculative and involves significant risk.
Assumptions
You funded your Markets.com Trading Account with a $2,000 initial deposit. You are considering investing in the US Equity Market and below are the trading conditions of some US Equity CFD Indices:
Instrument Name Contract Size 1 1
Leverag
S&P 500 DJ 30
USD interest rate is charged at 4.0%.
CFD Positions left open overnight incur a financing charge against the whole amount of the position at a rate of +/ -1.5%.
DAY 1 - Friday, July 3.
The US Non-Farm Payroll numbers come out worse than expected – unemployment rate is rising. This causes US stock markets to fall 2%. You believe that stock market losses are overdone and that upcoming corporate earnings numbers will be better than expected, and decide now is a good time to go long on the US stock market. You decide that the S&P 500 CFD is your best choice since it encompasses a wide group of market leading companies, and buy 100 lots at $874.25. Since you have bought 100 lots, an increase of 1 point in the S&P 500 index from 874.25 to 875.25 will earn a profit of $100, while a drop of 1 point from 874.25 to 873.25 will incur a loss of $100. + Opened Position: Buy 100 S&P Lots at 874.25 (Total purchase amount = $87,425)
+ Client Account Report
Balance (USD) $2,000 Equity (USD) $2,000 Lots Open # 100 Used Margin (USD) $874.25
U
Balance = Deposit ($2,000) + Sum of Realized Profit & Loss ($0) = $2,000 Equity = Balance ($2,000) + Sum of Unrealized Profit & Loss ($0) = $2,000 # Lots open = # lots S&P 500 CFD purchased = 100 lots Used Margin = # Lots open (100) x Value of one lot ($874.25) x Margin (1%) = $874.25 Usable Margin = Equity ($2,000) – Used Margin ($874.25) = $1,125.75
DAY 4 - Monday, July 6.
Your Assumptions are correct and corporate profits are better than expected as US companies were able to boost their earnings by cutting their expenses. On the next trading day, the S&P rallies over 3% to $901.50 where you close your position by selling your CFDs. + Closed Position: Sell 100 S&P Lots at 901.50 (Total sale amount = $90,150) + P&L Report:
Open Long Position Starting Value
$87,4 25 $87,4 25
= 100 S&P lots bought at 874.25 (Total purchase amount
1 lot of S%P 500 is $874.25 Financing Charge: 4.0% + 1.5% =
Overnight Financing
$26
Daily interest charge: [874.25 x (4.0% + 1.5%)]/360 = $0.1 Total interest charge:$0.13 x 100 lots x 2
Sales Proceeds Net Cost Profit on Trade
$90,1 50 $26 $2,69
= 100 S&P lots sold at 901.5 on Monda
= Interest paid to maintain the CFD long position
= Sale proceeds - Starting Value - Overnight financing = $90
9
DAY 6 - Wednesday, July 8.
Two days later, more poor economic data is published in the US and market sentiment turns negative. To capitalize on the downward correction in stocks, you decide to sell (go short) the Dow Jones (DJ 30) with the aim of buying it back cheaper in the short-term. On July 8, you sell 5 Lots of DJ 30 at a price of $8,180.00. Since you have sold 5 Lots, every drop of one point in the DJ 30 will earn you $5, and every increase of one point will cost you $5. + Opened Position: Sell 5 Lots of DJ 30 at $8,180.00 (Total sale amount = $40,900)
DAY 7 - Thursday, July 9.
Again, your strategy succeeds. Overnight the market drops lower and the next day, July 9, you buy back the 5 Lots of DJ 30 at $8,150, making a gross profit of $150 (5 lots x $30). + Closed Position: Buy 5 Lots of DJ 30 at $8,150 (Total purchase amount = $40,750) + P&L Report:
Open Sell Position Starting Value
$40,9 00 $40,9 00
= 5 DJ 30 lots sold at $8,180 (Total sale amount = $40,90
1 lot of DJ 30 is $8,180
Overnight Financing
Financing Charge: 4.0% - 1.5% = 2. $2.85
Daily interest received: [$8,180 x (4.0% - 1.5%)]/360 = $0.57,
Total interest received: $0.57 x 5 lots x 1 da
Purchase Amount Profit on Trade
$40,7 50 $152. 85
= 5 DJ lots bought at $8,150 on Wednesad = Starting Value - Purchase Amount + Overnight Financing = $152.85
PLEASE NOTE: the exact amount of interest to debit/ credit may vary each day depending on changes in any of the following factors: the
underlying instrument price, central bank rates, margin rates and the individual CFD portfolio.
WHAT IS FUNDAMENTAL ANALYSIS?
Fundamental analysis is a method that attempts to predict the intrinsic value of an investment. It is based on the theory that the market price of an asset tends to move towards its 'real value' or 'intrinsic value'. Fundamental analysis in Forex entails predicting the price valuation of a currency and its market trends by analyzing current economic conditions, government policy and societal factors within a business cycle framework. Forex Traders gauge a country's economic state by examining macroeconomic indicators covering: Interest Rates Announcement Gross Domestic Product (GDP) Consumer Price Index (Inflation) and Spending Indicators Employment Indicators Retail Trade and Consumer Confidence Balance of Trade Surplus or Deficit Government Fiscal and Monetary Policy Visit our economic indicators page and learn more about the different indicators and their impacts on the markets.
Fundamental Analysis Benefits
Determining the intrinsic value of an investment Identifying long-term investment opportunities
Fundamental Analysis Drawbacks
Too many macroeconomic indicators and indicator can confuse novice investors
MAIN MACROECONOMIC INDICATORS
Macroeconomic indicators are statistics that indicate the current status of the economy of a state depending on a particular area of the economy (industry, labor market, trade, etc.). They are published regularly at a certain time by governmental agencies and the private sector. Markets.com provides an Economic Calendar for the dates of critical fundamental announcements and events. When properly used, these indicators can be an invaluable resource for any Forex trader. In truth, these statistics help Forex traders monitor the economy's pulse; thus it is not surprising that these are religiously followed by almost everyone in the financial markets. After publication of these indicators we can observe volatility of the market. The degree of volatility is determined depending on the importance of an indicator. That is why it is important to understand which indicator is important and what it represents.
Interest Rates Announcement Interest rates play the most
important role in moving the prices of currencies in the foreign exchange market. As the institutions that set interest rates, central banks are therefore the most influential actors. Interest rates dictate flows of investment. Since currencies are the representations of a country’s economy, differences in interest rates affect the relative worth of currencies in relation to one another. When central banks change interest rates they cause the forex market to experience movement and volatility. In the realm of Forex trading, accurate speculation of central banks’ actions can enhance the trader's chances for a successful trade. Gross Domestic Product (GDP) The GDP is the broadest measure of a country's economy, and it represents the total market value of all goods and services produced in a country during a given year. Since the GDP figure itself is often considered a lagging indicator, most traders focus on the two reports that are issued in the months before the final GDP figures: the advance report and the preliminary report. Significant revisions between these reports can cause considerable volatility. Consumer Price Index The Consumer Price Index (CPI) is probably the most crucial indicator of inflation. It represents
changes in the level of retail prices for the basic consumer basket. Inflation is tied directly to the purchasing power of a currency within its borders and affects its standing on the international markets. If the economy develops in normal conditions, the increase in CPI can lead to an increase in basic interest rates. This, in turn, leads to an increase in the attractiveness of a currency. Employment Indicators Employment indicators reflect the overall health of an economy or business cycle. In order to understand how an economy is functioning, it is important to know how many jobs are being created or destructed, what percentage of the work force is actively working, and how many new people are claiming unemployment. For inflation measurement, it is also important to monitor the speed at which wages are growing. Retail Sales The retail sales indicator is released on a monthly basis and is important to the foreign exchange trader because it shows the overall strength of consumer spending and the success of retail stores. The report is particularly useful because it is a timely indicator of broad consumer spending patterns that is adjusted for seasonal variables. It can be used to predict the performance of more important lagging indicators, and to assess the immediate direction of an economy. Balance of Payments The Balance of Payments represents the ratio between the amount of payments received from abroad and the amount of payments going abroad. In other words, it shows the total foreign trade operations, trade balance, and balance between export and import, transfer payments. If coming payment exceeds payments to other countries and international organizations the balance of payments is positive. The surplus is a favorable factor for growth of the national currency. Government Fiscal and Monetary policy Stabilization of the economy (e.g., full employment, control of inflation, and an equitable balance of payments) is one of the goals that governments attempt to achieve through manipulation of fiscal and monetary policies. Fiscal policy relates to taxes and expenditures, monetary policy to financial markets and the supply of credit, money, and other financial assets. Conclusion: There are many economic indicators, and even more private reports that can be used to evaluate the fundamentals of forex. It's important to take the time to not only look at the numbers, but also understand what they mean and how they affect a nation's economy.
Compiled below are Forex trading examples. Please note that these are just examples; be aware that trading Forex is speculative and involves significant risk.
USD/CHF Trading Example
An investor deposits $10,000 in a Markets.com Trading Account. The account is set to 0.5% margin or 200:1 Leverage. This means that for every 5,000 lot opened, the investor must maintain at least $25 in Margin (= $5,000 x 0.5%). The investor expects the US dollar to rise against the Swiss franc and therefore decides to buy $ 100,000 of the USD/CHF pair.
Day 1 – USD/CHF Quotes = 1.0147-1.0150
The market quotes USDCHF 1.0147-1.0150. The investor buys USD at 1.0150 against CHF.
By doing this, he commits in the simultaneous buying of USD 100,000 (20 lots at $5,000) and the selling of CHF 101,500 (= $100,000 x 1.0150) by using $500 as a Margin (= $100,000 x 0.5%) and borrowing USD 99,500 from Markets.com (= $100,000-$500) Transaction Flows Report - Day 1
Account Name
Credit/Debi t C D
Day 1 USD +100,00 0 CHF -101,500
Comme
USD Account CHF Account
$100,000 Inve
# lots (20) x lot value ($5,000) x
Client Account Report – Day 1
Balance (USD) $10,000 (1)
Equity (USD) $10,000 (2)
Lots Open # 20 (3)
Used Margin (USD) $500 (4)
U
(1) Balance = Deposit ($10,000) + Sum of Realized Profit & Loss ($0) = $10,000 (2) Equity = Balance ($10,000) + Sum of Unrealized Profit & Loss ($0) = $10,000 (3) # Lots open = Investment ($100,000) / Value of one lot ($5,000) = 20 lots (4) Used Margin = # Lots open (20) x Value of one lot ($5,000) x Margin (0.5%) = $500 (5) Usable Margin = Equity ($10,000) – Used Margin ($500) = $9,500
Day 2-USD/CHF Quotes = 1.0300-1.0303
• The US dollar has risen and the USD/CHF quotes 1.0300-1.0303. The investor decides to take his profit and enters a sell market order in the Market trading platform. The order is executed instantaneously and the investor sells 20 lots of USDCHF at 1.0300. By doing this, he commits in the simultaneous selling of USD 100,000 (20 lots at $5,000) and the buying of CHF 103,000 (= $100,000 x 1.0300).
• Transaction Flows Report - Day 2
• Account Name • Credit/D ebit • D
• Day 1 • USD +100
• Day 2 • USD 100,
• Commen
• USD Account
• Sell # lots (20) x lot v
• CHF Account
•
• C
,000 • CHF 101, 500
000 • CHF +103 ,000
• Buy # lots (20) x lot value ($5 (1.030
• The dollar side of the transaction involves a credit and a debit of USD 100,000, the investor's USD account will show no change. The CHF account will show a debit of CHF 101,500 and a credit of CHF 103,000. This results in a profit of CHF 1,500 = approx. USD 1,456 (= CHF 1,500 / 1.0303) which represents a 14.56% profit on the deposit of USD 10,000. • Client Account Report– Day 2 (AFTER TRADE EXECUTION)
• Balance (USD) • $11,456 • (1)
• Equity (USD) • $11,456 • (2)
• Lots Open # • 0 • (3)
• Used Margin (USD) • $0 • (4)
• U
• (1) Balance = Deposit ($10,000) + Sum of Realized Profit & Loss ($ 1,456)= $11,456 (2) Equity = Balance ($11,456) + Sum of Unrealized Profit & Loss ($0) = $11,456 (3) All positions are closed, therefore # Lots open = 0 (4) Used Margin = # Lots open (0) x Value of one lot ($5,000) x Margin (0.5%) = $0 (5) Usable Margin = Equity ($11,456) – Used Margin ($0) = $11,456 Note: For simplicity's sake, we have disregarded the effect of difference in interest rate between USD and CHF over the 2-day period which would have marginally altered the profit calculation.
FOREX MARKET PLAYERS
Forex Market
The Forex market is an international over-the-counter market (OTC). It means that it is a decentralized, self-regulated market with no central exchange or clearing house, unlike stocks and futures markets. This structure eliminates fees for exchange and clearing, thereby reducing transaction costs. The Forex OTC market is formed by different participants – with varying needs and interests – that trade directly with each other. These participants can be divided in two groups: the interbank market and the retail market.
The Interbank Market
The interbank market designates Forex transactions that occur between central banks, commercial banks and financial institutions. Central Banks - National central banks (such as the US Fed and the ECB) play an important role in the Forex market. As principal monetary authority, their role consists in achieving price stability and economic growth. To do so, they regulate the entire money supply in the economy by setting interest rates and reserve requirements. They also manage the country's foreign exchange reserves that they can use in order to influence market conditions and exchange rates. Commercial Banks - Commercial banks (such as Deutsche Bank and Barclays) provide liquidity to the Forex market due to the trading volume they handle every day. Some of this trading represents foreign currency conversions on behalf of customers' needs while some is carried out by the banks' proprietary trading desk for speculative purpose. Financial Institutions - Financial institutions such as money managers, investment funds, pension funds and brokerage companies trade foreign currencies as part of their obligations to seek the best investment opportunities for their clients. For example, a manager of an international equity portfolio will have to engage in currency trading in order to buy and sell foreign stocks.
The Retail Market
The retail market designates transactions made by smaller speculators and investors. These transactions are executed through Forex brokers who act as a mediator between the retail market and the interbank market. The participants of the retail market are hedge funds, corporations and individuals. • Hedge Funds - Hedge funds are private investment funds that speculate in various assets classes using leverage. Macro Hedge Funds pursue trading opportunities in the Forex Market. They design and execute trades after conducting a macroeconomic analysis that reviews the challenges affecting a country and its currency. Due to their large amounts of liquidity and their aggressive strategies, they are a major contributor to the dynamic of Forex Market.
• Corporations - They represent the companies that are engaged in import/export activities with foreign counterparts. Their primary business requires them to purchase and sell foreign currencies in exchange for goods, exposing them to currency risks. Through the Forex market, they convert currencies and hedge themselves against future fluctuations. Individuals - Individual traders or investors trade Forex on their own capital in order to profit from speculation on future exchange rates. They mainly operate through Forex platforms that offer tight spreads, immediate execution and highly leveraged margin accounts.
WHAT IS FOREX?
History
Forex, or FX, is a shortened term that describes the Foreign Exchange Market, a marketplace where the world's various currencies are traded. It is an interbank market which was created in 1971 when international trade transitioned from fixed to floating exchange rates. As a result of its incredible volume and fluidity, the FX market has become the largest and most significant financial market in the world. Here are some unique characteristics that are the source of its success: Forex markets operate 24 hours a day Superior liquidity: the daily turnover of the FX market – over 4 Trillion Dollars – makes it easy to trade most currencies instantaneously You can profit from rising or falling markets You can benefit from leveraged trading with low margin requirements There are standard instruments available to help you control risk exposure Excellent Transparency: the Forex Market is transparent… you just need to keep yourself informed
The Exchange Rate
Forex plays the indispensable role of determining global exchange rates. The exchange rate is the number of units of one nation’s currency that must be exchanged in order to acquire one unit of another nation’s currency. A market exchange rate between two
currencies is determined by the interaction of the official and private participants in the foreign exchange rate market.
Market Participants
The main participants in the Forex market are: central banks, commercial banks, financial institutions, hedge funds, commercial companies and individual investors. The main reasons they participate in the Forex market are: • Profit from fluctuations in currency pairs (speculating) • Protection from fluctuating currency pairs which is derived from trading goods and services (Hedging) With technological development, the World Wide Web has become a great trading facilitator, as it can provide individual investors and traders with access to all the latest Forex news, technology and tools.
TRADING TERMS
FX & CFD Trading Terminology
Forex and CFD investing is just like any endeavor, where preparation is a valuable instrument. Understanding and familiarizing yourself with terminology is valuable asset for any trader. Quote An indicative market price, when used in Forex, refers to the prevailing exchange rate of the quoted currency at that moment. A quote will always be for a currency pair; for example EUR/USD, AUD/JPY or USD/JPY. The first currency in the pair is the quoted currency, while the second currency is referred to as the counterpart. A currency pair is usually quoted to a 1/10,000 degree of precision (i.e. until the 4th digit right of the decimal point); except for Japanese yen pairs, where quotes are usually made to 1/100 degree of precision (i.e. to the second digit right of the decimal point). A quote will always be provided in a form of two figures. The first figure is always the Bid or selling price, while the second is the Ask or buying price. For example:
• Bid/Ask The Bid or the selling price is the exchange rate at which a currency is offered for sale. The Ask or buying price is the exchange rate at which a currency can be bought. In the example above the EUR/USD pair (Euro vs. US dollar) is quoted at 1.5034/1.5037. In other words, the quote for the EUR/USD pair is 1.5034/1.5037, where 1.5034 is the Bid price and 1.5037 is the Ask price. Meaning if you wish to sell the quoted currency – in this case the Euro – then you would receive 1.5034 US Dollars per 1 Euro. On the other hand, if you were buying the quoted currency, then the quote tells you that to buy Euros for US dollars, you would need to pay 1.5037 dollars per 1 euro. • Lot A lot is the standard unit size of a transaction. It represents the minimum quantity which can be traded in any given instrument. For Forex Trading, Markets.com standard lot size is 1,000 units of the quoted currency. For CFD Trading, the standard lot size varies from 1 to 500 units of the quoted CFD. • Pip This is the smallest value in a currency quote and can be different for different currencies. For most currency pairs a pip is the 1/10,000 (0.0001) fraction of the quoted currency. However, in Japanese yen pairs, a pip refers to a 1/100 (0.01) fraction of the quoted currency. Profits on a trade can be expressed in pips, for example: Suppose you bought the EUR/USD at an exchange rate of 1.5016 and sold it at an exchange rate of 1.5037. 37-16=21. You made a 21 pip profit. • Pip Value The pip value can be either variable or fixed, depending on the currency pair it refers to and the base currency (i.e. measuring currency) of your account. The pip value is also a function of the amount traded. The simplest way to calculate the pip value is to divide 1 pip by the exchange rate and multiply it by the lot size. This gives you the pip value in terms of the quoted currency. If the base currency of your account is other than the quoted currency, then simply multiply this by the applicable exchange rate. For example: What is the pip value of a trade in GBP/JPY with a price of 128.92? The pip value of 1
standard lot (5,000) of GBP/JPY which is traded at 128.92 is: 0.01/128.92 = 0.00007756 GBP 0.00007756 x 5,000=0.387 GBP The base currency of your account is USD. If the exchange rate for GBP/USD is 2.0612, then the pip value for 1 standard lot in terms of the account's base currency is: 0.387x 2.0612 = $0.80. • Spread This is the difference between the bid price and the ask price. For example: If the quote for the EUR/USD pair is 1.5034/1.5037 (in other words the bid price is 1.5034 and the ask price is 1.5037), then the spread for the EUR/USD in this case is 3 pips. Low spreads ensure that traders can get in and out of their trades at very low slippage. • Margin The amount of funds required to open or maintain a position. It is usually expressed as a percentage of the open position. You may have a margin requirement of 0.5%, which would mean that in order to hold a position of 100,000 EUR/USD, an equity level of 500 euros or more must be maintained. • Leverage This is the use of borrowed capital to increase potential return. Trading on leveraged capital means that you can trade amounts significantly higher than the balance of your funds, which only serves as the margin. High leverage can significantly increase the potential return, but it can also significantly increase potential losses. The leverage is specified as a ratio, such as 200:1. This means that the trader can trade amounts 200 times higher than the sum in his or her margin account. If the trader has $1,000 in his account, it means that he can now open trades worth $200,000. • Interest In a sense, interest is the price of money. It is the amount paid on loans and received on deposits. • Long A trader going long expects the price to go up when buying a currency pair or a CFD. • Short A trader going short expects the price to go down when selling a currency pair or a CFD. • Value date The date on which counterparts to a financial transaction agree to settle their respective obligations, i.e., exchanging payments.
Rollover Process where the settlement of a deal is rolled forward to another value date and a charge is levied based on the difference in rates of interest of the two currencies. Every day, at 21:00GMT, open positions are rolled over to the next day and the positions gain or lose interest based on the interest differential between the bought and sold currencies. If you buy overnight a currency pair where the base currency has a higher interest rate than the terms currency, then you’ll receive interest and vice versa.
TRADING ORDERS
Forex and CFD Trading Orders
There are various types of orders which a trader can use to trade Forex and CFDs. Below we outline the different order types: Market Order, Stop-Loss / Limit Orders, Entry Orders, Trailing Stop-Loss Orders and One-Cancels-the-Other Orders.
Market Order A market order is an order to buy or sell at the current ask or bid price quoted on the market. The buy order may be to initiate a new position or liquidate a previous sell position. The sell order may be to initiate a new position or liquidate a previous buy position. Here is an example of a market order. The current market price – in this case, for buying US Dollars (Ask price) - is 1.0555 and for selling US Dollars (Bid price) is 1.0551.
Stop-Loss / Limit Orders Stop-Loss and Limit orders are protective orders that close an open position or future position under certain conditions, namely price. Stop-Loss Orders are used to limit trader's losses if the market moves against their position. The trader sets the maximum amount (in terms of pips) that he is willing to lose on a certain trade. When that specified price is reached, the trade is executed. Conversely, Limit Orders are used to lock in the trader's profit if the market moves favorably. The trader sets in advance the price at which he wants to close his position. In the example below, a trade was opened at the market price of 1.0561(buying order). According to the stop-loss order, the position will be closed if and when the price falls to 1.0553. According to the take-profit order, the position will be closed if and when the price hits 1.0565.
Entry Orders These types of orders open a new position only if the market reaches a price specified by the trader. Entry orders are divided into two varieties: Entry Limit Orders and Entry Stop Orders. Entry Limit Orders – Entry limit orders are orders that are placed by traders to enter the market at a more favorable price than the current price. When Buying a currency pair or a CFD, a Entry Limit order will be placed below the
current market price. When Selling, a limit entry order will be placed above the current market price. When placing Entry Limit Orders, the trader expects that the market price will bounce back after reaching the level at which the entry limit order was placed. For example:
The USD/CAD trades at 1.0547 / 1.0551. Here, you expect the pair to trend higher, but prefer going long at a better price – you expect the price to go down to 1.0525 before it continues going up. You then place an entry limit buy order of 1 lot (5,000 USD/CAD) at 1.0525. When the rate reaches 1.0525, the limit order will be executed and 1 lot of USD/CAD will be bought at 1.0525. Entry Stop Orders – Entry stop orders are orders that are being placed by traders to enter the market at a less favorable price than the current price. A BUY Entry Stop order will be placed above the current market price. When A SELL Entry Stop order will be placed below the current market price. When placing Entry Stop Orders, the trader
expects that once the market's momentum breaks through the specified price, the trend's movement is confirmed and will continue in that direction. For example:
The USD/CAD trades at 1.0553 / 1.0557. You estimate that the USD/CAD will continue trending higher. You also believe that should the pair break above 1.0600, it will rise by at least 50 pips. Thus, you place your BUY entry stop order of 20 lots (100,000) USD/CAD at 1.0600. Trailing Stop-Loss Orders A trailing stop-loss order is a stop-loss order that is set by the trader at a fixed number of pips from his entry rate. The stop loss order is automatically moved as the market price moves, but only in the direction of the investor's trade. For example: If you're Long on the USD/CAD pair at 1.0552 and you set the trailing stop at 30 pips, the stop will initially become active at 1.0522 (=1.0552-0.030). If the USD/CAD moves higher to 1.0565, the stop-loss order adjusts higher, pip by pip, with the market price and will then be active at 1.0535 (=1.0565-
0.030). If the USD/CAD ever goes down by 30 pips from 1.0565 to 1.0535, your stop will be triggered and your position closed. If the market goes up from 1.0565, your trailing stop will continue to move up in order to lock in additional profits.
One-Cancels-the-Other Orders (OCO) OCO orders are combined orders with both a stop price and a limit price. When one of the orders is executed, the other is automatically cancelled. OCO orders can be applied to open positions, or they can be used to open a new position. Say for example a trader believes that the USD/CAD, currently traded at 1.0548/1.0552, will continue trending higher; you believe that
should the pair break above 1.0560, it will rise to at least 50 pips. Nevertheless, you expect that prior to this major incline, the pair will retrace to 1.0544. You can place an entry limit at 1.0544, but in case the pair does not hit 1.0544 before climbing higher, you would miss the trade. You then place an OCO order to buy the USD/CAD if it reaches 1.0544 or 1.0560. Of the two, the first bid price to exist in the market will trigger the order:
Stop and limit orders entered on an existing position are also types of OCO orders. When either the stop or the limit is executed, the other is automatically canceled.
WHAT IS CFD? CFD Trading
CFD (Contracts for Difference) offers leveraged long/short trading on almost every financial instrument. It is a simple and inexpensive trading option to trade the change of price in multiple commodity and equity markets, with leverage and immediate execution.
Markets.com offers a wide range of CFDs giving you access to commodity markets - such as Oil, Agriculture and Precious Metals – and worldwide equity markets indices – such as FTSE 100, Dow Jones 30, S&P 500 and Hong Kong Hang Seng Index.
COMMODITIES Gold Oil Silver Sugar Corn Wheat Soybean
For a complete list of indices and commodities offered by Markets.com, please visit the CFD Trading Conditions page.
Why trade CFDs with Markets.com?
Product Diversity: Markets.com offers CFD trading on the world’s leading stock indices, as well as on Oil, Gold and other Commodities. Such a diverse array of products allows you to easily gain exposure to different markets and profit from multiple types of trading conditions. Low Margin Requirements: At Markets.com you are able to trade CFDs with margins between 1% - 2% (which means leverage of up to 100:1). This enables you to take gain bigger positions than you would be able to if you bought the actual underlying asset. High Liquidity: All Markets.com CFDs offer competitive spreads with bid/ask quotes that are filled on the spot – without delay. Lot Size: CFD trading enables you to trade in small and odd size lots. Normally, this is not possible when dealing with the underlying asset itself. No Commission: Markets.com offers commission-free CFD trading. Furthermore, Markets.com offers free intra-day trading – positions that are opened and closed on the same day incur no costs whatsoever. Ability to trade "Long" or "Short": With CFD Trading, you can profit no matter which way the market moves. You can use CFD to go “short” (when you believe markets will fall) as easily as to go "long" (when you expect prices to be on the rise).
To learn more about how market movement can potentially influence your CFD trading activities, please visit the CFD Trading Examples page.
CFD TRADING EXAMPLES
Compiled below are several CFD trading examples. Please note that these are just examples; be aware that trading Forex and Contracts for Difference (CFDs) – like online futures trading – is speculative and involves significant risk.
Assumptions
You funded your Markets.com Trading Account with a $2,000 initial deposit. You are considering investing in the US Equity Market and below are the trading conditions of some US Equity CFD Indices:
Instrument Name Contract Size 1 1
Leverag
S&P 500 DJ 30
USD interest rate is charged at 4.0%.
CFD Positions left open overnight incur a financing charge against the whole amount of the position at a rate of +/ -1.5%.
DAY 1 - Friday, July 3.
The US Non-Farm Payroll numbers come out worse than expected – unemployment rate is rising. This causes US stock markets to fall 2%. You believe that stock market losses are overdone and that upcoming corporate earnings numbers will be better than expected, and decide now is a good time to go long on the US stock market. You decide that the S&P 500 CFD is your best choice since it encompasses a wide group of market leading companies, and buy 100 lots at $874.25. Since you have bought 100 lots, an increase of 1 point in the S&P 500 index from 874.25 to 875.25 will earn a profit of $100, while a drop of 1 point from 874.25 to 873.25 will incur a loss of $100. + Opened Position: Buy 100 S&P Lots at 874.25 (Total purchase amount = $87,425)
+ Client Account Report
Balance (USD) $2,000 Equity (USD) $2,000 Lots Open # 100 Used Margin (USD) $874.25
U
Balance = Deposit ($2,000) + Sum of Realized Profit & Loss ($0) = $2,000 Equity = Balance ($2,000) + Sum of Unrealized Profit & Loss ($0) = $2,000 # Lots open = # lots S&P 500 CFD purchased = 100 lots Used Margin = # Lots open (100) x Value of one lot ($874.25) x Margin (1%) = $874.25 Usable Margin = Equity ($2,000) – Used Margin ($874.25) = $1,125.75
DAY 4 - Monday, July 6.
Your Assumptions are correct and corporate profits are better than expected as US companies were able to boost their earnings by cutting their expenses. On the next trading day, the S&P rallies over 3% to $901.50 where you close your position by selling your CFDs. + Closed Position: Sell 100 S&P Lots at 901.50 (Total sale amount = $90,150) + P&L Report:
Open Long Position Starting Value
$87,4 25 $87,4 25
= 100 S&P lots bought at 874.25 (Total purchase amount
1 lot of S%P 500 is $874.25 Financing Charge: 4.0% + 1.5% =
Overnight Financing
$26
Daily interest charge: [874.25 x (4.0% + 1.5%)]/360 = $0.1 Total interest charge:$0.13 x 100 lots x 2
Sales Proceeds Net Cost Profit on Trade
$90,1 50 $26 $2,69
= 100 S&P lots sold at 901.5 on Monda
= Interest paid to maintain the CFD long position
= Sale proceeds - Starting Value - Overnight financing = $90
9
DAY 6 - Wednesday, July 8.
Two days later, more poor economic data is published in the US and market sentiment turns negative. To capitalize on the downward correction in stocks, you decide to sell (go short) the Dow Jones (DJ 30) with the aim of buying it back cheaper in the short-term. On July 8, you sell 5 Lots of DJ 30 at a price of $8,180.00. Since you have sold 5 Lots, every drop of one point in the DJ 30 will earn you $5, and every increase of one point will cost you $5. + Opened Position: Sell 5 Lots of DJ 30 at $8,180.00 (Total sale amount = $40,900)
DAY 7 - Thursday, July 9.
Again, your strategy succeeds. Overnight the market drops lower and the next day, July 9, you buy back the 5 Lots of DJ 30 at $8,150, making a gross profit of $150 (5 lots x $30). + Closed Position: Buy 5 Lots of DJ 30 at $8,150 (Total purchase amount = $40,750) + P&L Report:
Open Sell Position Starting Value
$40,9 00 $40,9 00
= 5 DJ 30 lots sold at $8,180 (Total sale amount = $40,90
1 lot of DJ 30 is $8,180
Overnight Financing
Financing Charge: 4.0% - 1.5% = 2. $2.85
Daily interest received: [$8,180 x (4.0% - 1.5%)]/360 = $0.57,
Total interest received: $0.57 x 5 lots x 1 da
Purchase Amount Profit on Trade
$40,7 50 $152. 85
= 5 DJ lots bought at $8,150 on Wednesad = Starting Value - Purchase Amount + Overnight Financing = $152.85
PLEASE NOTE: the exact amount of interest to debit/ credit may vary each day depending on changes in any of the following factors: the
underlying instrument price, central bank rates, margin rates and the individual CFD portfolio.
WHAT IS FUNDAMENTAL ANALYSIS?
Fundamental analysis is a method that attempts to predict the intrinsic value of an investment. It is based on the theory that the market price of an asset tends to move towards its 'real value' or 'intrinsic value'. Fundamental analysis in Forex entails predicting the price valuation of a currency and its market trends by analyzing current economic conditions, government policy and societal factors within a business cycle framework. Forex Traders gauge a country's economic state by examining macroeconomic indicators covering: Interest Rates Announcement Gross Domestic Product (GDP) Consumer Price Index (Inflation) and Spending Indicators Employment Indicators Retail Trade and Consumer Confidence Balance of Trade Surplus or Deficit Government Fiscal and Monetary Policy Visit our economic indicators page and learn more about the different indicators and their impacts on the markets.
Fundamental Analysis Benefits
Determining the intrinsic value of an investment Identifying long-term investment opportunities
Fundamental Analysis Drawbacks
Too many macroeconomic indicators and indicator can confuse novice investors
MAIN MACROECONOMIC INDICATORS
Macroeconomic indicators are statistics that indicate the current status of the economy of a state depending on a particular area of the economy (industry, labor market, trade, etc.). They are published regularly at a certain time by governmental agencies and the private sector. Markets.com provides an Economic Calendar for the dates of critical fundamental announcements and events. When properly used, these indicators can be an invaluable resource for any Forex trader. In truth, these statistics help Forex traders monitor the economy's pulse; thus it is not surprising that these are religiously followed by almost everyone in the financial markets. After publication of these indicators we can observe volatility of the market. The degree of volatility is determined depending on the importance of an indicator. That is why it is important to understand which indicator is important and what it represents.
Interest Rates Announcement Interest rates play the most
important role in moving the prices of currencies in the foreign exchange market. As the institutions that set interest rates, central banks are therefore the most influential actors. Interest rates dictate flows of investment. Since currencies are the representations of a country’s economy, differences in interest rates affect the relative worth of currencies in relation to one another. When central banks change interest rates they cause the forex market to experience movement and volatility. In the realm of Forex trading, accurate speculation of central banks’ actions can enhance the trader's chances for a successful trade. Gross Domestic Product (GDP) The GDP is the broadest measure of a country's economy, and it represents the total market value of all goods and services produced in a country during a given year. Since the GDP figure itself is often considered a lagging indicator, most traders focus on the two reports that are issued in the months before the final GDP figures: the advance report and the preliminary report. Significant revisions between these reports can cause considerable volatility. Consumer Price Index The Consumer Price Index (CPI) is probably the most crucial indicator of inflation. It represents
changes in the level of retail prices for the basic consumer basket. Inflation is tied directly to the purchasing power of a currency within its borders and affects its standing on the international markets. If the economy develops in normal conditions, the increase in CPI can lead to an increase in basic interest rates. This, in turn, leads to an increase in the attractiveness of a currency. Employment Indicators Employment indicators reflect the overall health of an economy or business cycle. In order to understand how an economy is functioning, it is important to know how many jobs are being created or destructed, what percentage of the work force is actively working, and how many new people are claiming unemployment. For inflation measurement, it is also important to monitor the speed at which wages are growing. Retail Sales The retail sales indicator is released on a monthly basis and is important to the foreign exchange trader because it shows the overall strength of consumer spending and the success of retail stores. The report is particularly useful because it is a timely indicator of broad consumer spending patterns that is adjusted for seasonal variables. It can be used to predict the performance of more important lagging indicators, and to assess the immediate direction of an economy. Balance of Payments The Balance of Payments represents the ratio between the amount of payments received from abroad and the amount of payments going abroad. In other words, it shows the total foreign trade operations, trade balance, and balance between export and import, transfer payments. If coming payment exceeds payments to other countries and international organizations the balance of payments is positive. The surplus is a favorable factor for growth of the national currency. Government Fiscal and Monetary policy Stabilization of the economy (e.g., full employment, control of inflation, and an equitable balance of payments) is one of the goals that governments attempt to achieve through manipulation of fiscal and monetary policies. Fiscal policy relates to taxes and expenditures, monetary policy to financial markets and the supply of credit, money, and other financial assets. Conclusion: There are many economic indicators, and even more private reports that can be used to evaluate the fundamentals of forex. It's important to take the time to not only look at the numbers, but also understand what they mean and how they affect a nation's economy.
