Introduction tothe Forex Market

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Table of ContentsI. Basic Introduction

II. History of the Forex Market

III. Present Day MarketInfluencesTrading

Currency PairsPipsMarginLots, Mini-Lots, & LeverageCandlestick Charts & Four PricesTypes of OrdersRollover and Interest

IV: Technical AnalysisMoving Averages

Simple Moving AverageWeighted Moving AverageExponential Moving AverageGeneral Data on Moving Averages

Stochastics& OscillatorsRelative Strength Index (RSI)Bollinger BandsMoving Average Convergence Divergence (MACD)

V: Fundamental AnalysisUnemployment ReportsInterest Rates Consumer Price IndexTrade BalanceRetail SalesGold PricesOil PricesHousing Market Political StabilityGeneral Economic StrengthOverview

VI: Market MovementsTrend MovementsCounter-trend Movements

Breakout Movements

VII: Types of TradingTrend TradingCounter-Trend TradingBreakout TradingSwing TradingDay TradingScalping

VIII: Choosing a BrokerMarket MakersElectronic Communications NetworkMust Ask Questions

IX: Money Management

X: Final Overview

XI: Glossary & Appendix

Basic Introduction to ForexIf you had to make a guess as to what this chart was saying, would you have any idea at all, or does it read like ancient Greek? Or maybe you can read it…

Maybe you can see the highs and lows, opens and closes, and identify the basic patterns and trends, but do you know how to translate that into the right trading action?

Well wherever you are in your trading life, this report will help…

Getting back to the chart above, this is one of several of the more common charts you will see when you get involved trading Forex, and it can seem more intimidating than it really is. Even when you can read it, you wonder if you’re seeing everything you should be seeing, the trends, the patterns, and how to you make that jump to actually applying this information?

But before we get ahead of ourselves…

What is the Forex?

Forex is an abbreviated term for foreign exchange market. The Forex is the largest financial market in the entire world, with an average volume that exceeds over three trillion dollars, U.S. per day. The modern Forex market is what evolved from initial currency trading.

The idea is to use fluctuating currency rates to make money out of money. For example, let’s say you buy one mini lot (1 mini lot = 10,000 currency) of the EUR/USD at a rate of 1.1500. Two days later the markets shift and the EUR/USD is now 1.1525, and so you decide to sell. Using the formula to figure out profits/losses, 1.1525-1.1500 is .0025 * 10,000 (the size of the mini-lot) = $25. In this case, a $100 investment for one mini lot yielded a $25 profit.

Not a bad percentage by any count…especially for only two days. This is a simplified example, and as with any investing there is always the chance of loss, but this gives you an idea of what traders are shooting for when investing in Forex and why the potential for profit is so high.

Why the Forex Is Traded In “Pairs”…

Trading in the Forex market is conducted using “pairs.” The way it works is you are simultaneously buying one of the currencies while at the same time selling the other. If the EUR/USD is your pair, then you are selling Euros in order to buy dollars.

Let’s use the earlier pair as an example. If you are trading the Euro versus the US Dollar, your currency pair is EUR/USD. The Euro (EUR) is referred to as the base currency while the US Dollar (USD) is referred to as the cross currency. The base currency is the one you are selling, while the cross currency is the one you are buying.

The far majority of the Forex trading done in the world takes place between eight currencies: the United States Dollar (USD), Australian Dollar (AUD), Great Britain Pound (GBP), Canadian Dollar (CAD), Swiss Franc (CHF), Japanese Yen (JPY), and the Euro (EUR). Other nations’ currencies may be used, but these are the currencies that are most often used and profited from.

These countries have several things in common. First, they are all nations known for having stable governments. (All the European nations involved in using the Euro are treated the same way.)

Aside from stable governments, they also have centralized banks that are well respected internationally, and low inflation, which is a good sign of a strong and stable economy. Obviously, a strong economy means a stronger and more stable currency.

In fact, the earlier mentioned popular currencies are involved in over 4/5 of all Forex transactions and trades. This doesn’t mean that other currencies aren’t used, just that these currencies offer the value, stability, and are backed by economic strength of the larger world economies.

Forex trading can appear complicated, just as the stock market or commodities trading can be, but like any other form of trading a little education and good guidance goes a long way. The educated trader knows how to spot patterns and read charts with an ease that eventually becomes like a second nature. And traders will be hard pressed to find a better place than Forex to make well above average profits on their investment.

Top Traded Currencies:

1) USD (United States Dollar)2) EUR (Euro)3) GBP (Great Britain Pound)4) JPY (Japanese Yen)5) AUD (Australian Dollar)6) CAD (Canadian Dollar)7) CHF (Swiss Franc)

Over 80% of all Forex trades involve these currencies.

History of the Forex MarketThere’s an old adage that goes roughly: “To understand the future, first one must understand the past.” There are a dozen variations of this quote, and it seems relevant when trying to learn about the Forex market.

Most people have never heard of the Forex, and that’s understandable considering the market was closed to non-institutional traders until 2000 (Prior to this date the Forex market was an international banking market that allowed institutions from two different countries to trade currency on a large scale.)

The modern Forex market may be a relatively new thing, but the concept of currency trading is not. In some ways currency trading is a modern answer to an old problem: what happens when you have two people with two different money systems who want to do business? Initially the barter system was enough, but once actual currency started taking value, things changed…

In Swaziland red ochre and yellow ochre (pigments from clay that were colorful) were traded. Maybe the only hunter with yellow ochre could trade 3 to one on more common red, or maybe the red in a yellow heavy region was worth an arrowhead, a spear.

In many parts of the world sea shells were used as a form of currency. The more brilliant and rare the shell, the more you could get in exchange for it.

Romans had actual coin currency that would be used throughout the empire, but merchants on the edge would still need to be able to convert this to do business—say with Persia, or other empires that bordered Rome.

Rome also still traded with groups that did not value coin currency. For example, they traded swords to the Germanic barbarians for furs (which, if you know your history, turned out to be not so great a move for the Romans).

As currency and coins were printed and minted, the need for exchange became greater. Many empires before Rome used coins, but the Babylonians were also known to use paper receipts—the very first I.O.U.s, in a way. The first record (that we know of) where a single

culture actually accepted coins and money from another culture wasn’t an empire or nation, but the merchants of the Middle East who often traveled around and between the various kingdoms that each had their own money. With so many currencies and the need to go from one kingdom to another for profit, there had to be a way to compare the value of each culture’s money. This is how the first money changers came to be.

Exchanging currency was a necessity, however, not something that provided an opportunity for speculation or profit. Because so many nations were extremely nationalistic, there really wasn’t a lot of currency trade beyond basic exchange from the Middle Ages all the way to the onset of World War I.

WWI changed a lot of things in history, and the exchange of currency was one of many places that change happened. Realizing the old ways of closed borders just wouldn’t work any more, the growing international trade caused currency exchange activity to grow over 1,000%, or over ten times its previous level.

This came to a screeching halt when the booming 1920s were replaced with the Great Depression, which started in late 1929 with the Black Monday stock market crash in the United States. This set off a nearly world wide recession.

This was followed by World War II, which propelled the United States (and its currency) into a world power. Even before the war was completely over in 1944, the Bretton Woods Accord was agreed upon to help stabilize the global economy after World War II.

The Bretton Woods Accord was an important agreement which further solidified the world power of the United States Dollar. During the Great Depression, the US dollar was considered a weak, maybe even a “has-been” currency. But since the far majority of the United States itself wasn’t touched by the war, the dollar became the agreed upon standard that most other currencies would be compared to. “Little Brother” had arrived.

France, Great Britain, and the United States, made this agreement while looking towards rebuilding in a post war world. This marked the first time the British Pound was replaced as the currency by which all others were compared (though it should be noted that present day London is still considered the most important centers for Forex trading in the world, since it acts as a bridge between East Asia and the US).

What the Bretton Woods Accord did was first connect the US dollar to a gold standard at a price of $35 an ounce. This stabilized the dollar to a solid value and most world currencies were then pegged to the US dollar. This assured a baseline value for currencies after World War II, which would create a stable environment that would make it easier for nations to establish, or re-establish, their economies after the war.

This guaranteed that the US dollar would remain stable, and that in a roundabout way the currencies of less developed or badly damaged nations were also tied to gold. This stability left little room for speculation between currencies, but it did provide the needed safety and time to allow the world’s nations to rebuild their economies after the war.

The Bretton Woods Accord remained in place for 27 years until 1971. Having had decades to recover from the ravages of a second world war, many nations, especially in Europe, wanted to move away from their long dependency on the US dollar. The attempt to accomplish this started with the Smithsonian Agreement in December of 1971.

The Smithsonian agreement was very similar to the Bretton Woods agreement in a lot of ways, but the Smithsonian allowed for greater fluctuation between currencies so currency prices were not as firmly set. In fact, the Smithsonian (so named because it was signed at the Smithsonian Institution in Washington D.C.) can almost be considered more of a revision to the Bretton Woods Accord.

The major changes involved allowing the dollar to float at a range of 2.25% instead of just 1%, and to keep the fixed exchange rates without using an actual gold standard. Although this agreement failed, it did end the US dollar’s gold standard and cracked open the door for future investment based on currency speculation.

After that there was another attempt at regulating the market by Europe by founding the “European Joint Float” that gave the European currencies involved more space in how much their value could drift. That agreement also failed, but it opened the door for the inevitable: a free-floating currency system, which came into place in 1973 when all the other agreements fell apart.

Governments were now free to peg their currencies, semi-peg or allow them to freely float. Basically, they could do whatever their governments wanted and although there were other efforts to slow it

down, the market won out and currencies could now float in value: a perfect time for currency speculation to begin.

Quick Hit Time Line:

1944: Bretton Woods Accord stabilizes currency around US dollar

1971: Smithsonian Agreement is first of several steps in opening up the currency market to greater movement, setting the foundation for today’s Forex market.

1973: All the current agreements regulating the market fail, ushering in the free-floating system.

1978: Several European nations set up the European Monetary System as a last ditch effort to break dependence on the US dollar. Ironically, this is the same year the International Monetary Fund officially mandated the free floating system for world currencies.

1993: Strike three! The European Monetary System fails. The world wide free floating system is here to stay.

2000: The Commodity Futures Modernization Act of 2000 made Forex trading available to individual US traders for the first time.

Present day all the major currencies move independently. Currencies can be traded by anyone who wants to do so. This has caused a major increase in speculation by banks, hedge funds, brokerage houses, and even individual traders. The underlying factor that drives today's Forex markets is good old fashioned supply and demand.

Why are some currencies wanted more than others? Why does supply and demand shift in one day? There are a lot of specific reasons for this that we’ll get into in just a bit in the “How the Market Works” section, but the long and short of it is speculation.

Supply and demand in currencies shifts because there is an amazing opportunity for banks, investment firms, and traders to make a lot of profit by speculating. Any time there is a market with an estimated $3.5 TRILLION dollars a day in trading, there are profits to be made.

But before you can jump in and grab your slice of the pie, you need to understand what the Forex market is and how it works.

The Current Forex MarketOkay, history lesson’s over, no time like the present! The Forex market today is a complete free-floating system. In fact, buying and selling of currencies occurs so frequently that the Forex market reflects changes in currency rates every 4.8 seconds.

The advancement of technology has allowed the Forex to move at this speed and has made the Forex market one market instead of a group of different trading floors across the globe.

This brings up one of the great points that you should understand about the Forex market: There is no trading floor for Forex!

The far majority of Forex trading is done online, and there is no specific place to go and trade Forex. All research, all buy and sell orders, are done online so each trader can keep up with a market that sees changes every 4.8 seconds. This also allows the common trader to be involved since a good computer with a high speed Internet connection gives you access to the market.

And what a market the Forex is! The Forex market, in terms of trade value, is a staggering giant compared to other common investment markets. The US stock market usually does a little under $10 billion in trade volume a day. Not bad, but doesn’t hold a candle to the $300 billion in estimated daily trading of US Treasury Bonds.

But even the $300 billion dollar a day Treasury Bond market is nothing compared to the Forex…

At $3.5 trillion (yes, that’s TRILLION with a ‘T’), the Forex market does more than five times the daily volume of the stock market and treasury bond markets combined.

Advances in modern technology really has shaped the Forex market into what it is today. Not just accessibility, but also shifting the biggest factor in changing currency values to trader speculation. Banks and companies still perform the largest volume of currency speculation, but individual traders are coming in droves to get in on the action.

The currencies move because traders are trying to make money out of money, and good traders with a good system can do it very well indeed.

The Forex market remains unique, since it is a 24-hour market. The start of every Forex market cycle opens in Sydney, Australia, and moves around the world through Tokyo, London, and New York, opening with each time zone’s opening business day.

This means that in the United States the Forex market is open for trade from 5:00 PM Eastern time on Sunday until around 4:00 PM Eastern time on Friday. Holidays may stop some parts of the market, like the US market may be closed on Christmas, but other markets will continue to remain open.

Some brokers may close for a few minutes each morning to assure enough time for rollover from the night before, but the market itself doesn’t close. Because of computers, rollover can happen just like a snap of the fingers—and the trading continues.

NOTE: Rollover is when interest from the currency pair is either added or charged to your account on an overnight position. This will be explained in more detail a little further on.

Since the market is open 24/5, it is particularly reactive to a wide variety of influences. Several of these influences will be discussed in the next section.

What Factors Influence the Forex Market?

There are many factors that influence the Forex market. Since the Forex is trading global currencies, it makes sense that the political and economic situations in different countries can affect different currencies.

Nations also have economic reports. A bad unemployment report in the US could lead to the dollar weakening. On the other hand, an unexpected optimistic report from Japan could strengthen the Yen. Interest rate hikes, unemployment reports, and general economic strength all affect how a currency is perceived by traders.

And, of course, the Forex market is a free floating market, so speculation by banks and traders can have an influence on which currencies are rising and falling in demand. But don’t worry—the Forex market is way too large to be manipulated by any one entity.

How Trading Works in the Modern Forex Market

Currency PairsMost trading in the Forex is done online, and so you will need to be familiar with the charts, graphs, and other tools that are used to analyze the Forex. In addition, you will want to make sure you know and understand some of the most common and important terminology used in trading Forex.

All trading in the Forex is done with currency pairs. Since the US dollar (USD) is the most dominant currency in the world, over 80% of all trades will involve the USD as one of the two currencies being traded in the pair.

Let’s say you spot a sign or potential pattern from your technical analysis that you like and so decide to purchase Yen (JPY) by selling US dollars (USD).

This currency pair would be USD/JPY with the dollar as the base currency and the Yen as the cross currency. The base currency is making the purchase, the cross currency is the one you are receiving for your purchase. So if you see USD/JPY quoted at 114.95 you know that USD $1 is buying 114.95 Yen.

All Forex trading involves simultaneously buying one currency while selling the other.

PipsThe next very important piece of information to figure out is the value of a pip for any given currency pair. A pip is the smallest measure of value in a currency pair in the Forex, so it’s critical that you understand this concept. When someone is saying “30 pips,” they’re talking about thirty units of value in a trade.

For example, using the earlier example of USD/JPY at 114.95, if you’re trading this currency pair then one pip is .01 Yen, since that is the smallest unit of measurement used in this pair.

NOTE: The Yen is measure two decimal spaces, and almost all other currencies are measured in four, though it does vary.

Here’s another example: If the USD/CAD is trading at 1.0621 CAD than a pip for this transaction is .0001 CAD since that’s one unit of the furthest decimal place.

If you trade AUD/USD while it’s at 1.2433, then one pip for this trade is .0001 since that combination has four decimal places, as well.

See how that works?

Like many parts of Forex trading, it is easy once you get used to it.

So if the USD/JPY is quoted to only two decimal places, Yen .01 is the value of this pip. If this pair goes from 114.95 to 115.00, it increased 5 pips. Likewise, if the USD/CAD goes from 1.0621 to 1.0611, it decreased 10 pips.

Or, let’s say the USD/JPY went from 88.25 to 88.29…that would be a 4 pip increase. On the other hand, if it went from 88.25 to 87.90, that would be a 35 pip loss.

This also means that for each currency pair, the pip can be a different value, so you will want to keep track of this as you begin trading.

MarginMargin is a vitally important concept in any trading, but even more so with the Forex. Trading in Forex is done by moving large amounts of currency—in the tens and hundreds of thousands, or even millions of dollars per transaction. This is why most Forex trading was done by banks or large institutions, but Margin allows the common trader to get involved.

Margin is basically the amount of cash that a trader needs to deposit to open or maintain their position. Think of margin as the required collateral for an investment. The range can vary from anywhere between 1-4%, but 1% is the most common.

For example, if you had a 1% margin and invested $100, then that would allow you to control up to $10,000 of currency (which is about the value of 1 mini-lot) since 100 is 1% of 10,000. $1,000 can control a full lot by giving you leverage over $100,000 worth of currency. Margin goes hand in hand with leverage to allow individual investors the amount of money they need to profit on even small market movements.

Lots, Mini-Lots, and LeverageTrading in the Forex is done with “lots” and “mini-lots” of currency pairs. The standard size for a lot is $100,000 in currency, while a mini-lot usually represents $10,000 in currency. These are the most common amounts used, though occasionally you might hear of a “micro-lot” being traded. A micro-lot is 10% of a mini-lot and has a value of $1,000 of currency.

The use of lots allows more investing because a smaller amount of money (the margin) can allow a trader to control a much larger stake of actual currency.

Margin, leverage, lots and mini-lots are very much connected and allow the common trader to be involved in the Forex market. This allows traders to make a much larger return on their investments if they trade the market correctly since profit isn’t just being made on the initial investment, but on the amount of money that investment controls.

This is how a trader can make profit on a .0001 raise in a currency value – the sheer amount of currency involved is nearly 100 times the investment to leverage. The same can happen the other way, however, so while the Forex market offers unmatched opportunities in gaining profit, leverage also magnifies losses when the trader is on the wrong side of a market swing.

The SpreadThe spread is the difference between the ask (offer) and bid price in a market quote. If a trader buys a particular currency they will pay the asking (offer) price, but the current market will be based on what the marketplace is presently paying (bid) for this currency.

For instance, if you see a price quotation that is listed as 100.50-55, the spread is 5 pips, and 100.50 is the bid rate while 100.55 is the ask rate.

The Candlestick Chart and Four Prices

The Candlestick chart is one of the most commonly accepted and best ways of keeping track of a currency pair’s movements. Here is an example of an individual candlestick from a Candlestick Chart:

There are four prices that are tracked for each measured amount of time during a trading period. Depending on the chart the bar could represent a week, a day, four hours, one hour, 15 minutes, 5 minutes-there are many different choices depending on how the trader wants to analyze the market. The advantage of the candlestick chart is that it shows all four of them in a way that is easy to see and understand once you’re familiar with it.

The four prices in each candlestick are the high, low, open, and close. The high is the absolute highest value the currency achieved the entire period while the low is the lowest value. Open is still open, and close is close. Simple enough, huh?

The nice part about the candlestick is you can see all four prices in a glance. The top of the highest line was the high for the day, the bottom of the lowest line was the low for the day, and the bar itself on the line shows the open price and the closing price and the day’s range between the two. That’s a lot of good information you can get from just a glance.

The color of the bar will depend on whether the currency ended up higher than the open or lower than the open at the end of the measured session. It’s common to green for gain and red for loss, or white for gain and black for loss, but really the colors themselves don’t matter as long as you understand what each one represents.

Line ChartA line chart is a method that is used to plot the general direction of a market during a time period. These are the charts that almost everyone is familiar with from elementary math classes. Line charts for the Forex market take single prices for a selected time period and those prices are connected by a line.

The most popular version of this chart is to use the daily line chart, using the day’s closing price for each individual point. While this can give you a good view of the general “big picture,” it doesn’t fill in enough information on the price gaps within a given time frame, and these can vary greatly.

Bar ChartA Bar chart gives a little bit more detail, especially on the intra-day or intra-period fluctuations, than the line chart does. Any line in a bar chart will contain four points: the high, low, opening price, and closing price.

The bar for any given period will stretch from the highest price of the currency, while the lowest price will mark the bottom. There are two little notches, one on each side of the vertical line. The mark on the left hand side is the opening price. The one on the right side of the line is the closing price.

Bar charts are fairly easy to read, though not quite as easy as candlestick charts. The bar chart’s major advantages are its ability to display both the price range over the selected period of time while also being able to plot price gaps.

Types of OrdersThere are several different types of orders that can be put in while trading in the Forex market. Knowing each of these types of orders and knowing when and why to put each one in is important.

A “Market Order” may be one of the most common types of order. A market order doesn’t specify a specific price to buy at. It’s an order that is done at the best current price available.

A “Limit Order” is different. A limit order is an order to buy or sell a currency at a specified price, or better. By specifying the price the trader wants to buy or sell at, meaning the purchase or sale doesn’t actually take place unless the target value (as set by the Limit Order) is hit. There are several different types of limit orders:

• A “Good Till Canceled(GTC) Order” means the order has no stops on it and so will not be canceled until the trader does so manually, or enough pips are lost that the position closes by itself.

• A “Good For the Day (GFD) Order” is an order that stays in for one full day, though the closing time needs to be explicitly set since the Forex market is a world wide market and doesn’t close each day.

• An OCO, or “Order Cancels Other Order” is actually a mixture of two limit and/or stop orders. Basically two orders are placed: one above the current value of the currency pair, the other below it. When the market hits one of these points, that order is made while the other one is simultaneously cancelled.

• An “If Then Order” is an order is two single orders, but the second one only takes place if the first one is executed. Otherwise neither is made.

• An “If Then/OCO Order” is another two legged order, meaning that the second order (the OCO order in this case) is placed only after the first one is executed.

• A “Stop Order” is an order that goes into the market at the stop price to either buy or sell currency. This can be use to protect an existing position, or to jump into the market after confirming a trend.

• A “Stop-Loss Order” is more complex. This is an order to sell at a specified exchange rate that is away from the current market rate. Usually this is done to liquidate part, or even all, of an open position when the market conditions turn enough to cause the open position to lose value. In other words, this is put in place to minimize losses if things go really badly.

• A “Trailing Stop Order” is an order that trails the price of a currency. A Trailing Stop Order is set up so that if after several good gains the market starts going down, an automatic bid for the trade is put in. This helps maximize your chances for profit while minimizing risk.

This gives you an idea of the options you have as a trader as to both buying and selling, as well as protecting and covering your investment. The control you can have investing in Forex is something that can definitely work to your advantage when you understand how to use it.

Rollover and InterestInterest rates have a huge effect on trading currency pairs. For traders who are looking at a longer term trade, the practice of rollover comes into effect.

In the Forex market, all trades are supposed to be settled in two days. For that reason, traders who want to keep a currency position longer than two days will need to deal with rollover, and the interest that comes with it.

Basically the fee arises from a difference in interest rates between the two currencies being used in a Forex transaction. If the trader is buying a currency with the higher interest rate, then they can earn credit—which sometimes can be as much as 20% of the total profit of a transaction.

Here’s how the interest owed, or due, is figured. Let’s use the USD/JPY as an example. Suppose the interest rate in the United States is 5.5% while the interest rate in Japan is only .5% (point-five percent). Since the currency pair is USD/JPY, subtract 5.5 - .5 = 5%.

The basic reasoning behind this is that you are “borrowing” the Yen at .5% to purchase US Dollars which costs you 5.5%. So, 5% becomes the leftover difference that is owed to you. The interest is figured daily, and while holding this position, you will earn interest from the daily rollover.

When you go “interest positive” like this, it is referred to as a “carry trade”. Certain currency pairs have a tendency to catch a long term upswing when interest rates change because a large number of traders will look for the opportunity to take advantage of these pairs. The longer they hold these pairs, the more interest that can be accrued. This can be a very beneficial long term trade strategy.

If you’re considering a long term position with a currency pair, the interest rate may be a major consideration since up to a quarter of your profits from a long term carry trade may come from the positive interest being credited to your account.

Technical AnalysisTechnical Analysis is a method of evaluating the statistics created by the activities of any given market, in this case the Forex.

Technical analysis isn’t a magic crystal ball (if there ever was a trade or investment that was a “sure thing”, everyone would be rich), but many traders use technical analysis because it helps to stack the deck in their favor. They know that finding patterns and trends within the currency rate fluctuations can help them more accurately anticipate the most likely actions of those currency pairs, which should ultimately lead to more gains and fewer losses, and in the long run greater profit.

There are several different styles and tools involved with technical analysis. No one tool is necessarily “better” than another, so part of becoming a successful trader is determining which technical tools work best for you and your trading style. Here’s a brief run down of several of the tools used in technical analysis of the Forex market:

Moving Averages

Moving averages are one of the most basic and widely used series of indicators by technical analysts of the Forex market. Moving averages are used to confirm existing trends, identify new trends that are possibly emerging, and identifying trends that are coming to an end before a market correction.

There are three basic types of moving averages: Simple, Weighted, and Exponential. All three moving averages below use the past fourteen days for calculating the moving average.

Simple Moving AverageA simple moving average is one that gives equal weight to every price point over the specified period being studied. The analyst can decide whether to use the high prices, low prices, or close prices and then all the price points are added together and averaged out.

After using the averages a line is formed. Depending on the moving average you are using, you may have a line for the “high” averages and the “low” averages. Every new price point that gets added replaces the oldest point and the line adjusts accordingly. This should provide you a “tunnel” for the highs and lows. Whenever the price of a currency pair approaches or goes outside of these lines, this will provide you strong clues as to what the market will do next, and what actions you should consider.

NOTE: The close price is the most widely used number for calculating a moving average.

Weighted Moving AverageA weighted moving average does the same basic thing as a simple moving average, but as its name suggests a weighted moving average gives more emphasis to the most recent data.

Basically the closer to present time the data takes place, the greater the value a particular data point is given. This total is also added together, then divided by the sum of the weighted factors. The major benefit of a weighted moving average is that it allows the user to smooth out a curve while keeping the “average” more closely related to the most current information.

Exponential Moving AverageAn exponential moving average is a different way of weighing more current data. An exponential moving average multiplies a percentage of the most current price by the previous period’s average price.

Basically the oldest pieces of data are never removed, the way they are with other types of moving averages. Instead of replacing the oldest pieces of data with newer, the oldest pieces are given less and less value, creating an average that appears more like an exponential curve.

The latest market data is always changing, especially since Forex is such a liquid market full of movement. Because of this, the moving average is in a constant state of change.

Many traders will use a different “specified” time frame based on how they want to trade and what currency is involved. For example, traders may create moving averages for 5 days, 15, or even 30, depending on their desire and needed information.

Stochastics and Oscillators

Stochastics are one of the most common types of oscillators, which are among the most popular tools used in the technical analysis of the Forex market. You may even hear these referred to as stochastic oscillators.

Oscillators are considered a very useful tool for monitoring to see if a trend follows its expected course. Many analytical traders consider oscillators among the best indicators for a set period.

There are different types of oscillators, so don’t assume that one is like all the others. Most have very specific mathematical formulas, but knowing the formula isn’t as important as understanding the oscillator you’re using, and what the graph is telling you. It’s all about the interpretation.

These graphs are often used to determine which currency pairs are “over bought” or “over sold.” Knowing this information can help put a trader in position to profit when the correction comes around.

Williams %R

The Williams %R is presented on a chart that ranges in value from 0 to 100, and was developed by Larry Williams. The main purpose of a Williams %R is to determine when a currency is overbought or oversold. Knowing this can help give you an edge in predicting future currency movements.

A reading on the Williams %R of below -80 means a currency pair is oversold while above -20 means it is overbought. This can be a strong analytical tool that can point out signs to watch out for in the currency market.

Fibonacci

Fibonacci was a famous mathematician who noticed that there was a mathematical pattern to almost every spiral line in nature, which was proof to him that repeating patterns emerged everywhere. Traders took Fibonacci’s work and used it to create “Fibonacci Lines” that help predict “natural” retracement points in a currency’s value.

NOTE: Part of the theory of using Fibonacci lines is that after a currency moves significantly in price (direction doesn’t matter), that it will often times retrace a portion of the original move.

Fibonacci retracements are shown by taking two extreme points on a Forex chart, and then a series of three horizontal, “Fibonacci lines” between the two extremes. The three Fibonacci lines are drawn intersecting the trend line at three levels: 38.2%, 50%, and 61.8%.

The points where the market intersects these lines are places where strong buy and sell indicators can be predicted based on past patterns.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) measures the momentum of price movements and is plotted on a scale between 0 and 100.

Traders who like to use the RSI will look at readings over 70 as meaning the market is overbought (or susceptible to an upcoming downturn) and a reading under 30 as a market that is oversold and ready to start climbing.

The logic behind an RSI is that a market can not rise or fall forever and so by using an RSI study it can help determine times when the chances of a reversal are much higher than they would otherwise be.

In an RSI evaluation, the 50 level does work as the middle of the road in evaluating the market. Under 50 is considered bearish, while over 50 is considered bullish.

Bollinger Bands

Bollinger Bands are technical tools used to identify extreme highs or lows in relation to price. The point of Bollinger Bands are to establish parameters based on a moving average of the normal deviations seen within a traded pair.

A series of bands are made in order to create a middle “average” band. Bollinger Bands are often used with RSI in combination. When the price touches the upper band and the RSI is below 70, or when the price touches the lower band and the RSI is above 30, more often than not the current trend is likely to continue.

Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (MACD) is a more detailed method of technical analysis. The MACD method uses a very specific formula comparing a 26 day exponential moving average to a 12 day moving average. The 9 day mark is used as a “trigger point.”

In theory, when the MACD crosses below the “trigger point” it signals a bearish market. When it crosses above, it’s a bullish market signal.

The MACD, like most forms of technical analysis, tries to provide early signals about what the market may do. If the MACD analysis turns positive and makes higher lows while normal market prices are still tanking, this can be interpreted as a great time to buy. On the other hand, if the MACD makes lower highs while prices in the actual market are making new highs, this is a potentially strong signal to sell off before the market starts losing value.

Fundamental AnalysisFundamental analysis is a part of Forex trading that is best done in conjunction with any technical analysis. While technical analysis concentrates on specific movement of currency pairs, patterns, and movements, fundamental analysis concentrates on several of the fundamental factors that make up the general health of a nation’s economy.

Fundamental analysis can involve several factors, all of which involve the economy. Perhaps the most important reports in fundamental analysis of the Forex markets are economic reports involving the United States since over 80% of all Forex transactions involve the US dollar.

Now, this doesn’t mean you should ignore non-US reports. Quite the contrary…what affects the Yen can affect the Yen’s relation to the British Pound, which could affect the US dollar. It is a global economy, and you should pay attention to any reports that involve the nations’ whose currencies you are trading. There are several types of reports and factors that a trader using fundamental analysis will look at…

Unemployment ReportsUnemployment reports are always paid attention to by traders of all types. An unemployment percentage is often a good indication of how well (or poorly) a nation’s economy is doing, and affects the strength of their currency.

For example, if the unemployment rate is expected to be around 6%, and the report comes out with 5.5%, then that nation’s currency is going to strengthen. Likewise, if the expected rate is 6%, but it comes out worse at 6.3%, then the market will almost certainly move against that country’s currency.

Interest RatesInterest rate changes affect the general strength of a currency. A higher interest rate will usually cause a stronger currency because it will attract foreign traders. Interest rates are one of the BIGGEST key influences in driving a currency either up or down.

Interest rates often reflect other things going on in the economy, as well, which makes it one of the best individual indicators for fundamental analysis.

Consumer Price Index (CPI)The Consumer Price Index is a monthly report that gauges prices across the country in comparison to salary. In short, it gauges inflation, which is a major factor in the health of any economy. A sudden jump in inflation is never good news, so keep an eye on when these reports come out.

Trade BalanceThe trade balance refers to a nation’s trade surplus and/or deficit. This measures how much a nation exports versus how much it imports. Often times you may hear “trade deficit” referring to the United States, but this is not necessarily a bad thing—it depends on the situation and why the balance is tilted the way it is. This is also a monthly report in the United States.

Retail SalesA nation’s report of retail sales is an important indicator of the strength of the overall economy. In the United States this is a monthly report of how sales are going for individual businesses. Some parts of the year are going to be much busier than others. December, for example, will always be expected to have great retail sales because of the Christmas rush. This is a major indicator in fundamental analysis of the market.

Gold PricesNo currency is on the gold standard anymore, but the price of gold still affects various currencies. When economies get shaky, gold is often seen as a neutral investment that is assured to keep its value.

The price of gold has varying effects on the US dollar, British Pound, Canadian dollar, Australian dollar, or Euro. Often times the price of gold may affect some currencies one way while having the opposite effect on others. This keeps gold prices as an important indicator for the fundamental analyst.

Oil PricesThe more dependant a nation is on foreign oil, the bigger an effect raising or dropping oil prices can have on its currency. For a country

like the United States, which consumes a lot of oil, a hike in oil prices can damage the general economy and weaken the currency.

Housing MarketThe housing market is often a major part of the economy, and a housing boom can have a huge benefit to a nation’s economy, while a housing crisis can drag every market down. Always pay close attention when there is a sudden or violent shift in the housing market of a nation’s economy.

Political StabilityThe strongest currencies are from nations that seem to have little to no threat of coup or falling government. If tomorrow you woke up and heard about a military coup in Great Britain, it would be a very good time to dump the British Pound.

General Economic StrengthThe general economic strength of a country can often determine the strength of its currency. When an economy is strong, its currency is likely to be strong, too. The reverse is also true.

The general economic strength basically takes all the other earlier mentioned factors into consideration to come out with a general over all picture. For example, if housing is starting to slump but unemployment is down, the trade balance is excellent, retail sales are up, and oil prices are favorable, then the general economic strength is probably good even with the housing slump.

……

Fundamental analysis holds firm to the belief that the stronger the overall pillars of an economy, the stronger the currency should be (and vice-versa).

Technical analysis is often praised for being the best way to predict short term trends, while many traders who laude fundamental analysis are looking at the long term picture.

Market MovementsMarket movement is what makes Forex trading possible. Before going into specific types of trading and popular trading strategies, you will need to understand the basic ways that the Forex market moves. Without this knowledge and understanding, there’s no way to understand how different trading strategies work, and when each is appropriate.

In general, most market movements can be viewed into three different ways based on how to trade it: trending, counter-trending, and breakout. These three movements cover most of the movements a market will make, and by looking at it this way you can also associate the best trading strategy with the Forex market’s movement.

Trending Market

A trending market is a market where the prices have an obvious general direction where the currency pair is moving. The trend can be with rising prices (bull market) or falling prices (bear market). Here is an example of an upward trend:

Sometimes a trend will have all the time periods closing the same way, some may have a few odd days. For example, an upward trend can have five straight higher closes, or four high closes and one low in the middle. The main point with a trend is that the general direction of the closing market prices are going the same direction. Here’s an example of a downward trend:

Where the trend of a currency pair is going determines how you trade it and what strategies will be most profitable.

Counter-Trend Market

A counter-trend market is the opposite of a trending market. Rather than moving in a general direction (or or down), during a counter-trend the markets can appear to be “stuck.”

When you look at a long term market, if you can draw vertical diagonal lines, those are trending markets. If there is a longer period of time

where you can draw two horizontal lines and all the prices appear to go sideways, that’s when the currency pair is in a counter-trend market.

Eventually there will be a breakout from the counter-trend market back into a trend, but while it’s more or less moving sideways, that is a counter-trend market, which lends itself mainly to short term trading until a breakout takes place.

Breakout Market

A breakout market often comes out of a counter-trend market. When a market is counter-trending, traders are watching a market that is staying contained between a high and low pip amount. When a day’s trading ends up pushing the currency value out of that contained channel, that’s a breakout market.

But breakout markets aren’t limited just to counter-trend markets, but they can also occur out of trend markets. When a market is trending in

either direction, there still is a normal range that determines a trend. When the market breaks out in the opposite direction beyond the normal range of the trend, that can also be considered a breakout.

A breakout market can breakout either up out of the top line or down through the bottom. Often times breakout markets are actually talking about “breaking out into a trend,” but many times there can be just that initial breakout before returning to the previous counter-trend, or counter-trending again at a new level.

Types of TradingTrend TradingOne of the oldest rules of trading is “don’t trade against the current trend.” While I don’t necessary agree with that rule completely, it is a good suggestion (especially when you’re first getting started) and “trend trading” is how you do just that…

There are various tools for analyzing trends, most of which we’ve already discussed: Bollinger bands, Fibonacci lines, Moving averages, etc. The point of these tools is to help establish when the market is trending and if that trend is most likely to continue or not.

The easiest way to spot a trend is when each time period’s high keeps closing a little bit higher or when a time period’s low keeps closing a little bit lower with each close. One of the easiest ways to see these trends developing is through the use of “bands” such as Bollinger Bands…

A basic rule when using bands is to wait and see when the high price penetrates the upper band. This can be a signal that an upward trend is about to start. You want to buy when that price penetrates the upper band and go long. There’s a good chance the market will make an upward trend that a long position can profit from.

When the price penetrates the lowest band of your corridor, you want to sell and go short, watching the market for any confirmations on potential up or downward trends

The basic goal of trend trading strategies is always the same: join the move early (depending how you trade you can make money off an upward or downward movement) and hold your position, making as much money as possible, until the trend reverses and then get out ahead. In the Forex market a great way to do this is with a trailing stop loss.

You can set the stop loss so you keep riding the market trend, but once any loss occurs at a set number of pips, the stop loss kicks in the sell order and gets you out.

So if a currency pair gained 100 pips, but then lost 20, you would have an 80 pip profit if you were still in, but if you had a trailing stop loss at 10 pips, you would have a 90 pip profit because you got out in time. In

a market that can shift as quickly as Forex, having a stop loss of some sort is usually a very good idea.

Counter-Trend TradingCounter-Trend trading involves strategies specifically designed to trade when the market isn’t showing any kind of a trend. Since the market is more or less moving sideways and staying within a certain range, it can be harder to figure out a trading strategy.

Counter-trend trading usually involves short term strategies since the market overall is moving sideways, but even within that counter-trend range the market is going to move up and down during each period. Counter-trend trading looks to take advantage of that to make short term trades that profit, even while the market isn’t trending.

NOTE: As a general rule, you should avoid counter-trend trading unless you are an experienced trader or if you’re trading a tested and proven counter-trend system.

Breakout TradingBreakout trading involves trading during the beginning of a breakout in the market. These breakouts allow traders the chance to ride a strong sudden surge of volatility which, if executed properly, can mean large profits very quickly.

This strategy sounds simple, but the problem with playing a breakout is that breakouts are technically unstable, and no one knows how long they will last or when they will suddenly reverse.

One method of breakout trading involves using pivot lows and pivot highs, which are identified by using pivot high bars and pivot low bars. A pivot high bar is a bar that has a higher high than the bars both before and after it. A pivot low bar is bar that has a lower low than the bars both before and after it.

This method of breakout trading involves using these pivots to make an educated guess of when the market may be about to make a major break. If you’re on the right side of that trend, then a lot of money can be made from this strategy when the market breaks in your direction.

When you have a pivot high bar, especially when you have more than one signal to qualify it, then what you want to do if you are going to trade the breakout is to place an entry order one pip above the high close.

After that you use an if/then trade, and if the market swings the right way then profit is made. Most breakout trades concentrate on that initial break out action, and so the trade is closed out at the end of the day, session, or bar.

Other methods are also used for determining breakouts. Fibonacci retracement methods are also popular among certain traders. Many traders have different styles and tools they use depending on preference to locate breakouts and use a specific strategy for trading them.

The main point here is catching the breakout and getting in on the ground floor before the market takes off. This is often perceived as a high risk/high reward strategy.

Swing TradingSwing trading is a trading strategy employed by traders who often prefer to blend the use of technical analysis while using fundamental analysis to make sure the fundamental “cues” match up with what the current technical analysis is saying. Swing traders in the Forex market generally hold their position for more than a day.

This is a little bit of an over simplification, but swing trading tends to sit in the middle area somewhere between day trading strategy and trend trading strategy. A day trader will hold a currency for the short term, looking for a quick market movement to provide profit, and then get out. A long term fundamental trader will hold for a long period of time, expecting a result from larger fundamental signs about where a market will eventually trend.

A swing trader trades right between these two extremes. Swing traders will hold their currency for a specific amount of time and trade it based on its movement between the highs and lows over longer periods, almost always longer than a day and sometimes far longer.

Day TradingDay trading is what it sounds like: trading that all takes place in one day. In day trading the short term is concentrated on, meaning all entrances into, and exits from, the market need to take place on the same day.

Since day trading focuses on such a short term trade, traders who are involved with day trading are looking for a quick profit or series of profits which will eventually add up.

ScalpingScalping is an extreme example of day trading in the Forex markets. Traders who employ scalping trading methods (appropriately nicknamed “scalpers”) are traders who buy into a position intending to see quick movement and profit off a short transaction.

True scalping occurs when a trader opens and closes a position in literally minutes—or sometimes even less than a minute! This quick in and out is hoping that after a quick movement and show of profit, and immediate exit will in theory help minimize risk while collecting smaller profits bit by bit.

The downside to scalping, however, is that the small gains often get eaten up by the large spreads in the Forex market. For that reason, scalping is widely considered to be one of the most aggressive forms of trading around, and it should only be attempted by the most experience traders.

Choosing a BrokerFinding the right broker is a crucial decision that must be made before you can begin trading the Forex. Most brokers fall into one of two types of categories: Market Makers (MM) and Electronic Communications Network (ECN). Which type of broker, and which individual broker, is right for you depends on a variety of factors…

Market Makers (MMs)

Market Makers (MM) are brokerage firms that set both the asking price, and the bid price. In that way they “make” the market. An MM is the partner of your trade to each and every transaction. In other words, it doesn’t matter if you are buying or selling, the MM is your trading partner and taking the other side of that trade.

MMs charge a spread to their customers and these spreads vary from MM to MM (though they tend to remain tight and reasonable because of the competition between various MMs for your business). In the end, if two MM brokerage firms both have exactly what you want, but one has a lower spread, go with the one with a lower spread.

Positives of using an MM:• Most market makers have set spreads. This is very important if

you plan to trade news announcements or during other traditionally volatile times where spreads are likely to widen considerably.

• Market makers normally have user-friendly, downloadable trading platforms that include free charting software

• The prices can be more stable when compared to an ECN• MMs, since they are your trading partner, tend to guarantee that

your orders will be filled.

Negatives of using an MM:• There’s an obvious conflict of interest…if you are making

money, since they are your trading partner, they are losing money.

• Occasionally MMs can manipulate the currency price. This is a rarity, but since the broker knows where you have placed your stops, they can technically run their customers’ stops or even prevent the price from reaching the desired goal.

• Large amounts of slippage can occur when news announcements are released

• MMs don’t like scalpers or scalping practices. Since the MM is your trading partner, they will stop you from scalping, scalping for interest, or trading during major news announcements

So if scalping is going to be a major part of your trading strategy, at least part of your trading will have to go through an Electronic Communications Network.

Electronic Communication Networks(ECNs)

Electronic Communications Networks (ECNs) take the bid and ask prices from several different market participants (such as individual traders, banks, MMs) and then the bid and ask prices are displayed as bid/ask quotes.

When you place an order to buy, it’s matched with a sell order set at the same price. If there is no match, then your order simply will not be executed. Unlike the MMs, the broker does not take the other side of the trade. ECN brokers make their profit by charging a fixed transaction fee when you trade. They don’t make money from the spread. An ECN spread is variable, and under most circumstances, lower than then the equivalent MM counterpart.

Positives of using an ECN:• The bid/ask prices are normally better because there are

multiple sources used to derive them.• You can make trades within the spread itself and take the role

of an MM.• There is no conflict of interest, therefore no incentive to ever

manipulate the price.• Prices are more volatile, which is better for scalping.

Negatives of using an ECN:

• Trading platforms are less user friendly than MMs• ECNs are true markets, so there are times your order simply

won’t have any takers.

Many traders who use diverse styles of trading will have accounts with both MMs and ECNs, and knowing the differences between the two will help you determine which is right for you and your trading style.

Must Ask Questions

There are certain questions you need to be sure to ask prospective brokers before you open an account with them. There are more questions that are good to ask, and each person may have others they want to add to the list, but these are a great base for what you will need to ask to make sure the brokerage firm is one you actually want to consider.

1. How long have you been in business and how many clients do you have? Obviously the longer they have been around, the better. Having a large number of customers for a long time can also help to allay any fears.

2. What regulatory authority is your brokerage firm registered with, and in what country? The NFA (National Futures Association) audits books and is one of the best current regulators. The Forex market is currently far less regulated than stocks, bonds, and commodities—and so this is a very important question.

3. How fast is the order execution? It should a second or less than a second. With modern technology there’s no reason for it to take any longer.

4. Are you attached to any bank or lending institution? Banks are more heavily regulated, which gives extra peace of mind.

5. What country is your corporation held? The right answer is any country with strict banking laws and oversight. The wrong answer is anywhere else.

6. What type of a broker are you? Remember the difference between MMs and ECNs.

7. What is the minimum account trading size? This is important to remember to make sure your position isn’t closed out because you’re short on funds to cover.

8. What is the margin requirement? 1% is standard, but lower is better. The more control you have, the better.

9. Is my money held in a public or private company? You want it held in a public company, because they are insured. If a company goes bankrupt, you have a better chance of getting your money back.

There are many other questions that can be added to this list. Ask about the interest, slippage, and rollover. Any questions you have at all, ask them! Making sure you have a reputable and quality broker is a necessity before getting too deep into Forex trading.

Money ManagementThe management of money in your account is one of the most important factors in successfully trading the Forex market. Money Management is basically the system or model in place that determines how much money you should allocate for each trade.

There are two general theories to how to manage your money in the Forex market are the “Martingale Method” and the “Anti- Martingale.”

The Martingale Method increases the amount of equity during losing streaks. The reason behind this thought is that you will eventually have a winning trade and will make back all of your money.

There are two major assumptions with this strategy that causes problems:

• It assumes you have an unlimited amount of money and can ride out any amount of losses.

• It assumes your winners will be a predictable size, which is never a safe assumption

While the logic might be okay for this theory, it doesn’t play out well in real life. Unless you have an amazingly accurate system and a near endless bankroll, this will almost never be the best method for money management.

An anti-Martingale method increases equity during a winning streak. The more you’re gaining, the more you put in. Most of the more popular methods fall under anti-Martingale.

Fixed Amount Per Unit MethodOne method of money management is trading as many units as come with a fixed amount of money. In this method you decide how much you are willing to invest, and always used the same amount. So if you decide to trade one mini-lot per $5,000, and you have $20,000 in you’re account, then you can trade 4 mini-lots.

This method limits your risk, but limits your exposure while winning. This is best used with large accounts, and the basic algorithm for this method is:

Units per Fixed Amount = Equity/Fixed Amount

Percent of MarginA second method of money management is to use percent of margin. This is a very popular method. In this system, you make a percentage based trade. Many traders use between 1-3% of their margin, though it’s not uncommon to see considerably higher. One of the big advantages of this method is that smaller accounts, as they win the margin can be pushed up quickly to increase profits.

The algorithm for this is:

(% of Margin * Equity) / (Price * Leverage)

Percent of RiskThere is also the “percent of risk” method, which many beginner traders find both easy to understand and reassuring. In this method, you look at the total amount of your account and measure the size of your investments by a total percentage. So if you have an account of $10,000 and want to bet 3% per wager, then you would invest $300 per trade.

To take it a step further, you can also take your answer and divide it by your stop loss (let’s say 30 pips) to get the total number of mini-lots you can trade. $300/30 pip stop loss = 10 mini-lots

Proper money management can gain you profits in the same way that bad money management can lose it. Look at your account, your comfort with risk level, and find the style that you are most comfortable with.

Final OverviewThe Forex market can seem intimidating with all the graphs, technical indicators, fundamental analysis, and constant shifting of values and data. But take a look again at the graph from the very beginning:

What probably looked like Egyptian hieroglyphics the first time you ever looked at a chart like this now tells you a lot. You know it’s a candlestick chart and that the top of each individual candlestick is the high for the day, and the lowest section was the low for the day. One color is for days where the currency gained value, the other is for the days it didn’t.

You can start to search for patterns and are aware of the wide range of technical analyses that are available to use. Based on that, you can see by the bar where the currency opened and closed and more importantly, how it’s trending.

Just like that, you’ve gone from staring at an intimidating graph to being able to glean critical information at a glance.

Every successful trader knows this information, but they also know that this beginning knowledge is only half the battle. The majority of traders lose money in the Forex because they either don’t understand this information, or they do but don’t get a trading system that works to go with it.

The old saying might go that knowledge is power, but a good system is profit. The Forex remains attractive because those traders who do their homework and find a good system can make a far better profit than any other market because the potential is through the roof. The most important thing here is having the proper trader education. This isn’t a market where you can just “wing it.” (Well you can, but only if you’re looking to lose your nest egg, not build on it.)

Getting trader education from a good, proven, system from a professional trader is absolutely essential for success. Whatever the initial investment, it’s measly compared to the profit potential that the Forex market offers to traders who have the education and the system to unlock that potential.

With that said, I invite you to check out my own trading resources over at: http://www.ForexImpact.com

Thanks for reading, and as always…

Good trading,Jason Fielder

Glossary & AppendixAsk (Offer) Price: The ask, or offer, price is the price at which the market is willing to sell a specific currency. This is the price at which a trader can buy the base currency. It is the price always shown on the right hand side. For example, if you had 1.5552-1.5558, the 1.5558 would be the ask price.

Balance of Trade: An indicator of a country’s economic health used in fundamental analysis. Figured out by taking the value of a country's exports minus its imports. A negative number means a trade deficit.

Base Currency: The first listed of the two currencies involved in a traded Currency Pair. For example, if you are using the US Dollar and Japanese Yen, it would be USD/JPY, with USD as the base currency.

Bear Market: A market that is distinguished by its overall decline in prices.

Breakout Market: A market that bucks its current range (whether trending or counter trending) and suddenly breaks out past the recent range of price.

Broker: An individual or firm that acts as an intermediary between buyers and sellers for a fee or commission on each transaction.

Bull Market: A market that is distinguished by its overall rise in prices.

Buy Limit Order: An order to execute a trade at a specific limit price or lower. If this price isn’t met, the order is not executed.

Carry Trade: Any trade where you go interest positive, meaning that you are earning interest daily on your trade because of the currency pair.

Closed Position: Executed trades that are closed, therefore eliminating the original market position. The process of closing a position is the selling or buying a certain amount of currency to offset an equal amount of open positions. This will "square" the open position.

Counter-Trend Market: When the market is not trending up or down, but remaining within a specific range. Sometimes referred to as a horizontal market.

Cross Currency: The second of two currencies involved in a traded currency pair. Using the previous example, in a USD/GBP pair, GBP is the cross currency.

Currency Pair: Two currencies make up a foreign exchange rate. For instance, the US Dollar and Japanese Yen make the USD/JPY currency pair.

Day Order: An order that will expire automatically at the end of the trading day.

Day Trade: A trade opened and closed on the same trading day.

Execution: The process of completing an order or transaction.

Fixed Pip Value: When trading the USD, if the USD is on the right side of the pair, then the pip value is “fixed” at $1.00 per 10,000 currency units.

Floating Pip Value: When trading the USD, if the USD is on the left side of the currency air, or if the currency pair is made of two foreign currencies, the pip value “floats” or changes based on the fluctuation of the daily exchange rate.

Forex: Short for “Foreign Exchange” referring to the practice of trading one nation’s currency for another. Occasionally seen as FOREX or FX for short.

Fundamental Analysis: Analysis of economic and political information with the objective of determining future movements in a financial market.

Good Till Cancelled Order (GTC): A trade order placed for a specific amount of time to buy or sell a foreign currency.

Indicators: Different signs resulting from technical analysis that are used to try and predict future market movements.

Leverage: Refers to the ability of an trader to invest in controlling a lot of currency through the use of lots and margin.

Limit Order: An order to buy or sell at a designated price. Limit orders set to buy are placed below the current market price, while limit orders to sell are placed above the current market price.

Lot: A standard unit of measurement for Forex. One lot in a standard account is normally equal to $100,000 currency.

Margin: The amount of cash deposit required in order to open a position or to maintain an open position. Margin is basically collateral for a position.

Market Close: The time of day that a market closes. Since the Forex is a 24-hour market, there is no official market close. However, 5:00 PM Eastern is understood as “market close” because the date for a spot Forex transaction changes to the next date at that time, though all trading goes on unabated.

Market Order: A market order doesn’t actually specify a price, but is executed at the best current price available in the market.

Micro lots: 10% of a mini-lot, representing $1,000 of currency.

Mini lots: Whereas, one lot in a Mini account is approximately equal to $10,000 of currency

One Cancels the Other Order (OCO): A type of trade using two orders whereby when order is executed the other order is automatically cancelled.

Pip: PIP is an acronym for Price Interest Point. It is the smallest unit of a currency, represented by the farthest digit to the right of a currency pair. Suppose the EUR/USD shifts from 1.1400 to 1.1401, then it moved 1 pip which is equal to 0.0001. With currency pairs related to the Japanese Yen, a pip is equal to 0.01 because there are only 2 digits after the decimal. This means the actual value of a pip will differ from currency pair to currency pair.

Pivot High Bar: A bar that has a higher high than both the high before it and the high after it. This is often used as an indicator of a potential upward break out trend.

Pivot Low Bar: A bar that has a lower low than both the low bar before it and the low bar after it. This can also be used as an indicator of a potential downward break out trend.

Range: The area of price between the highest and lowest price recorded during a given trading session.

Rollover: The point at which interest is figured on an account according to the difference in interest rates between two currency pairs.

Sell Limit Order: An order to execute a trade at a specified price limit or higher.

Short Position: Selling a currency in anticipation of it falling in value. At that point you will be able to "cover" your short by buying back the currency at a lower price. In foreign exchange, when the base currency in the pair is sold, the position is said to be short in that currency. It is understood that when the base currency in the pair is 'short', the second currency will be 'long'.

Spread: In the Forex market, the spread is defined as the price gap between the bid rate and the offered rate. For instance, when the price quotation is shown as 150.50-55, the spread is 5 points, and 150.50 is the bid rate while 150.55 is the offered rate.

Stop loss: An order put in to sell at a certain amount, so if the market dips below there the investor can bail and minimize losses.