fx 101 lecture by marshall chang
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FX 101Marshall Chang
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What is Forex?
The foreign exchange market (forex, FX, or currency market)
Assists international trade and investments
History: 1970s Bretton Woods system => floating exchange rates
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Characteristics
huge trading volume world leading high liquidity
no physical location (OTC)
continuous operation 24 hours a day except weekends
low margins of relative profit
leverage
Variety of factors perfect competition?
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Financial Instruments (game rules)
Spot traded immediately using the current market price
Forward contract on an exchange rate for any date in the future
Swap an agreement between two parties to exchange sequences of cash flows for a
set period of time
Futures contract specifying a standard volume of a particular currency to be
exchanged on a specific settlement date
Options the right but not the obligation to exchange
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Who are the players?
Banks, commercial companies, central banks, investment management firms,
hedge funds, and retail forex brokers and investors
The largest financial market in the world
The Super Banks Large
Commercial
Companies
Governm
ents and
Central
Bank
The Speculators
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Just how big the market is
Averaged $5.3 trillion per day
(NYSE is about $22.4 billion per day)
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200 times BIGGER!
Retail traders (that’s us)
trade the spot market and
that’s about $1.49 trillion
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Market Stucture
• stock market
tends to be very
monopolistic
• “Specialist”
• no single price
• quotes from
dealers vary
• competition
• efficiency
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What is traded in FX market?
Money
“buying a share in a particular country”
CHF
(Confoederatio Helvetica franc)
Symbol Country Currency Nickname
USDUnited St
atesDollar Buck
EUREuro zone
membersEuro Fiber
JPY Japan Yen Yen
GBPGreat
BritainPound Cable
CHFSwitzerla
ndFranc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZDNew
ZealandDollar Kiwi
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The Dollar is King in the Forex Market
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How does it work?
Buying and Selling (Long and Short)
E.g Buy EUR/USD equals Sell USD/EUR
EUR/USD “euro dollar”
USD/JPY “dollar yen”
GBP/USD “pound dollar”
USD/CHF “dollar swissy”
USD/CAD “dollar loonie”
AUD/USD “aussie dollar”
NZD/USD “kiwi dollar”
Major Currency Pairs
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FX vs. Stocks
Advantages Forex Stocks
24-Hour Trading YES No
Minimal or no Commission YES No
Instant Execution of
Market OrdersYES No
Short-selling without an
UptickYES No
No Middlemen YES No
No Market Manipulation YES No
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Forex cs. Futures
Advantages Forex Futures
24-Hour Trading YES No
Minimal or no Commission YES No
Up to 500:1 Leverage YES No
Price Certainty YES No
Guaranteed Limited Risk YES No
Mr. Forex looks UNBEATABLE!
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The truth is…
About 95% of traders join FX market today will leave FX market in a year..
Only 5% of traders make money
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Next Lesson!
How to trade
Golden rules (if you want to survive)
Open an account
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Next Step: Trade FX!
What do you need first?
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A Broker to open an account!
Advance of internet in the 90s
The big brother: Commodities Futures Trade Commission (CFTC)
protect market users and the public from fraud
Brokers
Dealing Desk=> Market Makers
No Dealing Desk=> ECN + STP
(Electronic Communication Network +
Straight Through Processing)
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Dealing desk/Market Makers: Make money from spread
Also are liquidity provider to you
They are on the other side of your trade, fraud? Conflict of interest?
Not really, they execute large amount of buy and sell orders
What they do: Match your order to other clients/Provide liquidity to you
directly
They spread that you hate is their bread and butter
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No dealing desk(NDD): ECN+STP or ECN
A structure to connect you and others
The NDD STP system: Dealer routes clients order directly to liquidity provider
Variable Spread, Interbank Market
The NDD ECN system: Participants trade with each other, ideal
“Depth of market”
Commision
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Who to chose?
Dealer desk or NDD?
Tighter spread but commission => Day traders
Wider spread but no commission => Longterm traders
Dealing Desk (Market
Maker)No Dealing Desk (STP) No Dealing Desk (STP+ECN)
Fixed Spreads Most have variable spreads Variable spreads or
commission fees
Take the opposite side of
your trade
Simply a bridge between
client and liquidity
provider
A bridge between client
and liquidity provider and
other participants
Artificial quotes Prices come from liquidity
providers
Prices come from liquidity
providers and other ECN
particpants
Orders are filled by broker
on a discretionary basis
Automatic execution, no
re-quotes
Automatic, no re-quotes
Displays the Depth of
Market (DOM) or liquidity
information
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Bucket Shop
Worst thing for you
Jesse Lauriston Livermore, Great Bear of Wall Street
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Open an Account
Account type
Registration
Activation
http://www.fastbrokers.com/
DEMO!!!
“Trading live is a different beast altogether. It’s like the difference between sparring against your kid brother (or sister) and fighting Manny Pacquiao.”
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FX Market Analysis
Green Pill or Red Pill?
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Technical
Fundamental
Sentimental
three-legged stool
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Technical Analysis
Def: framework in which forex traders study price movement.
Theory: look at historical price movements and determine the current trading
conditions and potential price movement.
Evidence: all current market information is reflected in price. If price reflects
all the information that is out there, then price action is all one would really
need to make a trade.
“History tends to repeat itself“?
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Show me the Chart!
with all the traders who rely on technical analysis out there, these price
patterns and indicator signals tend to become self-fulfilling.
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Don’t Panic!
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Fundamental Analysis
analyzing economic, social, and political forces that may affect the supply
and demand of an asset
all of the factors that affect supply and demand
Economy goodStrengthen
High Interst rateStrengthen
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In a nutshell…
potential moves of a currency through the strength or weakness of that
country’s economic outlook
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Sentiment Analysis
“The market is just like Facebook – it’s a complex network made up of
individuals who want to spam our news feeds.”
The market represents the opinion of all participants
You as retail trader, can’t move the market your way, unless you are George
Soros or Goldman Sachs.
SentimentWhether market is bullish or bearish based on your analysis
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Recap
TechnicalStudy of currency price movement on charts
Fundamental Study of how the economy is doing
Sentimental Determine whether bull or bear
Fundamental factors shape sentiment
Technical analysis visualize that sentiment and apply a framework to create
our trade plans.
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Technical: Read Chart
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Trend
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Fibonacci
Fibonacci Retracement Levels
0.236, 0.382, 0.500, 0.618, 0.764
Fibonacci Extension Levels
0, 0.382, 0.618, 1.000, 1.382, 1.618
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