FX level 2

Agenda• Who and what drives the FX market?• How to trade using orders intelligently• When to trade• Why trade• Good trading habits

Who and what drives the FX market?

• Central banks• Hedge funds• News• Politics

Using orders intelligently• Order types

– Market– Limit– Stop if Bid– Stop if Offered– Trailing Stop if Bid– Trailing Stop if Offered

• Orders can be placed in the– Trade modules– Order module– Account Summary

Entry order

s

Entry

Take profit

Stop-loss

Take profit order

Entry/Buy

Stop-loss order

A 3-way order

Trailing stops• Distance to Market• Step size• Slippage

• EUR is bought at 1.2145• A trailing stop order placed at 1.2115.• Distance to Market is defined as 45 pips• Step is set at 5 pips. • A traditional, non-trailing, stop order would

have been executed when the market price of EUR reaches the original order level of 1.2115, at a 30 pip loss (entry at 1.2145, exit at 1.2115).

When to trade FX• There are two means of deciding when to trade FX

– Fundamental analysis– Technical analysis

Fundamental: News

• Non-Farm payrolls– Here you can see the

movement after the employment figures were announced in the US

Fundamental:Politics

Here you can see the USD decreases in value when Bush declares war on Iraq in March 2003

Fundamental:Central Banks

Here you can see the USD lose value as the Fed decide to cut interest rates by 0.5% to help the economy

Technical Analysis (TA) - A simple definition:• The systematic study of charts of a security’s past price action in an effort to determine future price action.• Also – used to find ”levels of significance”

Technical analysis:

Simple moving average

Buying at the support level

Sell signal

Buy

si

gnal

Technical:There are many technical analysis tools available through Saxo’s award winning platform

Why trade FX?• Speculation

– Taking advantage of volatility for profit– Interest rate arbitrage - Swap/Carry trading

• Hedging– Covering exposure of foreign stock trading– Reducing corporate, foreign trade liabilities– Portfolio diversification - A fundamental element of risk

management

Speculation• Speculation for profit is now a multi trillion dollar business

Profit

Buy

Sell

Sell

Buy

Profit

SpeculationInterest rate arbitrage: • This is done by ‘buying’ a high yielding currency and

‘selling’ a low yielding one, thus profiting from the interest rate differential

– Example: TRY (Turkish Lira) interest rates are currently 17% vs. JPY (Japanese Yen) at 0.5%

– But you should be aware of the volatility, which is usually higher on high-yielding currencies such as the TRY

Example of hedging• Companies that trade internationally

– Without hedging:• Business A buys 1 million USD worth of goods, which are to be paid for in 3 months • The Dollar is at that time worth 5.20 DKK, so business A earmarks 5.2 million DKK for

buying the goods 3 months later• 3 months later the Dollar is worth 5.40 DKK • So business A now have an extra expenses of 200,000 DKK

– With hedging:• Business B buys 1 million USD worth of goods, which are to be paid for in 3 months – but

chooses to hedge the FX risk • The Dollar is at that time worth 5.20 DKK, so business A earmarks 5.2 million DKK for

buying the goods 3 months later• The USD-interest is at 5 %, while the DKK-interest is at 4.5%• The difference is 0.5% in your favour.• Your gain on interests = 6500

Hedging:

•People trading the international stock markets, will always have a foreign exchange risk

Good trading habits• Discipline!• Set long-term goals• Don’t overextend your finances and manage your margins• Diversify, portfolio management• Trade with your head, not with your heart• Trade your plan: If you fail to plan, you plan to fail. Stick to your

strategy. Plan the trade, trade the plan.• Manage your positions and orders diligently

Thank you