Currency Pairs Selling Their Personalities

Forex (Foreign Exchange) simply refers to the buying of one currency and selling of another at the same time. The forex market is the largest financial market in the world, even bigger than stock markets. Its daily turnover exceeds $3 trillion. The forex market is a global network of buyers and sellers of currencies, and is done over-the-counter (OTC), which means that there is no central exchange and clearinghouse where orders are matched. Forex trading takes place 24 hours a day, five and a half days a week, unlike stock markets which have specified opening and closing times for trading.

Almost all currencies can be traded through a forex broker. Currencies are represented by three letters, where the first two letters stand for the name of the country and the third stands for the name of the currency. Some of the most traded currencies are: the US dollar (USD), the Euro (EUR), the Japanese yen (JPY), the British pound (GBP), the Swiss franc (CHF), the Canadian Dollar (CAD) and the Australian Dollar (AUD). A currency always goes up or down in value in relation to another currency. For example, when you simply say the US dollar is going down, it doesn't make much sense because the US dollar could be going up against the Australian dollar but down against the Euro. Hence currencies are always traded in pairs, and are quoted in a manner like this: EUR/USD. The first currency in the pair is called the base currency and the second is called the counter or quote currency. The four most traded currency pairs are known as majors and they are:
EUR/USD USD/CHF GBP/USD USD/JPY
As you can see from these pairs, the Euro, Swiss franc, British pound and Japanese yen are traded against the US dollar. As each pair has its own personality, it is essential for you to learn a bit more about each one, and understand the factors influencing their movements,

EUR/USD
The most recent 2007 Bank for International Settlements (BIS) survey shows that the most traded major currency pair is the EUR/USD with 27% of total daily volume. The EUR/USD is a great pair to trade for both new and seasoned currency traders. It is a very active pair with moderate volatility, which attracts traders to it like bees to honey. Its movements are quite smooth and there is enough action for day and short-term traders to capture meaningful profits.
EUR/USD tends to be negatively correlated to the USD/CHF and positively to the GBP/USD. What this means is that if EUR/USD goes up, then most likely USD/CHF will go down. This close relationship can be seen even on an intraday basis. In fact, this negative correlation is the closest relationship in the forex markets. You can take advantage of this relationship by opening both the EUR/USD and USD/CHF charts in your trading software, and compare both together. This way, you can have a better idea of where either pair could be moving next.
When you trade this pair, you need to be concerned with the bigger economic picture of both the Eurozone and the United States, and keep up with what monetary policymakers are saying about their country's economy and their domestic currency. The Federal Reserve (Fed) is the central bank of the United States and its current chairman is Ben Bernanke. The European Central Bank (ECB) is in charge of monetary policy for the the Euro, and its president is Jean-Claude Trichet.

USD/CHF
The 2007 BIS survey shows that trading of the USD/CHF constitutes only 5% of total daily volume, which makes it the least traded among the majors. Its bid/ask spread is usually wider than that of EUR/USD as a result, but don't let that stop you from trading this pair. It is still a popularly traded pair and its movements are negatively correlated to that of EUR/USD. Sometimes USD/CHF leads the movement of EUR/USD, other times it's the other way around. In general, the Swiss franc usually benefits from financial market or geopolitical turmoil as it is seen as a safe-haven currency.
USD/CHF tends to be influenced more by US fundamentals rather than economic and monetary happenings in Switzerland. The central bank of Switzerland is the Swiss National Bank (SNB) and its chairman is Jean-Pierre Roth. Switzerland relies heavily on export, like Japan and the Eurozone.

GBP/USD
GBP/USD, nicknamed Cable, is the third most liquid currency pair, according to the 2007 BIS survey, making up 12% of daily market turnover in the forex market. This pair is notorious for its wild and ultra-volatile movements, and is certainly not for the new trader. Price breakouts tend to be false and it is easy for new traders to get whipsawed by market noise. The British pound tends to move in the same direction as EUR/USD although that is not always the case. As the pound has a relatively high interest attached to it, it is seen as a high-yield currency.
The Bank of England (BOE) is the central bank of the United Kingdom, and Mervyn King is the governor. A series of interest rate hikes by the BOE in late 2006 and 2007 led the British pound to rise to the highest rate against the Euro in 2007.

USD/JPY
USD/JPY is the second most traded currency pair, with 13% of total daily volume according to the 2007 BIS survey. This currency pair is most actively traded during the Asian session, and has a tight bid/ask spread most of the time. Its movements are smooth and the pair reacts quickly to the risk environment in the financial markets. In times of risk aversion, the yen tends to strengthen against other currencies as global investors close out their carry trades.
The Bank of Japan (BOJ) is the central bank. Since Japan is highly dependent on exports, the BOJ has a strong interest in keeping the yen low compared to other currencies. On several occasions in the past, the BOJ has physically intervened in the forex market by selling the yen against US dollars and Euros, thus artificially weakening its currency for the sake of its export industry.

Summary
Each currency pair has its own characteristics and is influenced by different factors. It is important for a trader or investor to understand these characteristics and to trade or invest accordingly. You may find that one of them suits your own trading or investing style better, and in that case, just focus on what you think is best for you. There is always a currency pair out there among the hundreds which will catch your fancy and meet your goals.


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6 Facts That Give Forex Traders An Edge

Over the past few years, FX markets have exploded in popularity amongst retail traders. Hard to say if that was due to heavy promotional efforts from the industry itself, or whether the continual pumping of FX trading is a result of increased interest and demand. In any event, there are a lot of misconceptions and mistruths floating out there that need to be addressed. Most of the myths involve spot currency aka "FX" markets but some include currency futures, too.

Currency Markets Are Totally Random
Not at all... nothing could be further from the truth. An individual's stock price movement can be pushed up, down or sideways by an endless procession of factors. Part may be economic, part fundamentals to specific company, industry or sector. Another part of stock market action is pure emotion. Someone makes or sells a widget with perceived value higher than what turns out to be economic reality. Doesn't matter... stock prices can remain pumped on pure emotion longer than rational people can comprehend.
Currency markets aren't like that. They are purely supply and demand, a commodity if you will. Each currency is weighted on economic conditions for that specific denomination versus any or all others in the marketplace. Price value of currencies is nothing more than a reflection of where that denomination's economy ranks as weak or strong relative to others. There is no sentimental or emotional impact on a currency. No one buys the British Pound to unreasonable heights because they like the color scheme of those bills. No one sells the USD/CHF because that country has great skiing in the winter; therefore it's a "play" to profit from guesswork of increased tourism. If the Swiss economy is weak or strong, it'll be amply reflected in the CHF pairs accordingly. Same holds true for all currency pairs accordingly.

Technically Pure
FX markets are technically purer than stock markets. By that we mean price action reacts more strongly to resistance and support levels on a chart much better than equity markets do. FX traders and dealers only have supply and demand to make their buy/sell decisions from. It's all based on price levels, which is reflected in the charts. FX markets react better than stocks when it comes to Fibonacci tools, pivot points, trendlines, prior resistance - support levels, etc.
Stock market traders often struggle when a switch is made to currencies because there are no sentiment (another name for emotional) indicators to read. No advance/decline, TICK or TRIN, Level II/III and no volume studies in the spot market FX. Currency markets do react sharply to economic news and reports... anything affecting interest rate changes is a direct correlation to FX. Other than that, currency markets are immune to the emotional vagaries that often slap stock prices around. Stocks reflect a company or sector of companies while currencies are commodities. Pure supply and demand pressures equate to purer price movement in reflection of technical analysis in FX markets.

FX Broker/Dealers Purposely Trade Against Their Clients
This myth is repeated all the time. FX brokers with dealers’ desks purposely target traders with profitable accounts to "take them down". Any FX trader turning a profit is doing so at the expense of the FX broker, and therefore the broker does whatever possible to thwart that trader(s) success.
In reality, FX broker/dealer trading desks exist to trade against their "book", aka the collective sum of all clients as an aggregate. FX broker/dealers serve a similar role as anyone hosting a poker game, or we could say a casino "house". The reality is, a majority of traders in any financial market will naturally lose, no matter what. A dealer desk merely exists to take the other side of majority aggregate trades to hedge off risk. That makes the collection of bid/ask pip spread one profitable stream of income. Successful dealer desk trading against the sum total of their collective book may be another.
That being the case, no reputable broker/dealer is concerned about individual success stories amongst their aggregate clientele. The fact remains that most traders lose money, FX or otherwise. A dealer desk is focused on outperforming the natural, predictable results of a sum total with no regard to individuals. No major, reputable FX broker is going to look through their book, see that Johnny Smith is making +100% annual turning 10-lots and set their sights on him. What exactly can the dealer desk do? Move the entire GBP/USD pair 30 pips away from fair value just to take out his well-placed stop? Wouldn't that concentrated effort likewise move the market likewise in favor of nine otherwise losing traders into a profit zone? If the belief that nine out of ten traders (any market) are net losers, that scenario would be counter-productive for the dealer. They'd be making nine traders right (on average) just to make one trader wrong.
Major broker/dealers cannot individually move entire currency pair markets away from fair value far enough to consistently or repeatedly target individual traders and their stops. The concept is ludicrous and illogical when you stop and think about it. Just another one of those pervasive myths generated by people with an agenda against spot FX markets, some of which are currency futures brokers competing for clientele and commissions generated.
A retail FX trader is not pitted against the broker/dealer for success. Simply a matter of being on the correct side of enough trades to be net profitable overall... something a majority in collective group fashion will fail to do. Individual success will stand on its own, unfettered by a legitimate broker/dealer.

Currency Futures Are Superior To Spot Currency Markets
Like most other aspects of trading, there is no black and white objectiveness here. The choice to trade spot FX versus currency futures markets depends on personal preferences more than anything else. Each has strengths and limitations, features and benefits.
Currency futures markets are transparent. Traders can see volume and bid/ask, there is one standard pricing value across the board. The futures contracts are also traded through the same broker that other contracts listed on CME clear thru. No need for a second broker, different set of charts, more trading platforms or software, etc. Traders who focus on other futures markets to begin with OR traders who opt to work the currency futures markets alone, while content with their current brokerage = software setup, need do nothing more than flip symbols on their screen to be in business.
That said, currency futures are thinly traded in off-hours while spot FX dealers offer guaranteed stops to limit or eliminate slippage on stops during most situations between Sunday evening and the following Friday afternoon unbroken stretch of trading hours. That is a considerable advantage for spot over the futures when traders hold swing trades open beyond pit-session hours for the futures. Unexpected news events, regional or global can send currency markets soaring or tanking to extremes. There is a chance of painful slippage or outright missed fills on resting stop orders for any futures market. Some FX broker/dealers guarantee stops being filled in most situations (examine details specific to any such offer) guaranteed.
FX Markets Have Bigger Trade Costs Than Futures
Spot currency markets have a bid/ask spread structure as a profit incentive for broker/dealers that makes a retail market available to traders. If it weren't for the bid/ask spread as a revenue stream, who would create or offer a spot market for trading to begin with? With the FX major broker/dealers, there is no other per-trade commission cost involved. Trades held overnight in the spot currency market are subject to interest-rate carry charge adjustments, but that's a negligible cost relative to commissions and bid/ask spreads.
Currency futures traders have a charged per-trade cost debited from their account on every round-turn. Winning trades, scratched trades and losing trades all incur the same cost of commission and exchange fee alike. There is a fixed per-trade cost in currency futures on each and every trade without exception. Take a trade, get charged a commission fee regardless of that trade's outcome.
By comparison, spot currency FX transactions have no real trade costs. Think about that for minute. Let's say you take the same currency futures trades and spot FX trade side by side. You are working equal contracts in the EUR/USD futures and spot FX with a futures broker and FX dealer alike. The futures contract has a 1-pip bid/ask spread valued at $12.50 while the FX contract has a 2-pip spread valued at $20. On its face, the futures contract seems "cheaper" to trade. But is it? Each futures trade includes a -$4 commission cost per contract, win, lose or draw. The FX trade does not.


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