CURRENCY TRADING

Currency trading means to exchange one currency for another currency is termed as currency
trading. This industry is one of the largest in the world with regards to trading volume.
Foreign currency is the ratio of one currency in consideration with another. How this process
takes place. For example if we take an interbank currency trade for instance, there are two
banks A and B. Then bank A will call bank B and will ask for the quote of the currency. For
example rupee against the dollar. Then bank B will reply to bank A with the rate of his bank.
If the rate seems attractive to bank A then they will enter a deal. All the basic information
like price, amount, and purchased amount will be entered in their systems. When the actual
settlement takes place bank A will depart with the specified rupee amount and bank B will
follow suit by turning in the dollar amount. If the rupee rises against the dollar then bank A
will gain the difference as profit.

When traders enter into currency trading they give a two- way quote. One of them is the rate
of purchase and other is the price of sale. The two prices are mainly separated by a hyphen.
On the left is the price at which the trader will purchase and on the right is the price at which
is the price at which the trader will sell. The difference between the purchase rate and sale is
called the bid-ask spread. The trader expects the slight variations on the sale and purchase
rate. He will also trade in the similar amounts of what he had purchased. There will not be
any drastic differences. The margin thus earned by the trader is the difference of the bid-ask
spread.

The profit gained depends on the variation in the exchange rate and the size of the position.
Speculating over a period of time can be dangerous and hence every government has the
strict rules laid down which have to be adhered to, to prevent the chaos.

FOREX CURRENCY TRADING

Currency trading is done in Paris. They follow the International standards organization
(ISO), which has built a code abbreviation. For instance

EUR/USD- EURO AND US DOLLAR. Similarly we have USD/CHF, GBP/USD etc. Thus
foreign exchange is the trading of one currency for another. It is the ratio of one currency as
valued for another. While trading the first currency is known as the base currency and the
other is known as the counter of quote currency. Counter currency is purchased on one unit
of the base currency. While selling we are told how much the counter or quote currency we
will receive for every base currency unit.

For simplifying foreign currency trade one monetary unit is considered equal to the base
currency. So if we are talking of the base currency i.e. Rupee, Euro, Dollar, it is 1 Rupee, 1
Euro, and 1 Dollar. As the US Dollar is mostly traded with any currency paired with the US
Dollar is known as the direct rate. If the currency is not against the US Dollar it is known as
the cross rate. As the quote currency is lower than the base currency it is converted into
smaller units of the base currency. Foreign currency trading involves many intricacies but
once one gain knowledge and practice it, it soon get easy and attractive.

FOREX CURRENCY TRADING SYSTEM

There are many currencies trading systems.

1) Piranha system: this system depends upon prevailing interest rates. It helps to determine
that whether on should play long or short. Smooth to enter and exit is the core is the core
fund of this system. This system has solid profit ground.

2) Cross bow Swiss trading system: this system is based on entering long on dips and selling
short on rallies, the system is designed to allow online trading, thus allowing online market
information and transactions.

HEDGING IN CURRENCY TRADING

Risk is the factor that is involved everywhere. It is very high in currency trading. With the
currency trading evolving as huge market it is important to cover the risks involved in case
of a huge unexpected downfall.

Hedging is the kind of a transaction where two positions are made to offset each other in case
of price changes. It is the risk covered by those who are desirous of taking it and who are
capable of taking and handling it.

In the currency trading market high amounts are traded with. Hence if there is sudden decline
in prices it can be quite demanding on the investors and the whole economy per say.

CURRENCY TRADING ONLINE

Trading is always given an impetus because of its ability to promote an activity beyond its
current realms. Be it basic trading or online currency trading. It gives the individual a
different feeling. More of one to one basis. It eliminates the need of middlemen and thus
reduces cost. Online currency trading is more dangerous unless you are adapting with its
requirements. Some brokers offer teaching the uses of online trading at a minimal fee.
Trading currency online gives one the advantage of working from home. If you are in
individual investor you can delineate your commands to your broker from the comfort of
your home. Receive confirmation and check the transfer of funds in your account. On the
other hand if you are an investor you can trade in the main market. Buy on dips and sell on
rallies or trade on whatever system. Its possible from your home. Another advantage of
trading online is that no special software is required. Connect yourself to internet and get
working. You can get prices 24 hours a day. Through the internet you can access the latest
exchange rates, reports, news and analysis. It is absolutely commission free. However it
depends upon the portal you are using for online currency trading as the charges differ from
company to company.

CURRENCY EXCHANGE
With Indians going global and dealing in international trade, currency exchange is very
common. Indian rupee is exchange is anywhere in the world. However its still weak to US
Dollar, GB Pound and EURO, so the exchange rate varies according to vagaries of the day to
day market. For the common trader or professional who wished to invest in currency
exchange the best way to do is through official channels.

Banks, forex institutions, authorized travel agents are the only ones who can exchange the
rupee to any other currency. When a person goes abroad for a holiday or for a business, a
certain slab is reserved for exchange. Any amount of currency cannot be exchanged. Since
there a restrictions some people try to smuggle hard cash in suitcases. Which is an offence,
and if caught they can be deported or not allowed to leave the country, without giving proper
explanation.

FACTORS DECIDING CURRENCY FLUCTUATION

1) CURRENCY FLUCTUATION

A market based exchange rate will change whenever the values of either of the two
component currencies change. A currency will tend to become more valuable whenever
demand for it is greater than the available supply. It will become less valuable whenever
demand is less then available supply (this does not mean people no longer want money, it
just means they prefer holding their wealth in some other form, possibly another currency).

Increased demand for a currency is due to either an increased transaction demand for money,
or an increased speculative demand for money. The transaction demand for money is highly
correlated to the country's level of business activity, gross domestic product (GDP), and
employment levels. The more people there are out of work, the less the public as a whole will
spend on goods and services. Central banks typically have little difficulty adjusting the
available money supply to accommodate changes in the demand for money due to business
transactions.

The speculative demand for money is much harder for a central bank to accommodate but
they try to do this by adjusting interest rates. An investor may choose to buy a currency if
the return (that is the interest rate) is high enough. The higher a countries interest rates, the
greater the demand for that currency. It has been argued that currency speculation can
undermine real economic growth, in particular since large currency speculators may
deliberately create downward pressure on a currency in order to force that central bank to
sell their currency to keep it stable (once this happens, the speculator can buy the currency
back from the bank at a lower price, close out their position, and thereby take a profit).

2). In the absence of government intervention, the main driver of currency fluctuations is
the demand for the currency relative to the demand for other currencies. If many people
want to trade dollars for Indian rupees, the value of the rupee will rise and the dollar will
fall. This happens when there is a greater demand for one country's products, denominated
in its home currency, relative to the demand for another country's products. India, I believe,
runs a large trade surplus with the rest of the world, while the U.S., on the other hand, and
runs a large trade deficit.

There are several factors that can influence this dynamic. A country's central bank can
reduce the money supply by issuing bonds and collecting currency for them. They can
increase the required reserve level that banks must hold, therefore reducing the amount they
can lend.

On the other hand, the central bank can buy back bonds, injecting more money into the
market, or they can simply start printing more money and buy things, thus getting it into
circulation. This last tactic usually leads to runaway inflation, since the government often
winds up issuing more money to keep ahead of individuals' perception of its value.

Other governments can also affect the value of a country's currency, which has happened in
the case of the U.S. Since the U.S. dollar is the world's de facto reserve currency (the one
that most international transactions are done in), it is in the interest of many countries to
keep large stocks of U.S, currency on hand, and to keep the value of the dollar stable. This
allows the U.S. to float more of its debt on world markets without suffering the ill effects of
devaluing its currency.
3). Supply & Demand
Supply: If countries are inflating their currency, there will be more available on international
markets and it will not be as valuable. This will additionally cause lower interest rates in the
domestic market.

Demand: If investment opportunities are poor in the domestic economy, currency will
not be as valuable internationally.

4). Currency fluctuation or rather the value of a currency is determined by various factors
depending upon what time frame, we are looking at. Short term values are determined by
immediate supply and demand you may find during pre election time the rupee will
appreciate because lot of funds from abroad will get converted to Indian currency .In the
medium term it is the country's export /import and capital flows that will determine the
value. In the long term it is the confidence of people in the country's policies, the stability of
the system of government, its credibility etc which determines the value of a currency. Dollar
enjoyed the reserve currency status because of this factor.

5).The value of a local currency is its value in real terms. i.e., its purchasing power in the
international market. For example what you can buy by, say Rs. 100.If you can buy items
worth US $2 then the value of Rupee is 1/50 American Dollar. Similar is the case with other
currencies.

MARKET PARTICIPANTS
According to research data

53% of the forex deals are arranged between dealers or banks;

33% are between a dealer (a bank) and a fund manager or other non- banking
financial institutions;
14% involves a dealer and a non financial company.

BANKS

The largest part of forex market belong to the banks. They cater both to the majority of
commercial turnover and large amounts of speculative trading every day. Daily turnover of
one large bank may reach billions of dollars. And only the small part of trading this trading is
undertaken on behalf of customers. The rest trading banks arrange for their own account.

Today large banks have moved on to electronic systems such as EBS, the Chicago mercantile
exchange, Bloomberg and Trade book(R).
COMMERCIAL COMPANIES
Commercial companies that seek foreign exchange to pay for goods or services are important
part of forex market. Comparing with banks or speculators, commercial companies trade
fairly small amount. Besides there trade usually have little short term impact on currencys
exchange rates. But sometimes multinational companies can have unpredictable impact on
market rates. Especially when market participants do not know about very large positions,
covered due to little known exposures.

CENTRAL BANKS
National central banks are one of the most important participants of foreign exchange
market. There purpose is to control money supply, inflation and interest rates. Usually they
have official or unofficial target rates for their currencies. Usually their substantial foreign
exchange reserves as a stabilization market tool. One of the best stabilization strategies, used
by central banks, is to buy while the exchange rate is the loosest and to sell when the rate is
high. In such a way central banks may get a good profit. Nevertheless, central banks are
more protected then other market participants, as they dont go bankrupt if they make large
losses. At the same time there is no convincing evidence that central banks do not make a
profit trading.

INVESTMENT MANGEMENT FIRMS

Their main activity is managing large accounts on behalf of customers such as pension funds,
endowments etc. Investment managers usually use the forex market to facilitate transactions
in foreign securities. Especially if an investment management firm is specialized in foreign
equities, it will need to buy and sell foreign currencies in the spot market in order to pay for
purchases.

However some investment management firms have speculative specialist currency overlay
units. They manage client's currency exposures with the aim of generating profits as well as
limiting risk. But the number of this type of investment management firms is comparatively
small.
COMPANY PROFILE
StarFing (Star Financial Group) is a leading stock, share, currency & commodity broking
headquartered in India. They operate on a unique retail focused stock trading model that
provides revolutionary trading platforms and expertise to a diversified client base.

Star Fing Corporate identity Number KR03D0029133

(2011) and also 3/93/5/3594/2014
They are registered in Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and
the two leading Commodity Exchanges in the county MCX & NCDEX.

Exchange Registration Details

AP0397134991 (NSE)
AP0397134991 (NSE-SX)
AP0397134991 (NSE F&O)
AP0106120157353 (BSE)
AP0106120157353 (BSE F&O)
AP 111340(MCX)
AP 111340 (NCDEX)
They also provide training, They are with a simple aim, They teach you how to invest your
money and make profits. If you have ever considered how to be a trader, what to trade,
what trading software to use or just how you can learn about the market.look no further.
With their trading program their offer a full range of financial training course all based on
price action trading so whether you are interested in trading futures markets, Commodities,
or day trading the currency markets they can teach you how to trade consistently and
profitably.

They believe at Training Traders they can offer the very best Training, Coaching and follow
up Mentorship available anywhere. Your Training Course is just the beginning of your
journey. They take great care and pride in offering strong Mentorship and Coaching follow
up. It does not matter if you are a new trader or experienced the education process never
ends. No two days are the same in Markets and all traders learn or should learn every day.

They are committed to providing world-class products and services which exceed the
expectations of their customers, achieved by teamwork and a process of continuous
improvement.

It is their faith in Indian Stock and Commodities market that has helped them in creating a
satisfied client base that runs into lakhs.
It is the faith of their clients in their excellent research, prompt and quality services, which
have seen them, smile even during the most turbulent times in financial markets.

MISSION
Star Fing mission is to provide comprehensive and innovative brokerage solutions backed-up
by reliable support services at extremely competitive prices to their clients.

VISION
StarFing vision is to remove complexity out of the trading equation.
they also envisions becoming one of the leading financial service providers in the country .

SERVICES
ADVISORY SERVICES
Training & Education
StarFing (Star Financial Group) focus on training and educating individuals about
financial market and to sharpen their skills to participate in the financial world. StarFing
came alive with the intention to provide support and guidance to new comers to the trading
world. With their knowledge and years of experience in trading they have customized the
training programme and made it simple for a layman to understand the financial market.

Their courses are targeted for individual investors or traders, novice or experienced, who
want to learn how to use the same tools and techniques as the professional traders.

These courses offer a complete education and training experience focusing on trading
fundamentals, technical analysis, risk management, and highly-developed skills of execution
for virtually any trading instrument. Star Fing are with a simple aim, They want to teach you
how to invest your money and make profits. If you have ever considered how to be a
trader, what to trade, what trading software to use or just how you can learn about the
market.look no further. With their trading program they offer a full range of financial
training course all based on price action trading so whether you are interested in trading
futures markets, Commodities, or day trading the currency markets they can teach you how
to trade consistently and profitably. They believe at Training Traders they can offer the very
best Training, Coaching and follow up Mentorship available anywhere. Your Training
Course is just the beginning of your journey. They take great care and pride in offering
strong Mentorship and Coaching follow up. It does not matter if you are a new trader or
experienced the education process never ends. No two days are the same in Markets and all
traders learn or should learn every day.
 FINANCIAL SERVICES

Financial Planning:
As you ascend newer highs in your life, your aspirations and needs grow proportionately.
These ever-increasing needs are further compounded by inflation, which depreciates the
purchasing power of your hard-earned money. To achieve your dreams and fulfill your future
obligations, you need to carefully plan your finances. This can be done via sound financial
planning that takes into account your current and future needs, your individual risk profile
and your income to chart out a roadmap to meet these anticipated needs.

Investment Planning:
Placing of funds into the proper investment vehicles based on the investors future goals,
time horizon and priorities. This also takes into account the safety of the investments as well
as liquidity and level of return. Ideally, proper investment planning will allow the investors
funds to produce financial rewards over time.

Risk Management:
Risk Control Techniques
Avoidance of activities which cause loss.
Reduction of the frequency of loss risk prevention.
Reduction of the severity of loss risk reduction.

Approach:
The clients benefit always comes first. Their experience has taught them that customer is the
key to success. In -order to be successful; they understand the risks and objectives of each
client and guide them.

FRANCHISEE SERVICES
They are providing a once in a lifetime opportunity to you to grow your own business, and
take the financial markets by storm.

They are offering you a Franchisee of their broking business arm in collaboration with
Familiar Brokers. They are providing Comprehensive and innovative Brokerage solution
backed-up by reliable support services at extremely competitive prices to their clients.
The features of the deal are as follows:

Decide your own brokerage: You can decide what brokerage you want to charge from your
clients, it can be as lowest price 10 to as high as Rs 5000/Crore or even more. Anything that
lets you grow your business and gain desirable profits.

Share in profits: Whatever business/brokerage you generate, you can keep 70% of that and
30% has to be shared with the company. And as you go on to grow your business and meet
certain business objectives you will be provided with incentives ranging from a higher
percentage in brokerage to monetary rewards.

Back office support: They provide you with a back office dashboard to keep track of all
your clients. It provides useful insights and analytics so that you get actionable insights for
your business. When you partner with Starfing you can rest assured that you will be provided
with the best back office support, may it be in terms of client on boarding, form filling, other
general queries, trading queries or any problem or queries you face (if any).

Trading software: They provide you with the NEST trading platform. And also providing
Mobile Platform services

Trading Platform web-based and desktop-based trading facilities.

Online Back Office for easy access of investment records.

Electronic Communication E Contract Notes, Ledger Statements, and the like.

Dedicated team of Trained Executive to address all your concerns.

Advisory and research services: They will provide you with actionable advisory and
research tips. They will share their research based on technical and fundamental factors and
recommend stocks, commodities etc, in which you can trade if you wish to and you can also
share this research with your fellow clients.

Logo visibility: It is necessary for you to make sure that our companys logo is always
highlighted and promoted, failure to do so may lead to termination of the business
partnership.
 OTHER SERVICES

Real Estate

Their business philosophy is to create value for their clients by integrating accurate and
comprehensive information with key services to make property buying simple and hassle
free.

Their Expertise

Their expertise extends to all major land uses including residential, commercial, retail and
mixed-use properties as well as in specialized areas such as property management and
property investment solutions.

Property Consulting

whether you are selling, buying or looking for smart real estate investment. Star Fing is
simply your perfect property partner

High end Residential

High end Offices
Retail space in up market locations

Real Estate Investment

Since couple of decades Real Estate investment in India has always been a lucrative option
and as the County progresses the demand will only increase, further increasing the property
prices in and around the Country. But then one need to identify and invest in the right
property at the right time, here is where you will need the assistance of an expert who
understands the property market in India and guide you in making the right decision.

Their team having around ten years of expertise in Real Estate market with a strong presence
and knowledge is your perfect partner who will guide you to make the right investment at the
right time.

For further information and assistance please feel free to contact

their realestate@starfing.com.
Insurance

Life insurance is a simple answer to a very difficult question: How will my family manage
financially when I die? Its a subject no one really wants to think about. But if someone
depends on you financially, its one you cannot avoid.

There are many types of life insurance, but for all them the bottom line is the same: They pay
cash to your family after you die, allowing loved ones to remain financially secure. Life
insurance payments can be used to cover daily living expenses, mortgage payments,
outstanding loans, college tuition and other essential expenses. And, importantly, the death
benefit proceeds of a life insurance policy are almost never subject to income tax.

If you have worked hard to establish a solid financial framework for your family
investments , home equity, a saving plan ,retirement accounts life insurance is the
foundation upon which it all rests. It can guard against the need for your loved ones to make
drastic changes to future plans when you die. Certain types of insurance even have a built-in-
cash- accumulation feature that can help you reach savings goals.
 CHAPTER 1

CURRENCY TRADING

WHAT IS CURRENCY TRADING?

Trading is about speculating on the value of one currency versus another. The key words in
the last sentence are speculating and currency. We think that looking at currency trading
from two angles- or two dimensions. On the other hand, its speculation, pure and simple,
just like buying an individual stock, or any other financial security, in hope that it will make
a profitable return. On the other hand, the securities you are speculating with are the
currencies of various countries. Viewed separately, that means that currency trading is both
about dynamics of market speculation, or trading, and the factors that affect the value of
currencies. If we put them together we can get the largest, most dynamic and exciting
financial market in the world.

SPECULATING AS AN ENTERPRISE

Speculating is all about taking on financial risk in the hope of making a profit. But its not
gambling and its not investing. Gambling is about playing with money even when you know
the odds are stacked against you. Investing is about minimizing risk and maximizing return,
usually over a long time period. Speculating, or active trading, is about taking calculated
financial risks to attempt to realize a profitable return, usually over a very short time horizon.

To be a successful trader in any market requires:

Dedication ( in terms of both time and energy)

 Resources ( technological and financial)

Decisiveness

Perseverance

Knowledge

CURRENCY AS THE TRADING VEHICLE

The forex market is the largest financial market in the world, at least in terms of daily trading
volumes. The forex market is unique in many respects. The volumes are indeed, huge, which
means that liquidity is ever present. It also operates around the clock six days a week, giving
traders access to market any time they need it.

Few trading restrictions exist- no trading limits up or down, no restrictions on position sizes,
and no requirements on selling a currency pair short. Selling a currency pair short means you
are expecting the price to decline. Because of the way currencies are quoted and because
currency rates move up and down all the time, going short is as common as being long

Most of the action takes place in the major currency pairs, which pit the US dollar (USD)
against the currencies of the EUROZONE (the European countries that have adopted the euro
as their currency), Japan, Great Britain, and Switzerland. Theres also plenty of trading
opportunities in the minor pairs, which see the U.S. dollar traded against the Canadian,
Australian, and New Zealand dollars. On the top of that, theres cross-currency trading,
which directly pits two non- USD currencies, against each other, such as the Swiss franc
against the Japanese yen. Altogether, there are anywhere from 15 to 20 different currency
pairs, depending on which forex brokerage you deal with.

Most individual traders trade currencies via the internet through a brokerage firm. Online
currency trading is typically done on a margin basis, which allows individual traders to trade
in larger amounts by leveraging the amount of margin on deposit

The leverage, or margin trading ratios, can be very high, sometimes as much as 200:1 or
greater, meaning a margin deposit of $ 1,000 could control a position size of $ 200,000. But
trading on margin carries its own rules and requirements and is backdrop against which all
your trading will take place. Leverage is a two- edged sword, amplifying gains and losses
equally, which makes risk management the key to any successful trading strategy.
Before you ever start trading, in any market, make sure you are only risking money that you
can afford to lose, whats commonly called risk capital. Risk management is the key to any
successful trading plan. Without a risk- aware strategy, margin trading can be an extremely
short-lived endeavour. With a proper risk plan in place, you stand a much better chance of
surviving losing trades and making winning ones.

WHAT AFFECTS CURRENCY RATES?

In a word- information. Information is what drives every financial market, but the forex
market has its own unique roster of information inputs. Many different cross- currencies are
at play in the currency market at any given movement. After all, the forex market is setting
the value of one currency relative to another, so at the minimum, you are looking at the
themes affecting two major international economies.

FUNDAMENTALS DRIVE THE CURRENCY MARKET

Fundamentals are the broad grouping of news and information that reflects the
macroeconomic and political fortunes of the countries whose currencies are traded. Most of
the time when you hear someone talking about the fundamentals of a currency, hes referring
to the economic fundamentals. Economic fundamentals are based on:

Economic data reports

Interest rate levels

Monetary policy

International trade flows

International investment flows

There are also political and geopolitical fundamentals. An essential element of any
currencys value is the faith or confidence that the market places in the value of the currency.
If political events, such as an election or scandal, are seen to be undermining the confidence
in a nations leadership, the value of its currency may be negatively reflected.
Gathering and interpreting all this information is just part of a currency traders daily routine,
which is one reason why we put dedication at the top of our list of successful trader
attributes.
UNLESS ITS THE TECHNICALS THAT ARE DRIVING THE
CURRENCY MARKET

The term technicals refers to technical analysis, a form of market analysis most commonly
involving chart analysis, trend- line analysis, and mathematical studies of price behaviour,
such as momentum or moving averages.

We dont know of too many traders who dont follow some form of technical analysis in
their trading. Even the stereotypical seat-of- the-pants, trade-your-gut-traders are likely to at
least be aware of technical price levels identified by others. If you have been an active trader
in other financial markets, chances are, you have been engaged in some technical analysis or
at least heard of it.

Technical analysis is especially important in the forex market because of the amount of
fundamental information hitting the market at any given time. Currency traders regularly
apply various forms of technical analysis to define and refine their trading strategies, with
many people trading on technical indicators alone.

FINDING YOUR TRADING STYLE

What do you mean by trading style? Basically it boils down to how you approach currency
trading in terms of

Trade timeframe: how long you hold a position? Are you looking at short-
term trade opportunities (day trading), trying to capture more significant shifts
in currency prices over days or weeks, or something in between?
Currency pair election: are you interested in trading in all the different
currency pairs, or are you inclined to specialize in only one or two?
Trade rationale: are you fundamentally or technically inclined? Are you
considering creating a systematic trading model? Are you a trend follower or
a breakout trader?
Risk appetite: how much are you prepared to risk and what are your return
expectations?
PLANNING THE TRADE
Whatever trading style, you ultimately choose to follow, you wont get very far if you dont
establish a concrete trading plan and stick to it. Trading plans are what keep small bad trades
from becoming big bad trades and what can turn small winners. More than anything, though,
they are your road map, helping you to navigate the market after the adrenaline and emotions
start pumping, no matter what the market throws your way.

We are not telling you that trading is any easier than any other financial market speculation.
But we can tell you that trading with a plan will greatly improve your chances of being a
successful in the forex market over time. Most important, we want to caution you that trading
without plan is a surf ire recipe for disaster.

EXECUTING THE TRADE PLAN FROM START TO FINISH

The start of ant trade comes when you step into the market and open up a position. How you
enter your position, how you execute the first step of your trading plan, can be as important
as the trade opportunity itself. After all, if you never enter the position, the trade opportunity
will never be exploited. And probably nothing is more frustrating as a trader than having
pinpointed a trade opportunity, having it go the way you expected, but having nothing to
show for it because you never put the trade on.

The effort and resources you invest in researching, monitoring, and analyzing the market
come to a concrete result when you open a trade. You are now exposed to price fluctuations
and your trading account will register a profit or loss as a result. But thats just the beginning
of it.

Active trade management is also critical to keeping more of what you make in the market. In
our experience, making money in the forex market is not necessarily the hard part. More
often than not, keeping what you have made is the really hard part.

Exiting each trade is the culmination of the entire process and you are either going to be
pleased with a profit or disappointed with a loss. Every trade ends in either a profit or a loss
(unless you get out at the entry price); its just the way the market works. While you trade is
still active, however, you are still in control and you can choose to exit at any time.
 Chapter 2
WHAT IS FOREX MARKET?

The forex market is the crossroads for international capital, the intersection through which
global commercial and investment flows have to move. International trade flows, such as
when a Swiss electronics company purchases Japanese- made components, were the original
basis for the development of the forex markets.

Today, however, global financial and investment flows dominate trade as the primary non
speculative source of forex market volume. Whether its an Australian pension fund in U.S.
Treasury bonds, or a British insurer allocating assets to the Japanese equity market, or a
German conglomerate purchasing a Canadian manufacturing facility, each cross-border
transaction passes through the forex market at some stage.

More than anything else, the forex market is a traders market without equal. Its a market
thats open around the clock six days a week, enabling traders to act on news and events as
they happen. Its a market where half-billion- dollar trades can be executed in a matter of
seconds and may not even move prices noticeably. Try buying or selling a half-billion of
anything in another market and see how prices react.

GETTING INSIDE THE NUMBERS

Average daily currency trading volumes exceed $2 trillion per day. Its about 10 to 15 times
the size of daily trading volume on the entire worlds stock market combined. That $2-
trillion-a- day number, which you may have seen in the financial press or other books on
currency trading, actually overstates the size of what the forex market is all about- spot
currency trading.

TRADING FOR SPOT

Spot refers to the price where you can buy or sell currencies now, as in on the spot. If you
are familiar with stock trading, the price you can trade at is essentially a spot price.
Technically, the term refers to the nearest settlement date on which a transaction can be made
and is primarily meant to differentiate spot, or cash, trading from futures trading, or trading
for some future delivery date. The spot currency market is normally traded for settlement in
two business days.
The bank for international settlements (BIS), the international supervisory body for banks
around the world, surveys forex market volumes every three years. The 2004 BIS survey (the
most recent available) revealed a daily spot-trading volume of about $620 billion, with
another $100+ billion in estimated gaps due to reporting. The rest of the volume that makes
up the $2 trillion figure is comprised of swap and outright forward currency trading (trades
made for settlement dates other than spot).

SPECULATING IN CURRENCY MARKET

While commercial and financial transactions in the currency markets represent huge nominal
sums, they still pale in comparison to amounts based on speculation. By far the vast majority
of currency trading volume is based on speculation- traders buying and selling for short- term
gains based on minute-to-minute, hour-to-hour, and day-to-day price fluctuations.

Estimates are that upwards of 90 percent of daily trading volume is derived from speculation
(meaning, commercial or investment-based FX trades account for less than 10 percent of
daily trading volume). The depth and breadth of the speculative market means that the
liquidity of the overall forex market is unparalleled among global financial markets.

The bulk of spot currency trading, about 75 percent by volume, takes place in the so-called
major currencies, which represent the worlds largest and most developed economies.
Trading in the major currencies is largely free from government regulation and takes place
outside the authority of any national or international body.

GETTING LIQUID WITHOUT GETTING SOAKED

Liquidity refers to the level of market interest- the level of buying and selling volume-
available at any given movement for a particular asset or security. The higher the liquidity, or
the deeper the market, the faster and easier it is to buy or sell a security.

From a trading perspective, liquidity is a critical consideration because it determines how

quickly prices move between trades and over time. A highly liquid market like forex can see
large trading volumes transacted with relatively minor price changes. An illiquid, or thin
market will tend to see prices move more rapidly on relatively lower trading volumes. a
market that only trades during certain hours( futures contracts, for example) also represents a
less liquid, thinner market.
AROUND THE WORLD IN A TRADING DAY
The forex market is open and active 24 hours a day from the start of business hours on
Monday morning in the Asia Pacific Time zone straight through to the Friday close of
business hours in New York. At any given movement, depending on the time zone, dozens of
global financial centres - such as Sydney, Tokyo, or London- are open, and currency trading
desks in those financial centres are active in the market.

In addition to the major global financial centres, many financial institutions operate 24-hour-
a-day currency trading desks, providing an ever-present source of market interest. It may be
a U.S. hedge fund in Boston that needs to monitor currencies around the clock, or it may be a
major international bank with a concentrated global trading operation in one financial sector.

Currency trading doesnt even stop for holidays when other financial markets, like stocks or
futures exchanges, may be closed. Even though its a holiday in Japan, for example, Sydney,
Singapore, and Hong Kong may still be open. It might be the fourth of July in the United
States, but if its a business day, Tokyo, London, Toronto, and other financial centres will
still be trading currencies.

THE OPENING OF THE TRADING STOCK

There is no officially designated starting time to the trading day or week, but for all intents
the market action kicks off when Wellington, New Zealand, the first financial centre west of
the international dateline, opens on Monday morning local time. Depending on whether
daylight saving time is in effect in your own time zone, it roughly corresponds to early
Sunday afternoon in North America, Sunday evening in Europe, and very early morning in
Asia.

The Sunday open represents the starting point where currency markets resume trading after
the Friday close of trading in North America( 5 p.m. eastern time). This is the first chance for
the forex market to react to news and events that may have happened over the weekend.
Prices may have closed New York trading at one level, but depending on the circumstances,
they may start trading at different levels at the Sunday open.

As a trading consideration, individual traders need to be aware of the weekend gap risk and
know what events are scheduled over the weekend. Theres no fixed set of potential events
and theres never any way of ruling out what may transpire, such as a terror attack, a
geopolitical conflict, or a natural disaster.
TRADING IN ASIA-PACIFIC SESSION

Currency trading volumes in the Asia- pacific session account for about 21 percent of total
daily volume, according to the 2004 BIS survey. The principal financial trading centers are
Wellington, New Zealand, Sydney, Australia, Tokyo, Japan, Hong Kong and Singapore.

The overall trading direction for the NZD, AUD, and JPY can be set for the entire session
depending on what news and data reports are released and what they indicate.

In addition news from China, such as interest rate changes and official comments or currency
policy adjustments, may also be released. Occasionally as well, late speakers from the United
States, such as Federal Reserve officials speaking on the West Coast of the United States,
may offer remarks on the U.S. economy or the direction of U.S. interest rates that affect the
value of the U.S. dollar against major currencies.

For individual traders, overall liquidity in the major currency pairs is more than sufficient,
with generally orderly price movements. In some most liquid, non- regional currencies, like
GBP/USD or USD/CAD, price movements may be more erratic or nonexistent, depending
on the environment.

TRADING IN THE EUROPEAN/ LONDON SESSION

About midway through the Asian trading day, European financial centers begin to open up
and the market gets into its full swing. European financial centers and London account for
over 50 percent of total daily global trading volume, according to the 2004 BIS survey.

The European session overlaps with half of the Asian trading day and half of the North
American trading session, which means that market interest and liquidity is at its absolute
peak during this session. Asian trading centers begin to wind down in the late- morning
hours of the European session and North American financial centers come in a few hours
later, around 7 a.m.
KEY DAILY TIMES AND EVENTS

Expiry options

Currency options are typically set to expire either at the Tokyo expiry (3 p.m. Tokyo
time) or the New York expiry (10 a.m.). The New York option expiry is the most
significant one, because it tends to capture both European and North American option
market interest. When an option expires, the underlying option ceases to exist. Any
hedging in the spot market that was done based on the option being alive suddenly
needs to be unwound, which can trigger significant price changes in the hours leading
up to and just after the option expiry time.

The amount and variety of currency option interest is just too large to suggest any
single way that spot prices will always react around the expiry ( there may not even
be any significant option interest expiring on many days), but you should be aware
that option-related interest is most in evidence around the daily expiries.

Setting the rate at currency fixings

There are several daily currency fixings in various financial centres, but the two most
important are the 8:55 a.m. Tokyo time and the 4 p.m. London time fixings. A
currency fixing is a set time each day where the prices of currencies for commercial
transactions are set, or fixed.

From a trading standpoint, these fixings may see a flurry of trading in a particular
currency pair in the run-up (generally 15 to 30 minutes) to the fixing time that
abruptly ends exactly at the fixing time. A sharp rally in a specific currency pair on
fixing-related buying, for example, may suddenly come to an end at the fixing time
and see the price quickly drop back to where it was before.

Squaring up the currency future markets

The Chicago mercantile exchange (CME), one of the largest future markets in the
world, offers currency futures through its international Monetary Market (IMM)
subsidiary exchange. Daily currency futures trading close each day on the IMM at 2
p.m. central time (CT), which is 3 p.m.ET. Many futures traders like to square up or
 close any open positions at the end of each trading session to limit their overnight
exposure or for margin requirements.

The 30 to 45 minutes leading up to the IMM closing occasionally generates a flurry of

activity that spills over into the spot market. Because the amount of liquidity in the spot
currency market is at its lowest in the New York afternoon, sharp movements in the futures
markets can drive the spot market around this time. Theres no reliable way to tell if or how
the IMM close will trigger a move in the New York afternoon spot market, so you just need
to be aware of it and know that it can distort prices in the short term.

THE U.S. DOLLAR INDEX

The U.S. dollar index is a futures contract listed on the New York Board of Trade (NYBOT)
and Dublin- based financial instruments exchange (FINEX) futures exchanges. The dollar
index is an average of the value of the U.S. dollar against a basket of six other major
currencies, but its heavily weighted toward European currencies.

The exact weightings of other currencies in the U.S. dollar index are

Euro: 57.6 percent

Japanese yen: 13.6 percent

British pound: 11.9 percent

Canadian dollar: 9.1 percent

Swedish krona: 4.2 percent

Swiss franc: 3.6 percent

The European currency share of the basket- Euro zone, United Kingdom, Sweden, and
Switzerland- totals 77.3 percent.

CURRENCIES AND OTHER FINANCIAL MARKETS

As much as we like to think of the forex market as the be-all and end-all of financial trading
markets, it doesnt exist in vacuum. There are some markets like gold, oil, stocks, and bonds.
GOLD

Gold is commonly viewed as a hedge against inflation, an alternative to the U.S. dollar, and
as a store of value in times of economic or political uncertainty. Over the long term, the
relationship is mostly inverse, with a weaker USD generally accompanying a higher gold
price, and a stronger USD coming with a lower gold price. However, in the short run, each
market has its own dynamics and liquidity, which makes short-term trading relationships
generally tenuous.

Overall, the gold market is significantly smaller than the forex market, so if we were gold
traders, we would sooner keep an eye on whats happening to the dollar, rather than the other
way around.

With that noted, extreme movement in gold prices tend to attract currency traders attention
and usually influence the dollar in a mostly inverse fashion.

OIL

A lot of misinformation exists on the internet about the supposed relationship between oil
and the USD or other currencies, such as CAD or JPY. The idea is that, because some
countries are oil producers, their currencies are positively (or negative) affected by increases
(or decreases) in the price of oil. If the country is an importer of oil (and which countries
arent today?)

The best way to look at oil is an inflation input and as a limiting factor on overall economic
growth. The higher the price of oil, the higher inflation is likely to be and the slower an
economy is likely to grow. The lower the price of oil, the lower inflationary pressures are
likely (but not necessarily) to be.

STOCKS

Stocks are micro economic securities, rising and falling in response to individual corporate
results and prospects, while currencies are essentially macroeconomic securities, fluctuating
in response to wider- ranging economic and political developments. As such there is a little
intuitive reason that stock markets should be related to currencies. Long term correlation
studies bear this out, with correlation coefficients of essentially zero between the major USD
pairs and U.S. equity markets over the last five years.

The two markets occasionally intersect, though this is usually only at the extremes and for
very short periods.

BONDS

Fixed income or bond markets have a more intuitive connection to the forex market because
they are both heavily influenced by interest rate expectations. However, short term market
dynamics of supply and demand interrupt most attempts to establish a viable link between the
two markets on a short term basis. Sometimes the forex market reacts first and fastest
depending on shifts in interest rate expectations. At other times, the bond market more
accurately reflects changes in interest rate expectations, with the forex market later playing
catch-up(Because it takes longer to turn a bigger ship around).

GETTING STARTED WITH THE TRADING ACCOUNT

For newcomers to currency trading, the best way to get handle on what currency trading is all
about is to open a practice account at any online forex brokers. Most online brokers offer
practice accounts to allow you to experience the real- life price action of the forex market.
Practice accounts are funded with virtual money, so you are able to make trades with no real
money at stake and gain experience in how margin trading works.

Practice accounts give you a great chance to experience the minute-to-minute price
movements of the forex market. You all be able to see how prices change at different times
of the day, as well as how various currency pairs may differ from each other.

How the forex market really moves, you can

Start trading in real market conditions without any fear of losing money.
Experiment with different trading strategies to see how they work.
Gain experience using different orders and managing open positions.
Improve your understanding of how margin trading and leverage work.
Start analyzing charts and following technical indicators.
 Chapter 3

Who trades currencies?

Meet the players

The forex market is regularly referred to as the largest financial market in the world based on
trading volumes. But this massive market was unknown and unavailable to most individual
traders and investors until the start of this decade. That leaves a lot of the people in the dark
when it comes to exactly what the currency market is: how its organized, whos trading it,
and why.

THE INTERBANK MARKET IS THE MARKET

When people talk about the currency market, they are referring to the interbank market,
whether they realize it or not. The interbank market is where the really big money changes
bands. Minimum trade sizes are one million of the basic currency, such as euro 1 billion of
EUR/USD or $ 1 million of USD/JPY. Much large trades of between $10 million and $100
million are routine and can go through the market in a matter of seconds. Even larger trades
and orders are a regular feature of the market. For the individual trading FX online, the
prices you see on your trading platform are based on the prices being traded in the interbank
market. The sheer size of interbank market is what helps makes it such a great trading
market, because investors of every size are able to act in the market, usually without
significantly affecting prices. Its one market where we would say size really doesnt matter.
We have seen spot traders be right with million-dollar bets, and sophisticated hedge funds be
wrong with half-billion-dollar bets.

GETTING INSIDE THE INTERBANK MARKET

So what is the interbank market and where did it come from? The forex market originally
evolved to facilitate trade and commerce between nations. The leading international
commercial banks, which financed international trade through letters of credit and bankers
acceptances, were the natural financial institutions to act as the currency exchange
intermediary. They also had the foreign branch network on the ground in each country to
facilitate the currency transfers needed to settle FX transactions.

Currency futures markets operate alongside the interbank market, but they are definitely the
tail being waged by the dog of the spot market. As a market currency futures are generally
limited by exchange-based trading hours and lower liquidity than is available in the spot
market.

BANK TO BANK AND BEYOND

The interbank market is a network of international banks operating in financial centers

around the world. The banks maintain trading operations to facilitate speculation for their
own accounts, called proprietary trading or just prop trading in short, and to provide currency
trading services for their customers. Banks customers can range from corporations and
government agencies to hedge funds and wealthy private individuals.

TRADING IN INTERBANK MARKET

The interbank market is an over-the-counter (OTC) market, which means that each trade is
an agreement between the two counterparties to the trade. There are no exchanges or
guarantors for the trades, just each banks balance sheet and the promise to make payment.
The bulk of spot trading in the interbank market is transacted through electronic matching
services, such as EBS and Reuters Dealing. Electronic matching services allow traders to
enter their bids and offers into the market, hit bids ( sell at the market), and pay offers ( buy
at the market). Price spreads vary by currency pair and change throughout the day depending
on market interest and volatility.

The matching systems have pre-screened credit limits and a bank will only see prices
available to it from approved counterparties. Pricing is anonymous before deal, meaning you
cant tell which bank is offering or bidding, but the counterparties names are made known
immediately after a deal goes through. The rest of the interbank trading is done through
currency brokers, referred to as voice brokers to differentiate them from the electronic ones.
Traders can place bids and offers with these brokers the same as they do with the electronic
matching services. Prior to the electronic matching services, voice brokers were the primary
market intermediaries between banks.
STEPPING ON TO A CURRENCY TRADING FLOOR

Interbank trading rooms are staffed by a variety of different market professionals and each
has a different role to play. The typical currency trading room has Flow traders: sometimes
called execution traders, these are the market makers, showing two-way prices at which to
buy or sell, for the banks customers. If the customer makes a trade, the execution trader then
has to cover the resulting deal in the interbank market, hopefully at a profit. These traders are
also responsible for watching and executing customer orders in the market. These are sthe
traders who are generating most of the electronic prices and price action.

Proprietary traders: these traders are focused on speculative trading for the banks
own account. Their strategies can run the gamut from short term day trading to
longer-term macroeconomic bets.

Forward traders: are active in the forward currency market, which refers to trades
made beyond the normal spot value date. The forward market is essentially an interest
rate differential market, where the interest rates of the various currencies are traded.

Options traders: they manage the bank portfolio or book of outstanding currency
options. They hedge the portfolio in the spot market, speculate for the banks own
account with option strategies, and provide pricing to the banks customers on
requested option strategies.

Sales staff: The sales staff acts as the intermediary between the trading desk and the
banks customers. They advise the banks customers on market flow, as well as whos
buying and selling; recommend spot and option trading strategies; and execute trades
between the bank and its customers.

HEDGERS AND FINANCIAL INVESTORS

The forex market sits at the crossroads of global trade and international finance and
investing. Whether its a U.S. conglomerate managing its foreign affiliates balance sheets or
a German mutual fund launching an international stock fund, they all have to go through the
forex market at some point.
Financial transactors are important to the forex market for several reasons:

Their transactions can be extremely sizeable, typically hundreds of millions or

billions.
Their deal is frequently one-time events.

They are generally not price sensitive or profit maximizing.

HEDGING YOUR BETS

Hedgers come in all shapes and sizes, but dont confuse them will hedge funds. Hedging is
about eliminating or reducing risk. In financial markets, hedging refers to a transaction
designed to insure against an adverse price move in some underlying asset. In the forex
market, hedgers are looking to insure themselves against an adverse price movement in a
specific currency rate.

1).Hedging for international trade purposes

Trade related hedging regularly comes into the spot market in two main forms:

At several of the daily currency fixings.

Mostly in USD/JPY, where Japanese exporters typically have large amounts of USD/
JPY to sell.

1.Hedging for currency options.

GLOBAL INVESTMENT FLOWS

One of the reasons forex market remain as lightly regulated as they are is that no developed
nation wants to impose restrictions on the flow of global capital. International capital is the
lifeblood of the developed economies and the principal factor behind the rapid rise of
developing economies like China, Brazil, Russia, and India. The forex market is central to
the smooth functioning of international debt and equity markets, allowing investors to easily
obtain the currency of the nation they want to invest in.
CROSS BROKERS WITH MERGERS AND ACQUISTIONS

Mergers and acquisitions activity is becoming increasingly international and shows no sign
of abating. International firms are now involved in a global race to gain and expand market
share and cross - border acquisitions are frequently the easiest and fastest way to do that.
When a company seeks to buy a foreign business, there can be a substantial foreign
exchange implication from the trade.

SPECULATORS
Speculators are market acquisitions who are involved in the market for one reason only: to
make money. In contrast to hedgers, who have some form of existing currency market risk,
speculators have no currency risk until they enter the market. Hedgers enter the market to
neutralize or reduce risk. Speculators embrace risk taking as a means of profiting from long-
term or short-term price movements.

Speculators are what really make a market efficient. They add liquidity to the market by
bringing their views and, most important, their capital into the market. That liquidity is what
smoothes out price movements, keeps trading spreads narrow, and allows a market to
expand. In the forex market, speculators are running the show. Conventional market
estimates are that upwards of 90 percent of daily trading volume is speculative in nature. If
you are trading currencies for your own account, welcome to the club. If you are trading to
hedge a financial risk, you can thank the specs for giving you a liquid market and reducing
your transaction costs.

HEDGE FUNDS
Hedge funds are type of leveraged fund, which refers to any number of different forms of
speculative asset management funds that borrow money for speculation based on real assets
under management. For instance a hedge fund with $100 billion under management can
leverage those assets to give them trading limits of anywhere from $500 million to 2 billion.
Hedge funds are subject to the same type of margin requirements as you or we are, just with
whole lots of zeros involved.

The other main type of leveraged fund is known as commodity trading Advisor (CTA). A
CTA is principally active in futures markets. But because the forex market operates around
the clock, CTAs frequently trade spot FX as well. The major difference between the two
types of leveraged funds comes down to regulation and oversight. CTAs are regulated by the
Commodity Futures Trading Commission (CFTC), the same governmental body that
regulates retail FX firms. As a result, CTAs are subject to raft of regulatory and reporting
requirements. Hedge funds, on the other hand, remain largely unregulated. Whats important
is that they all pursue similarly aggressive trading strategies in the forex market, treating
currencies as a separate asset class, like stock or commodities.

National governments are routinely active in forex market, but not for purposes of attempting
to realign or shift the values of the major currencies. Instead, national governments are active
in the forex market for routine funding of government operations, making transfer payments,
and managing foreign currency reserves. The first two functions have generally little impact
on the day-to-day forex market.

CURRENCY RESERVE MANAGEMENT

It refers to how national governments develop and invest their foreign currency reserves.
Foreign currency reserves are accumulated through international trade. Countries with large
trade surpluses will accumulate reserves of foreign currency over time. Trade surpluses arise
when a nation exports more than it imports. Because it is receiving more currency for its
exports than it is spending to buy imports, foreign currency balances accumulate.

The problem is one of perception and also prudent portfolio management:

1. The perception problem stems from the continuing growth of U.S. deficits, which
equates to your continually borrowing money from a bank.

2. The portfolio-management problem arises from the need to diversify assets

in the name of prudence.

BANK FOR INTERNATIONAL SETTLEMENTS

The bank for international settlements is the central bank for central banks. Located in Basel,
Switzerland, the BIS also acts as the quasi government regulator of the international banking
system. It was BIS that established the capital adequacy requirements for banks that today
underpin the international banking system. As the bank to national governments and central
banks, the BIS frequently acts as the market intermediary of those nations seeking to
diversify their currency reserves. By going through the BIS, those countries can remain
relatively anonymous and prevent speculation from driving the market against them.
THE GROUP OF SEVEN

The group of seven, or G7, is composed of the seven largest developed economies in the
world: Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
The G7 is the primary venue for the major global powers to express their collective will on
relative currency values and the need for any adjustments. For forex markets, the big guns of
the G7 are the hottest game in town. Depending on circumstances, currency values may be
on the agenda for these meetings and the communiqu, the official statement issued at the
end of each gathering, may contain an explicit indication for a desired shift among the major
currencies. If currencies are not a hot- button topic, the G7 will include a standard boilerplate
statement that currencies should reflect economic fundamentals and that excessive currency
volatility is undesirable. The power of G7 statements lies in the perception that all the
participants are in agreement with what is contained in the communiqu. Most important, it is
seen as giving the market a green light to carry out the G7s expressed wishes. If the
G7indicates that a recently weak currency is not reflecting fundamentals, for example, its a
signal to the market that the G7 would like to see that currency appreciate
 Chapter 4

The mechanics of currency trading

BUYING AND SELLING SIMULTANEOUSLY

The biggest mental hurdle facing newcomers to currencies, especially traders familiar with
other markets, is getting their head around the idea that each currency trade consists of a
simultaneous purchase and sale. In the stock market, for instance, if you buy 100 shares of
Google, its pretty clear that you now own 100 shares and hope to see the price go up. When
you want to exit that position, you simply sell what you bought earlier. But in currencies, the
purchase of one currency involves the simultaneous sale of another currency. This is the
exchange in foreign exchange. To put it another way, if you are looking for a dollar to go
higher, the question is higher against what? the answer has to be the other currency. In
relative terms, if the dollar goes up against another currency, it also means that the other
currency has gone down against dollar.

CURRENCIES COME IN PAIRS

Forex markets refer to trading currencies by pairs, with names that combine the two different
currencies being traded against each other, or exchanged for one another. Additionally, forex
markets have given most currency nicknames or abbreviations, which reference the pair and
not necessarily the individual currencies involved.

4The U.S. dollars central role in the forex markets stems from a
few basic factors:

The U.S. economy is the largest national economy in the world.

The U.S. dollar is the primary international reserve currency.
The U.S. dollar is the medium of exchange for many cross-border transactions.
The United States has largest and most liquid financial markets in the world.
The United States is a global military superpower, with a stable political system.
MAJOR CURRENCY PAIRS

The major currency pairs all involve the U.S. dollar on one side of the deal. The designations
of the major currencies are expressed using international standardization organization (ISO)
codes for each currency. Currency names and nicknames can be confusing when you are
following the forex market or reading commentary and research.

MAJOR CROSS CURRENCY PAIRS

Although the vast majority of currency trading takes place in the dollar pairs, cross currency
pairs serve as an alternative to always trading the U.S. dollar. A Cross- currency pair, or
cross or crosses for short, is any currency pair that does not include the U.S. dollar. Cross
rates are derived from respective USD pairs but are quoted independently and usually with a
narrower spread than you could get by trading in the dollar pairs directly. Crosses enable
traders to more directly target trades to specific individual currencies to take advantage of
news or events. For example, your analysis may suggest that the Japanese yen has the worst
prospects of all the major currencies going forward, based on interest rates or the economic
outlook.

Cross trades are especially effective when major cross- border mergers and acquisitions are
announced. If a UK conglomerate is buying a Canadian utility company, the UK Company is
going to need to sell GBP and buy CAD to fund the purchase. The key to trading on M&A
activity is to note the cash portion of the deal. If the deal is all stock, then you dont need to
exchange currencies to come up with the foreign cash.

The most actively traded crosses focus on the three major non-USD currencies (namely EUR,
JPY, and GBP) and are referred to as euro crosses, yen crosses and sterling crosses. The
remaining currencies (CHF, AUD, CAD, and NZD) are also traded in cross pairs.

PROFIT AND LOSS

Profit and loss (P &L) is how traders measure success and failure. You dont want to be
looking at the forex market as some academic or thrill- seeking exercise. Real money is made
and lost every minute of every day. If you are going to trade currencies actively, you need to
get up close and personal with P&L.

A clear understanding of how P&L works is especially critical to online margin trading,
where your P&L directly affects the amount of margin you have to work with.

MARGIN BALANCES AND LIQUIDATIONS

When you open an online currency trading account, you will need to pony up cash as
collateral to support the margin requirements established by your broker. That initial margin
deposit becomes your opening margin balance and is the basis on which all your subsequent
trades are collateralized. Unlike futures markets or margin- based equity trading, online forex
brokerages do not issue margin calls. Instead, they establish ratios of margin balances to open
positions that must be maintained at all times.

UNREALIZED AND REALIZED PROFIT AND LOSS

Most online forex brokers provide real-time mark-to-market calculations showing your
margin balance. Mark-to-market is the calculation that shows you unrealized P&L based on
where you could close your open positions in the market at that instant. Depending on your
brokers trading platform, if you are long the calculation will typically be based on where
you could sell at that movement. If you are short, the price used will be where you can buy at
that movement. Your margin balance is the sum of your initial margin deposit, your
unrealized P&L, and your realized P&L.

Realized P&L is what you get when you chose out a trade position, or a position of a trade
position. If you close out the full position and go flat, whatever you made or lost leaves the
unrealized P&L calculation and goes into your margin balance. If you only close a portion of
your open positions, only that part of trades P&L is realized and goes into the trading
balance. Your unrealized P&L will continue to fluctuate based on the remaining open
positions and so will your total margin balance.

UNDERSTANDING ROLLOVERS AND INTERSET RATES

One market unique to currencies is rollovers. A rollover is a transaction where an open
position from one value date (settlement date) is rolled over into the nest value date.
Rollovers represent the intersection of interest-rate markets and forex markets.

CURRENCY IS MONEY, AFTER ALL

Rollover rates are based on the difference in interest rates of the two currencies in the pair
you are reading. Thats because what you are actually trading is good old-fashioned cash.
Thats right: currency is cold, hard cash with a fancy name. When you are long a currency
(cash), its like having a deposit in the bank. If you are short currency (cash), its like having
borrowed a loan. Just as you would expect to earn interest on a bank deposit or pay interest
on a loan, you would expect an interest gain/ expense for holding a currency position over
the change in value.

The catch currency in currency trading is that if you carry over an open position from one
value date to the nest, you have two bank accounts involved. Think of it as one account with
a positive balance (the currency you are long) and one with a negative balance (the currency
you are short). But because your accounts are in two different currencies, the two interest
rates of the different countries will apply.

The difference between the interest rates in the two countries is called the interest-rate
differential. The larger the interest-rate differential, the larger the impact from rollovers. The
narrower the interest- rate differential, the smaller the effect from rollovers. So how do
interest rates get turned into currency rates? After all, interest rates are in percent and
currency rates are, well, not in percent. The answer is that deposit rates yield actual returns,
which are netted, producing a net cash return. That net cash return is then divided by the net
position size, which gives you the currency pips, which is rollover rate.

UNDERSTANDING CURRENCY PRICES

Now we are getting down to the brass tasks of actually making trades in the forex market.
Before we get ahead of ourselves, though, its critical to understand exactly how currency
prices work and what they mean to you as a trader. Keep in mind that different online forex
brokers use different formats to display prices on their trading platforms. A thorough picture
of what the prices mean will allow you to navigate different brokers platforms and know
what you are looking at.

BIDS AND OFFERS

When you are in the front of your screen and looking at an online forex brokers trading
platform, you will see two prices for each company pair. The price on the left-hand side is
called the bid and the price on the right hand side is called the offer (some call this the ask).
Some brokers display the prices above and below each other, with the bid o the bottom and
the offer on the top. The easy way to tell the difference is that the bid price will always be
lower than the offer price.

The price quotation of each bid and offer you see will have two components: the big figure
and the dealing price.

SPREADS

A spread is the difference between the bid price and the offer price. Most online brokers
utilize spread- based trading platforms for individual traders. In one sense you can look at the
spread as the commission that the online brokers charge for executing your trades. So even if
they say you are commission free, they may be earning difference when one trader sells at
the bid price and another trader buys at the offer price. Another way to look at the spread is
that its the compensation the broker receives for being the market-maker and providing a
regular two-way market.

EXECUTING A TRADE

There are two main ways of executing trades in the FX market: live trades and orders. If you
are an adrenaline junkie, dont focus only on the live dealing section- the orders section
gives you a plenty of juice to keep you going, too.

TRADING ONLINE

Clicking and dealing

Most forex brokers provide live streaming prices that you can deal on with a simple click of
your computer mouse. On these platforms to execute a trade:

Specify the amount of the trade you want to make.

Click on the buy or sell button to execute the trade you want.

The forex trading platform will respond back, usually within second or two, to let you know
whether the trade went through:

SIf the trade went through, you will see the trade and your new position appear in your
platforms list of trades.

If the trade failed because of a price change, you need to start again from the top.
 If the trade failed because the trade was too large based on your margin, you need to
reduce the size f the trade.

When the trade goes through, you have a position in the market and you will see your
unrealized P&L, begin updating according to market price fluctuations.

Here are the parameters that you can usually set up in advance:

Present trade amounts

Automatic stop-loss orders at a predetermined distance from the trade- entry price.
Square buttons

Some online brokers advertise narrower trading spreads as a way to attract traders. If you
click-and-deal trade attempts frequently fail, and the platform then asks if you would like to
make the trade at a worse price, you are probably being re-quoted.

PHONE TRADING

Placing live trades over the phone is available from most online forex brokers. You need to
find from your broker whether it offers this service and exactly what its procedures are
before you can ready to use it.

To place a trade over the phone, you will need to:

Call the telephone number at your broker for placing a trade.

When you are connected to a representative, identity yourself by name and give your
trading account number.
Ask what the current price is for the currency pair you are trading.

1) If you dont want the price, say, NO, thank you.

2) If you want the price, specify exactly what trade you would like to make.

3) Confirm with your broker exactly what trade you just made.

4) Get the name of the brokers representative you just made the trade with in case you have
to call back.

ORDERS
Currency traders use orders to catch market movements when they are not in front of their
screens. The forex market is open 24hours a day. A market move is just as likely to happen
while you are asleep or in the shower as it is while you are watching your screen. If you are
not a full-time trader, then you have to probably get a full-time job that requires your
attention when you are at work- at least your boss hopes he has your attention.

Experienced currency traders also routinely use orders to:

Implement a trade strategy from entry to exit.

Capture sharp, short-term price fluctuations.
Limit risk in volatile or uncertain markets.
Preserve trading capital from unwanted losses.
Maintain trading discipline.
Protect profits and minimize losses.

TYPES OF ORDERS

1. Take profit orders

An order used by currency traders specifying the exact rate or number of pips from the
current price point where to close out their current position for a profit. The rate deemed to
be the level where the trader wants to take a profit is sometimes referred to as the "take-profit
point".

As the name suggests, take-profit orders are used to lock in profits in the event the rate
moves in a favourable direction. For example, if you are long a currency pair position and
believe the price will rise to a certain level, but are unsure what it will do beyond that level,
placing a take-profit order at that point will automatically close out your position allowing
you to lock in profit.

Place a take-profit order at 108.80. Price then rises from 107.40 to 108.80 Take-profit order
automatically executed to sell $100 and buy 10,880 yen Profit of 140 yen realized.

2. Limit orders

To avoid buying or selling a stock at a price higher or lower than you wanted, you need to
place a limit order rather than a market order. A limit order is an order to buy or sell a
security at a specific price. A buy limit order can only be executed at the limit price or lower,
and a sell limit order can only be executed at the limit price or higher. When you place a
market order, you can't control the price at which your order will be filled.
For example, if you want to buy the stock of a "hot" IPO that was initially offered at $9, but
don't want to end up paying more than $20 for the stock, you can place a limit order to buy
the stock at any price up to $20. By entering a limit order rather than a market order, you will
not be caught buying the stock at $90 and then suffering immediate losses if the stock drops
later in the day or the weeks ahead.

3. Stop loss orders

What does stop loss order Mean?

An order placed with a broker to sell a security when it reaches a certain price. It is designed
to limit an investor's loss on a security position.

Also known as a "stop order" or "stop-market order".

In other words, setting a stop-loss order for 10% below the price you paid for the stock would
limit your loss to 10%.

It's also a great idea to use a stop order before you leave for holidays or enter a situation in
which you will be unable to watch your stocks for an extended period of time.

A stop loss is an order to buy (or sell) a security once the price of the security climbed above
(or dropped below) a specified stop price. When the specified stop price is reached, the stop
order is entered as a market order (no limit) or a limit order (fixed or pre-determined price).

With a stop order, the trader does not have to actively monitor how a stock is performing.
However because the order is triggered automatically when the stop price is reached, the stop
price could be activated by a short-term fluctuation in a security's price. Once the stop price
is reached, the stop order becomes a market order or a limit order.

4. Trading stop loss orders

A stop loss is an order that is sold automatically if the currency trading venture you invest in
reaches a certain price, preventing more losses to occur. When you place a stop order, you
need to set an exit point, to happen if the trade losses a specific value. The stop order is
basically what it sounds like, it stops your losses and lowers your risks, and so even if the
trading in foreign currency fails to make a profit, your investment is relatively safe.
 Chapter 5

Getting to know the major currency pairs

The vast majority of trading volume in the major currency pairs: EUR/USD, GBP/USD, and
USD/CHF. These currency pairs account for about two-thirds of daily trading volume in the
market and are the most watched barometers of the overall forex market. When you hear
about the dollar rise and falling, its usually referring to the dollar against these other
currencies.

Even though these four pairs are routinely grouped together as the major currency pairs, each
currency pair represents an individual economic and political relationship. Its important to
understand of how different pairs rates move. Most currency trading is very short-term in
nature, typically from a few minutes to few days. This makes understanding a currency pairs
price action a key component of any trading strategy.

THE BIG DOLLAR: EUR/USD

EUR/USD is by far the most actively traded currency pair in the global forex market. The
same goes for the big banks. Every major desk has at least one, and probably several,
EUR/USD traders. This is in contrast to less liquid currency pairs such as GBP/USD or
AUD/USD, for which trading desks may not have dedicated trader. All those EUR/USD
traders add up to vast amounts of market interest, which increases overall trading liquidity.

TRADING FUNDAMENTALS OF EUR/USD

EUR/USD is the currency pair that pits the U.S. dollar against the single currency of Euro
zone, the euro. The Euro zone refers to a grouping of countries in the European Union (EU)
that in 1999 retired their own national currencies and adopted a unified single currency. The
move to a single currency was the culmination of financial unification efforts by the founding
members of the European Union. In adopting the single currency, the nations agreed to abide
by fiscal policy constraints that limited the ratio of national budget deficits to gross domestic
product among other requirements.
TRADING EUR/USD BY THE MEMBERS

Standard market convention is a quote EUR/USD in terms of the number of USD per EUR.
For example, a WUR/USD rate of 1.3000 means that it takes $1.30 to buy 1 euro. EUR/USD
trades inversely to the overall value of the USD, which means when EUR/USD goes up, the
euro is getting stronger and the dollar weaker. When EUR/USD goes down, the euro is
getting weaker and the dollar stronger. If you believed the U.S. dollar was going to move
higher, you are looking to sell EUR/USD. If you thought the dollar was going to weaken, you
would be looking to buy EUR/USD.

EUR/USD has the euro as the base currency and the U.S. dollar as the secondary or counter
currency. That means

EUR/USD is traded in amounts denominated in Euros.

The pip value, or minimum price fluctuation, is denominated in USD.
Profit and loss accrue in USD.
Margin calculations in online trading platforms are typically based in USD.

SWIMMING IN DEEP LIQUIDITY

Liquidity in EUR/USD is based on a variety of fundamental sources, such as

Global trade and asset allocation.

Central bank credibility.
Enhanced status as a reserve currency.

WATCHING THE DATA REPORTS

European central bank (ECB) interest rate decisions and press conferences after ECB
Central Council meetings.
Speeches by ECB officials and individual European finance ministers.

EU-harmonized Consumer price index (CPI), as well as national CPI and Producer Price
Index (PPI) reports

Trading tick by tick.

Fewer price jumps and smaller price gaps.
Backing and filling.
TACTICAL TRADING CONSIDERATIONS IN EUR/USD

Deciding whether its a U.S. dollar move or a euro move.

Being patient in EUR/USD.
Taking advantage of backing and filling.
Allowing for a margin of error on technical levels.

TRADING USD/JPY BY THE NUMBERS

USD/JPY has the U.S. dollar as the base currency and the JPY as the secondary or counter
currency. This means

USD/JPY is traded in amounts denominated in USD.

The pip value, or minimum price fluctuation, is denominated in JPY.
Profit or loss accrues in JPY.
Margin calculations are typically calculated in USD.

IMPORTANT JAPANESE DATA REPORTS

Industrial production.
Industrial production.
Retail sales.
Unemployment rates.

TRADING BEHAVIOR OF EUR/USD

The price action behaviour in EUR/USD regularly exhibits a number of traits that traders
should be aware of:

Machine orders.
Trade balance and current account.
Retail trade.
Bank lending.
Domestic corporate goods price index (CGPI).
National CPI and Tokyo-area CPI.
All- industry activity index and tertiary industry activity index.
TACTICAL TRADING CONSIDERATIONS IN USD/JPY

Actively trading trend-line and price-level breakouts.

Jumping on spike reversals.
Monitoring EUR/JPY and other JPY crosses.

TRADING FUNDAMENTALS OF GBP/USD

GBP/USD is traded in amounts denominated in GBP.

The pip value, or minimum price fluctuation, is denominated in USD.
Profit and loss accrue in USD.
Margin calculations are typically calculated in USD in online trading platforms.

PRICE ACTION BEHAVIOR IN GBP/USD AND USD/CHF

Price action tends to be jumpy, even in normal markets.

Price action tends to see one-way traffic in highly directional markets.
False breaks of technical levels occur frequently.

TACTICAL TRADING CONSIDERATIONS IN GBP/USD and USD/CHF

Reducing position size relative to margin.

Allowing to greater margin of error on technical breaks. Actively trading trend-line
and price-level breakouts.
Jumping on spike reversals.
Monitoring EUR/JPY and other JPY crosses.

TRADING FUNDAMENTALS OF GBP/USD

GBP/USD is traded in amounts denominated in GBP.

The pip value, or minimum price fluctuation, is denominated in USD.
 Profit and loss accrue in USD.
Margin calculations are typically calculated in USD in online trading platforms.

PRICE ACTION BEHAVIOR IN GBP/USD AND USD/CHF

Price action tends to be jumpy, even in normal markets.

Price action tends to see one-way traffic in highly directional markets.
False breaks of technical levels occur frequently.

TACTICAL TRADING CONSIDERATIONS IN GBP/USD AND USD/CHF

Reducing position size relative to margin.

Allowing to greater margin of error on technical breaks.
Being quick on the trigger.
Picking your spots wisely.

TRADING USD/CAD BY THE NUMBERS

USD/CAD has the USD as the primary currency and the CAD as the counter currency. This
means

USD/CAD is traded in amounts denominated in USD.

The pip value, or minimum price fluctuation, is denominated in CAD.
Profit and loss register in CAD.
Margin calculations are typically based in USD, so to see how much margin is
required to hold position in USD/CAD its simple calculation using leverage ratio.

TRADING AUD/USD BY THE NUMBERS

AUD is the primary currency in the pair, and the USD is the counter currency, which means

AUD/USD is traded in amounts denominated in AUD.

The pip value is denominated in USD.
Profit or loss accrues in USD.
Margin calculations are typically in USD on online trading platforms.
TRADING NZD/USD BY THE NUMBERS

NZD/USD is traded position sizes denominated in NZD.

The pip value is denominated in USD.
Profit and loss accrues in USD.
Margin calculations are typically based in USD on margin trading platforms.
 Chapter 6

Minor currency pairs and cross- currency trading

CROSS CURRENCY PAIR

A cross currency pair is any currency pair that does not have the U.S. dollar as one of the

currencies in the pairing. For example, one of the most active crosses is EUR/JPY, pitting the

two largest currencies outside the U.S. dollar directly against each other. But the EUR/JPY

rate at any given instant is a function of the current EUR/USD and USD/JPY rates.

The most popular cross pairs involve the most actively traded major currencies, like
EUR/GBP, EUR/GBP, and EUR/CHF. According to the 2004 BIS survey of foreign
exchange market activity, direct cross trading accounted for a relatively small percentage of
global daily volume-less than 10 percent for the major crosses combined.

WHY TRADE THE CROSSES?

Cross pairs represent entirely new sets of routinely fluctuating currency pairs that offer
another universe of trading opportunities beyond the primary USD pairs. Developments in
the currency market are not always a simple but on whats happening to the U.S. dollar.
Crosses are the other half of the story, and their significance appears to be increasing
dramatically as a result of electronic trading.
Cross trading offers the following advantages:

You can pinpoint trade opportunities based on news or fundamentals.

You can take advantage of interest-rate differentials.
You can exploit technical trading opportunities.
You can expand the horizon of trading opportunities.
You can go with the flow.
 CHAPTER 7

CURRENCY FUTURES

DEFINATION OF CURRENCY FUTURES

A futures contract is a standardized contract, traded on an exchange, to buy or sell a certain

underlying asset or an instrument at a certain date in the future, at a specified price. When the
underlying asset is a commodity, e.g. Oil or Wheat, the contract is termed a commodity
futures contract. When the underlying is an exchange rate, the contract is termed a
currency futures contract. In other words, it is a contract to exchange one currency for
another currency at a specified date and a specified rate in the future. Therefore, the buyer
and the seller lock themselves into an exchange rate for a specific value or delivery date.
Both parties of the futures contract must fulfil their obligations on the settlement date.

Currency futures can be cash settled or settled by delivering the respective obligation of the
seller and buyer. All settlements however, unlike in the case of OTC markets, go through the
exchange.

Currency futures are a linear product, and calculating profits or losses on Currency Futures
will be similar to calculating profits or losses on Index futures. In determining profits and
losses in futures trading, it is essential to know both the contract size (the number of currency
units being traded) and also what the tick value is. A tick is the minimum trading increment
or price differential at which traders are able to enter bids and offers. Tick values differ for
different currency pairs and different underlying. For e.g. in the case of the USD-INR
currency futures contract the tick size shall be 0.25paise or 0.0025 Rupees.
FUTURES TERMINOLOGY

Spot price: The price at which an asset trades in the spot market. In the case of
USDINR, spot value is T + 2.
Futures price: The price at which the futures contract trades in the futures market.
Contract cycle: The period over which a contract trades. The currency future
contracts on the NSE have one- month, two-month, three-month upto twelve month
expiry cycles. Hence the NSE will have 12 contracts outstanding at any given point of
time.
Value date/final settlement date: The last business day of the month will be termed
the value date/ final settlement date of each contract. The last business day would be
taken to be the same as that for inter-bank settlement in Mumbai. The rules for Inter-
bank settlements, including those for known holidays and subsequently
declared holiday would be those as laid down by FEDAI(Foreign
Exchange Dealers Association of India).
Expiry date: It is the date specified in futures contract. This is the last day on which
contract will be traded, at the end of which it ceases to exist. The last trading day will
be two business days prior to the value date/final settlement date.
Contract size: the amount of asset that has to be delivered under one contract. Also
called as a lot size.
Basis: in the context of financial futures, basis can be defined as the futures price
minus the spot price. There will be a different basis for each delivery month for each
contract. In the normal market, basis will be positive. This reflects that futures prices
normally exceed spot prices.
Cost of carry: The relationship between the spot prices and future prices can be
summarized as the cost of carry. This measures the storage cost plus the interest that
is paid to finance or carry the asset till delivery less the income earned on the asset.
For equity derivatives carry cost is the rate of interest.
Initial margin: The amount that must be deposited in the margin account at the time a
futures contract is first entered into is known as initial margin.
Marking-to-market: In the futures market, at the end of each trading day, the margin
account is adjusted to reflect the investors gain or loss depending upon the futures
closing price. This is called as marking-to-market.
Maintenance margin: this is somewhat lower than the initial margin. This is set to
assure that the balance in the margin account never becomes negative. If the balance
in the margin account falls below the maintenance margin, the investor receives a
margin call and is expected to top up margin account to the initial margin level before
trading commences on the next day.
RATIONALE FOR INTRODUCING CURRENCY FUTURES

Futures markets were designed to solve the problems that exist in forward markets. A future
market is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain place. But unlike forward contracts, the future contracts are standardized
and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies
certain standard features of the contract. A futures contract is standardized contract with
standard underlying instrument, a standard quality and quality of the underlying instrument
that can be delivered, ( or which can be use for references purposes in the settlement) and a
standard timing of such settlement.

The standardized items in a futures contract are:

Quantity of underlying.
Quality of underlying.
The date and month of delivery.
The units of price quotation and minimum price change.
Location of settlement.

The rationale for introducing currency futures in the Indian context has been outlined in the
Report of the Internal Working Group on Currency Futures (Reserve Bank of India, April
2008) as follows;

The rationale for establishing the currency futures market is manifold. Both residents and
non-residents purchase domestic currency assets. If the exchange rate remains unchanged
from the time of purchase of the asset to its sale, no gains and losses are made out of
currency exposures.

But if domestic currency depreciates (appreciates) against the foreign currency, the exposure
would result in gain (loss) for residents purchasing foreign assets and loss (gain) for non
residents purchasing domestic assets. In this backdrop, unpredicted movements in exchange
rates expose investors to currency risks. Currency futures enable them to hedge these risks.
Nominal exchange rates are often random walks with or without drift, while real exchange
rates over long run are mean reverting. As such, it is possible that over a long run, the
incentive to hedge currency risk may not be large. However, financial planning horizon is
much smaller than the long-run, which is typically inter-generational in the context of
exchange rates. As such, there is a strong need to hedge currency risk and this need has
grown manifold with fast growth in cross-border trade and investments flows. The argument
for hedging currency risks appear to be natural in case of assets, and applies equally to trade
in goods and services, which results in income flows and lags and get converted into
different currencies at the market rates.

Empirically, changes in exchange rate are found to have very low correlations with foreign
equity and bond returns. This in theory should lower portfolio risk. Therefore, sometimes
argument is advanced against the need for hedging currency risks. But there is strong
empirical evidence to suggest that hedging reduces the volatility of returns and indeed
considering the episodic nature of currency returns, there are strong arguments to use
instruments to hedge currency risks.