Intro to Forex (1)

8/3/2019 Intro to Forex (1)

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Adam Narczewski X-Trade Brokers Dom Maklerski S.A.

X-Trade Brokers Dom Maklerski S.A.

Introduction to the Forexmarket


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The money market

The capital market

The currency market

The derivatives market

The financial market can be divided into:


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The currency market efficient market..?

What is an efficient market?

The market is efficient if competition between its participants leads

to a situation, where at any time the current asset price reflects thefull impact of all relevant information, which has already beenpublished and the one that the market expects.

In other words, if the market is efficient if, at any time the current

price of the assets is equal to its intrinsic value.


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Basic assumptions of an efficient market by Eugene Fam

A large number of reasonably thinking, actively competing witheach other investors, each of which is to achieve the greatest profit.

Symmetric information - all investors have unlimited, free access toall information relevant for determining the price of the assets.

There are no transaction costs (commissions, fees, taxes)


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The forex market as an example of a market close to an efficientmarket

Practically any information relevant for asset prices on the forexmarket is also available to all participants, and is almostimmediately reflected in the price of the asset.

Multiplicity and diversity of participants in the forex market

The world's largest volume of turnoverEffective and very flexible mechanism


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The OTC market

OTC Over the Counter Market

Not having a physical market place, which means that transactionstake place between market participants: banks, companies,currency brokers, individual investors, communicating via theInternet and telephone lines. The basis of the market are

transactions, carried out 24 hours a day, between banks andfinancial institutions that make up the interbank market. Thismarket operates 24 hours a day from Sydney, Tokyo, London andNew York. Daily turnover over $4.5 trillion (3 times larger thanstocks and bonds put together)


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Currency market participants:

Central banks

Commercial banks

Mutual funds

Brokers and brokerage houses

Participate as hedgers, speculators, arbitargeurs ormarket makers


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The great number of participants makes FOREX the

most liquid financial market in the world and practicallyimpossible to manipulate even for central banks of themost developed countries. For this reason, traders whoare able to properly predict future pricemovements can achieve significant profits on the

market.

To date this currency market was accessible only tomajor players like banks, investment funds, large

companies or wealthy private investors. Nowadays,thanks to licensed electronic trading brokers like X-Trade, even individual investors can take a part intrading FOREX worldwide.


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Transactions on the FOREX market include:

Settlement of international transactions

Interbank loans

Speculation

Hedging of currency risk


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CFD - Contract for Difference, non delivery spottransaction gives an opportunity to make profit onchanges in currency rates, commodity, stock marketindices or share prices. The transaction gives an

opportunity to buy or sell a specified amount of assetinvolving only limited amount of money for initial margin- the percentage of the nominal price of the CFDcontract. Typically, initial margin is intended to represent

the maximum one-day net loss you could reasonably beexpected to incur on the position.

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Contract for Difference (CFD) as derivatives


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Symbol Base Quoted BID ASK

EURUSD Euro Dollar 1.3601 1.3603

USDPLN Dolar Zoty 2.9514 2.9554

USDJPY Dolar Yen 90.16 90.19

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Sample quotes of exchange rates


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XTB-TraderMarkets

1) Commodities market

oil gold silver industrial commodities soft commodities

3) Equities market stocks and bonds(stocks of US companies, bonds from the US and German markets);

contracts for indices: USA, UK, France, Hong Kong, Tokio, Warsaw and many more.

2) Currency market(Forex) largest market in the world

open 24h a day, 5 days a week.


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Financial Leverage

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Leverage allows investors to open a significant market

position with the need to deposit only - as a percentageof the nominal- margin.

Investors by depositing margins may therefore

maximize the achievable rate of return.

On the other hand, leverage carries the risk of incurringlosses in excess of the standard investment losses

through such instruments like ex. stocks.

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Margin (initial deposit)

margin blocked when opening a transaction;

it allows the use of leverage;

margin amount (standard): 1% of nominal for currencies

2% of nominal for indices

3% of nominal for commodities

7% of nominal for equities

3% of nominal for W20PLN

allows you to open a large number of trades with a small commitment ofcapital.


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Margin Calculation

Find in Regulations:

Derivatives Specification table


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Margin for currency contracts is 1% of the nominal value of the contract(check in the Table of Margin Levels).

Then, for a contract of 1 lot:

MARGIN= 100 000 EUR * 1% = 1 000 EUR

Interpretation: In order to make a trade with a nominal value of 100 000EUR, we only need 1000 EUR.

An example of a currency contract on EURUSD


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PIPS the smallest possible price change

The procedure of calculating the value of 1 pip (EURUSDexample):

(Attention: The value of the pip is calculated using the second currency

in the pair!!!) Size of one pip EURUSD: 0,0001 (Derivatives Specification)

1 Pip = 0,0001 * 100 000 USD = 10 USD

Interpretation: how much will investors profit/loss change if the pricemoves by 1 pip (0,0001).


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Terminal the Trade tab, the most important parameters ofthe account

Balance - the value of the account with no open trades;

Equity the value of the portfolio including open trades;

Free margin the amount of capital that can be used as margin in trades;

Margin Level (ML) built-in indicator.

If ML drops below 30%, the transaction with the biggest loss will be closed.

EquityML = *100%

Margin


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Example 1:

Contracts for Difference (CFD)

Buy 1 lot EURUSD at 1,3600 long position

Profit

Loss

Quote

1,3600

1,37001,3500

At 1,3700 the result of the buyer of the contract = + 0,0100 pips

At 1,3500 the result of the buyer of the contract = - 0,0100 pips

1 pip = 10 USD


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Example 2:

Contracts for Difference (CFD)

Sell 0.5 lots EURUSD at 1,3550 short position

Profit

Loss

Quote

1,3550 1,36501,3450

At 1,3450 the result for the seller of the contract = + 0,0100 pips

At 1,3450 the result for the seller of the contract = - 0,0100 pips

1 pip = 5 USD


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Work it out through an example

My capital is 10,000 USD, investors capital involvement30%, maximum loss 2%, eur/usd market; (EURUSD =1.3600)

How many lots can I buy? How far my stop loss should be (in points)?

Tips:

Calculate the amount that has to be used as deposit andcompare it with the amount needed to purchase 1 lot.

Calculate the amount of losses in USD, calculate the value of 1

pip at that nominal.


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Solution

Amount for deposit = 3,000 USD (the 30%)

Amount for 1 lot of EURUSD (1000 eur) = 1,360 USD

3,000/1,360= 2.2 lots

Value of 1 pip with 2.2 lots = 22 USD

Amount of acceptable loss 2%*10000=200USD

200/22=9 pips


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Factors affecting prices

The price of a financial instrument may be influenced by suchfactors as:

political stability

economic cycles

public finances

central banks monetary policy

aversion/appetite for risk


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The most important factors affecting prices

U.S labor market report

Interest rate decisions

Gross Domestic Product - GDPInflation (PCE, CPI, PPI, deflator)

Current Account

Trade Balance

Institute of Supply Management (ISM)


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Where to look for macro publications

www.xtb.in Markets and Instruments tab then ECONOMIC CALENDAR + important macro

publications marked *www.xtb.in main site, lower right-hand side

www.reuters.com

www.forexfactory.com

www.wsj.com

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The most important factors affecting prices

The most important element in shaping the market price is theattitude of investors towards the asset (the bias).

Whatever the macroeconomic data will appear, often times mayhave no effect on the asset price.

On the currency market the most important are the expectations ofits participants as to the future value of the assets and the supply

and demand for them. Therefore, this market is considered themost technical of all the financial markets.


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Market Correlations:currencies-currencies

EUR/USD vs. USD/PLN


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Market reaction (EUR/USD)


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Market reaction(USD/PLN)


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Justification of reaction

Rapid strengthening of the USD versus the PLN was due to theEURUSD drop because of the review of the August data of the numberof new jobs in non-agricultural sector (from -4 thousand to 89thousand). Also, better than expected were September's news (110thousand against the forecast of 100 thousand.).

Strengthening of the U.S. Dollar, however, was short-lived, whichresulted from a general anti-dollar attitude of the market. This was dueto the overall situation of the Amercian economy and published earlier

data from the manufacturing and service sectors (manufacturing ISMand services ISM).


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Commodities are quoted in U.S. dollars, thus the

weakening of the U.S. currency increases the interest incommodities, because they are cheaper for investorshaving other currencies, ex. USD or GBP (negativecorrelation).

Market Correlations(commodities - example)


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Basics of TECHNICAL ANALYSIS


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Trend the basis of technical analysisNever play against the trend

Intuitive: market direction.

Upward trend: market direction,in which lows and peaksare located higher.

Downward trend: following peaks and lowsare located lower.

Horizontal trend: following peaks and lowslocated horizontaly.


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UPWARD TREND


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DOWNWARD TREND


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Trend support and resistance levels

Support: level from which lowsbounce back

Resistance: level from which

consecutive peaks bounce back

Application: Natural levels where

the market shows its strength orweakness of the signals to opena position.

support

resistance

resistance

support


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Practical advice for investors on theforex market


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Stop Loss: loss minimalization

Setting the S/L based on capital management (1-5% ofcapital)

Setting the S/L based on the chart

(support and resistance levels)

Setting the S/L based on volatility.

Elements of an investment strategy


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Capital management: loss minimalization

Involvement of capital in a single transaction(ex. no morethan 10%)

Setting the maximum potential loss (ex. A percentage ofthe invested funds)



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Control over your trades

Choose 2-3 markets

Investing in avariety of instruments makes the investor losecontrol of his/her open positions.



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Thanks for your attention

Aditya Myana

[email protected]

X-Trade Brokers Services India Pvt. Ltd.A-703, 215 Atrium, Andheri-Kurla Road, Andheri

East, Mumbai - 400059

tel. +91 2267 13 13 13/22

www.xtb.in

Intro to Forex (1)

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