How Do You Identify Stocks that are Appropriate for Swing Trading?

All of the methods that are used to identify stocks that are appropriate for swing

trading are based on technical analysis. Technical analysis is a way of using

historical price/volume patterns to predict future behavior. It is not necessary to

have a detailed understanding of technical analysis in order to swing trade.

There are tools available that can assist investors at every level – from novice to

expert. While there are many sources of information and tools that help identify

swing trading opportunities, this book will focus on those provided at

www.mrswing.com. Once you understand the principles, you can explore other

sources of information.

What Tools are Available?

• Subscriptions services that provide daily swing trading recommendations –

www.mrswing.com offers a service called MasterSwings. Larry Swing uses

technical analysis and pattern recognition software (SwingTracker) to

identify candidates for swing trading. Every evening, subscribers receive emails

that identify several different types of patterns that are conducive to

swing trading. Aside from showing you the pattern, the email indicates the

current price, the entry price, the target (limit) price for taking profit, and the

stop loss price for limiting downside risk. This service can be used by

investors at all knowledge levels.

An example of a MasterSwings email alert for Lockheed Martin (LMT) is

shown on the next page. A candlestick chart shows the recent price action for

LMT, and a table indicates the closing price and all three action prices – the

price to buy (using a buy stop order), the target price which is 7% above the

purchase price (using a buy limit order), and the protective stop price which

is approximately 4% below the purchase price (using a sell stop order). The

20- and 50-day moving averages (MA) are also shown so that you can more

easily visualize the direction of the trend.

The rational behind these prices are discussed in the section entitled The

Master Plan.

Introduction to Swing Trading

To make money in the stock market it is necessary to have a disciplined approach to

trading. We also believe that it is also important to keep things simple. While our

goal is to keep things simple, the trading rules might initially seem a bit complex.

However, once you learn the rules and you trade with discipline, you will make

money in the stock market.

Swing trading allows you to make money when the market is bullish, or bearish, or

just going sideways. That is why it has a distinct advantage over other approaches

to investing. The goal is to make money, not to rest one’s hopes on the future of a

stock, a sector, or the economy.

4.1 What is Swing Trading

Everyone is familiar with waves. A wave alternates from positive to negative, then

to positive and negative, and so on. Waves are found in nature – you see waves

when you throw a rock into a lake. Sound is transmitted in waves. And when stock

prices change, they follow a wave-like pattern. The wave is rarely as orderly a sine

wave, but they are waves nevertheless, and we use these waves in Swing Trading.

4.2 Let’s Look at an Up Trends

The chart below shows the price movement of Myriad Genetics (MYGN) in an

uptrend. Notice that after the price moves up, it takes a rest, or pulls back. When

we swing trade an uptrend, we buy on the pull-back.

An uptrend can be identified by a series of higher highs and higher lows (the bottom

of each pull-back). In other words, an uptrend is a series of successive rallies with

each rally going higher than the previous one and each pull-back stopping above the

previous one.

The price movement looks more like the zig-zag of a saw blade than a sinusoid, but

once an uptrend is established the pattern tends to repeat itself. In swing trading

we capitalize on the predictability of the pattern. We buy during the pull-back to

increase our chances of making a profit.

The Steps in Swing Trading

First, restrict your selection to the universe of stocks that fulfill certain criteria.

Choose stocks that …

• Have a price of at least $7

• Have an average daily volume of at least 500,000 shares

Then …

STEP 1 – Identify a stock that is in an uptrend or a downtrend.

STEP 2 – For stocks in an uptrend, identify those that are experiencing a pull-back.

For stocks in a downtrend, identify those that are experiencing a pull-up.

STEP 3 – Once an appropriate candidate is identified, place a limit order to buy

(uptrend) or sell short (downtrend) the stock based on the Master Plan.

STEP 4 – Once a stock has been traded (a position opened), place a stop-loss order

to limit downside risk and place a limit order to identify the price at which

you will take profits. (Ideally, these two orders are placed together as an

OCO (One Cancels Other) order; this is sometimes called an OCA (One

Cancels All) order.

STEP 5 – At the end of each day, adjust the stop loss prices based on the Master

Plan.

4.5 What Can You Expect?

First – only a portion of your trades will be executed. The Master Plan is designed

to only trade stocks that initially move in the anticipated direction. If the

price moves in the opposite direction (continues pulling back or pulling

up), the trade is not placed.

Second – you will be holding positions for a limited amount of time. While swing

trading is not day trading, you are only holding positions until targets are

met.

Third – some of your trades will result in losses, however losses are minimized by

the Master Plan which raises the stops as the stock price rises; this is

known as trailing stops. Being disciplined, and following the Master

Plan will insure that profits exceed losses which means you will make

money.

Overview of trading Forex online

How a Forex system operates in real time

Online foreign exchange trading occurs in real time. Exchange rates are

constantly changing, in intervals of seconds. Quotes are accurate for the time

they are displayed only. At any moment, a different rate may be quoted.

When a trader locks in a rate and executes a transaction, that transaction is

immediately processed; the trade has been executed.

Up-to-date exchange rates

As rates change so rapidly, any Forex software must display the most up-todate

rates. To accomplish this, the Forex software is continuously

communicating with a remote server that provides the most current exchange

rates. The rates quoted, unlike traditional bank exchange rates, are actual

tradable rates. A trader may choose to “lock in” to a rate (called the “freeze

rate”) only as long as it is displayed.

Trading online on Forex platforms

The internet revolution caused a major change in the way Forex trading is

conducted throughout the world.

Until the advent of the internet-Forex age at the end of the 1990’s, Forex

trading was conducted via phone orders (or fax, or in-person), posted to

brokers or banks. Most of the trading could be executed only during business

hours. The same was true for most activities related to Forex, such as making

the deposits necessary for trading, not to mention profit taking. The internet

has radically altered the Forex market, enabling around the clock trading and

conveniences such as the use of credit cards for fund deposits.

Forex on the internet: basic steps

In general, the individual Forex trader is required to fulfill two steps prior to

trading:

• Register at the trading platform

• Deposit funds to facilitate trading

Requirements vary with each trading platform, but these steps bear further

discussion:

Registering

Registration is done online by the individual trader. There are various forms

used in the industry. Some are quite simple, where others are longer and

more time-consuming. In part, this can be attributed to governmental or

other authorities’ requirements, though some Forex platforms require more

information than is actually needed. Some even require a face-to-face

meeting, or to obtain hard copies of required documents such as a passport,

or driver’s license.

The key requirements for registration are the trader’s full name, telephone,

e-mail address, residence, and sometimes also the trader’s yearly income or

capital (equity) and an ID number (passport / driver’s license / SSN / etc.).

Typically, the Forex platform is not required to run a thorough check, but rely

on the registrant to be truthful. Nevertheless, each Forex platform conducts

certain routines, in order to check and verify the authenticity of the details

provided.

Registrants are required to declare that funds used for trading are not in

question, and are not the result of any criminal act or money laundering

activity. This is mandatory as part of a global anti-money laundering effort

Questions and answers about market making

What is a market maker?

A market maker is the counterpart to the client. The Market Maker does not

operate as an intermediary or trustee. A Market Maker performs the hedging

of its clients' positions according to its policy, which includes offsetting

various clients' positions, and hedging via liquidity providers (banks) and its

equity capital, at its discretion.

Who are the market makers in the Forex industry?

Banks, for example, or trading platforms (such as Easy-Forex™), who buy and

sell financial instruments “make the market”. That is contrary to

intermediaries, which represent clients, basing their income on commission.

Do market makers go against a client's position?

By definition, a market maker is the counterpart to all its clients' positions,

and always offers a two-sided quote (two rates: BUY and SELL). Therefore,

there is nothing personal between the market maker and the customer.

Generally, market makers regard all of the positions of their clients as a

whole. They offset between clients' opposite positions, and hedge their net

exposure according to their risk management policies and the guidelines of

regulatory authorities.

Do market makers and clients have a conflict of interest?

Market makers are not intermediaries, portfolio managers, or advisors, who

represent customers (while earning commission). Instead, they buy and sell

currencies to the customer, in this case the trader. By definition, the market

maker always provides a two-sided quote (the sell and the buy price), and

thus is indifferent in regards to the intention of the trader. Banks do that, as

do merchants in the markets, who both buy from, and sell to, their

Can a market maker influence market prices against a client’s position?

Definitely not, because the Forex market is the nearest thing to a “perfect

market” (as defined by economic theory) in which no single participant is

powerful enough to push prices in a specific direction. This is the biggest

market in the world today, with daily volumes reaching 3 trillion dollars. No

market maker is in a position to effectively manipulate the market.

What is the main source of earnings for Forex market makers?

The major source of earnings for market makers is the spread between the bid

and the ask prices. Easy-Forex™ Trading Platform, for instance, maintains

neutrality regarding the direction of any or all deals made by its traders; it

earns its income from the spread.

How do market makers manage their exposure?

The way most market makers hedge their exposure is to hedge in bulk. They

aggregate all client positions and pass some, or all, of their net risk to their

liquidity providers. Easy-Forex™, for example, hedges its exposure in this

fashion, in accordance with its risk management policy and legal

requirements.

For liquidity, Easy-Forex™ works in cooperation with world's leading banks

providing liquidity to the Forex industry: UBS (Switzerland) and RBS (Royal

Bank of Scotland).

Types of exchange rate systems

An exchange can operate under one of four main types of exchange rate

systems:

Fully fixed exchange rates

In a fixed exchange rate system, the government (or the central bank acting

on its behalf) intervenes in the currency market in order to keep the exchange

rate close to a fixed target. It is committed to a single fixed exchange rate

and does not allow major fluctuations from this central rate.

Semi-fixed exchange rates

Currency can move within a permitted range, but the exchange rate is the

dominant target of economic policy-making. Interest rates are set to meet

the target exchange rate.

Free floating

The value of the currency is determined solely by supply and demand in the

foreign exchange market. Consequently, trade flows and capital flows are the

main factors affecting the exchange rate.

The definition of a floating exchange rate system is a monetary system in

which exchange rates are allowed to move due to market forces without

intervention by national governments. The Bank of England, for example,

does not actively intervene in the currency markets to achieve a desired

exchange rate level.

With floating exchange rates, changes in market supply and demand cause a

currency to change in value. Pure free floating exchange rates are rare - most

governments at one time or another seek to “manage” the value of their

currency through changes in interest rates and other means of controls.

Managed floating exchange rates

Most governments engage in managed floating systems, if not part of a fixed

exchange rate system.

The advantages of fixed exchange rates

Fixed rates provide greater certainty for exporters and importers and, under

normal circumstances, there is less speculative activity - though this depends

on whether dealers in foreign exchange markets regard a given fixed

exchange rate as appropriate and credible.

The advantages of floating exchange rates

Fluctuations in the exchange rate can provide an automatic adjustment for

countries with a large balance of payments deficit. A second key advantage of

floating exchange rates is that it allows the government/monetary authority

flexibility in determining interest rates as they do not need to be used to

influence the exchange rate.

Who are the participants in today’s Forex market?

In general, there are two main groups in the Forex marketplace:

Hedgers account for less than 5% of the market, but are the key reason

futures and other such financial instruments exist. The group using these

hedging tools is primarily businesses and other organizations participating in

international trade. Their goal is to diminish or neutralize the impact of

currency fluctuations.

Speculators account for more than 95% of the market.

This group includes private individuals and corporations, public entities,

banks, etc. They participate in the Forex market in order to create profit,

taking advantage of the fluctuations of interest rates and exchange rates.

The activity of this group is responsible for the high liquidity of the Forex

market. They conduct their trading by using leveraged investing, making it a

financially efficient source for earning.

Market making

Since most Forex deals are made by (individual and organizational) traders, in

conjunction with market makers, it’s important to understand the role of the

market maker in the Forex industry.

The fall of the US dollar

The steady and orderly decline of the US dollar from early 2002 to early 2004

against the euro, Australian dollar, Canadian dollar and a few other currencies

(i.e. its trade-weighted average, which is what counts for purposes of trade

adjustment), while significant, has still only amounted to about 20 percent.

There are two reasons why concerns about a free fall of the US dollar may not

be worth considering. Firstly, the US external deficit will stay high only if US

growth remains vigorous, and if the US continues to grow strongly, it will also

retain a strong attraction for foreign capital which, in turn, should support

the US dollar. Secondly, attempts by the monetary authorities in Asia to keep

their currencies weak will probably not work in the long run.

The basic theories underlying the US dollar to euro exchange rate

Law of One Price: In competitive markets, free of transportation cost barriers

to trade, identical products sold in different countries must sell at the same

price when the prices are stated in terms of the same currency.

Interest rate effects: If capital is allowed to flow freely, exchange rates

become stable at a point where equality of interest is established.

The dual forces of supply and demand

These two reciprocal forces determine euro vs. US dollar exchange rates.

Various factors affect these two forces, which in turn affect the exchange

rates:

The business environment: Positive indications (in terms of government

policy, competitive advantages, market size, etc.) increase the demand for

the currency, as more and more enterprises want to invest in its place of

origin.

Stock market: The major stock indices also have a correlation with the

currency rates, providing a daily read of the mood of the business

environment.

Political factors: All exchange rates are susceptible to political instability and

anticipation about new governments. For example, political instability in

Russia is also a flag for the euro to US dollar exchange, because of the

substantial amount of German investment in Russia.

Economic data: Economic data such as labor reports (payrolls, unemployment

rate and average hourly earnings), consumer price indices (CPI), producer

price indices (PPI), gross domestic product (GDP), international trade,

productivity, industrial production, consumer confidence etc., also affect

currency exchange rates.

Confidence in a currency is the greatest determinant of the real euro to US

dollar exchange rate. Decisions are made based on expected future

developments that may affect the currency.

The explosion of the euro market

The rapid development of the Eurodollar market, which can be defined as US

dollars deposited in banks outside the US, was a major mechanism for

speeding up Forex trading. Similarly, Euro markets are those where currencies

are deposited outside their country of origin. The Eurodollar market came

into being in the 1950s as a result of the Soviet Union depositing US dollars

earned from oil revenue outside the US, in fear of having these assets frozen

by US regulators. This gave rise to a vast offshore pool of dollars outside the

control of US authorities. The US government reacted by imposing laws to

restrict dollar lending to foreigners. Euro markets were particularly attractive

because they had far fewer regulations and offered higher yields. From the

late 1980s onwards, US companies began to borrow offshore, finding Euro

markets an advantageous place for holding excess liquidity, providing shortterm

loans and financing imports and exports.

London was and remains the principal offshore market. In the 1980s, it

became the key center in the Eurodollar market, when British banks began

lending dollars as an alternative to pounds in order to maintain their leading

position in global finance. London's convenient geographical location

(operating during Asian and American markets) is also instrumental in

preserving its dominance in the Euro market.

Euro-Dollar currency exchange

The euro to US dollar exchange rate is the price at which the world demand

for US dollars equals the world supply of euros. Regardless of geographical

origin, a rise in the world demand for euros leads to an appreciation of the

euro.

Factors affecting the Euro to US dollar exchange rate

Four factors are identified as fundamental determinants of the real euro to US

dollar exchange rate:

• The international real interest rate differential between the Federal

Reserve and European Central Bank

• Relative prices in the traded and non-traded goods sectors

• The real oil price

• The relative fiscal position of the US and Euro zone

The nominal bilateral US dollar to euro exchange is the exchange rate that

attracts the most attention. Notwithstanding the comparative importance of

bilateral trade links with the US, trade with the UK is, to some extent, more

important for the euro.

The following chart illustrates the EUR/USD exchange rate over time, from

the inauguration of the euro, until mid 2006. Note that each line (the

EUR/USD, USD/EUR) is a “mirror” image of the other, since both are

reciprocal to one another. This chart is illustrates the steady (general) decline

of the USD (in terms of euro) from the beginning of 2002 until the end of

2004.

In the long run, the correlation between the bilateral US dollar to euro

exchange rate, and different measures of the effective exchange rate of

Euroland, has been rather high, especially when one looks at the effective

real exchange rate. As inflation is at very similar levels in the US and the Euro

area, there is no need to adjust the US dollar to euro rate for inflation

differentials. However, because the Euro zone also trades intensively with

countries that have relatively high inflation rates (e.g. some countries in

Central and Eastern Europe, Turkey, etc.), it is more important to downplay

nominal exchange rate measures by looking at relative price and cost

developments.

What is the global Forex market?

Today, the Forex market is a nonstop cash market where currencies of nations

are traded, typically via brokers. Foreign currencies are continually and

simultaneously bought and sold across local and global markets. The value of

traders' investments increases or decreases based on currency movements.

Foreign exchange market conditions can change at any time in response to

real-time events.

The main attractions of short-term currency trading to private investors are:

• 24-hour trading, 5 days a week with nonstop access (24/7) to global

Forex dealers.

• An enormous liquid market, making it easy to trade most currencies.

• Volatile markets offering profit opportunities.

• Standard instruments for controlling risk exposure.

• The ability to profit in rising as well as falling markets.

• Leveraged trading with low margin requirements.

• Many options for zero commission trading.

A brief history of the Forex market

The following is an overview into the historical evolution of the foreign

exchange market and the roots of the international currency trading, from the

days of the gold exchange, through the Bretton-Woods Agreement, to its

current manifestation.

The Gold exchange period and the Bretton-Woods Agreement

The Bretton-Woods Agreement, established in 1944, fixed national currencies

against the US dollar, and set the dollar at a rate of USD 35 per ounce of gold.

In 1967, a Chicago bank refused to make a loan in pound sterling to a college

professor by the name of Milton Friedman, because he had intended to use

the funds to short the British currency. The bank's refusal to grant the loan

was due to the Bretton-Woods Agreement.

Bretton-Woods was aimed at establishing international monetary stability by

preventing money from taking flight across countries, thus curbing speculation

in foreign currencies. Between 1876 and World War I, the gold exchange

standard had ruled over the international economic system. Under the gold

standard, currencies experienced an era of stability because they were

supported by the price of gold.

However, the gold standard had a weakness in that it tended to create boombust

economies. As an economy strengthened, it would import a great deal,

running down the gold reserves required to support its currency. As a result,

the money supply would diminish, interest rates would escalate and economic

activity would slow to the point of recession. Ultimately, prices of

commodities would hit rock bottom, thus appearing attractive to other

nations, who would then sprint into a buying frenzy. In turn, this would inject

the economy with gold until it increased its money supply, thus driving down

interest rates and restoring wealth. Such boom-bust patterns were common

throughout the era of the gold standard, until World War I temporarily

discontinued trade flows and the free movement of gold.

The Bretton-Woods Agreement was founded after World War II, in order to

stabilize and regulate the international Forex market. Participating countries

agreed to try to maintain the value of their currency within a narrow margin

against the dollar and an equivalent rate of gold. The dollar gained a premium

position as a reference currency, reflecting the shift in global economic

dominance from Europe to the USA. Countries were prohibited from devaluing

their currencies to benefit export markets, and were only allowed to devalue

their currencies by less than 10%. Post-war construction during the 1950s,

however, required great volumes of Forex trading as masses of capital were

needed. This had a destabilizing effect on the exchange rates established in

Bretton-Woods.

In 1971, the agreement was scrapped when the US dollar ceased to be

exchangeable for gold. By 1973, the forces of supply and demand were in

control of the currencies of major industrialized nations, and currency now

moved more freely across borders. Prices were floated daily, with volumes,

speed and price volatility all increasing throughout the 1970s. New financial

instruments, market deregulation and trade liberalization emerged, further

stoking growth of Forex markets.

The explosion of computer technology that began in the 1980s accelerated

the pace by extending the market continuum for cross-border capital

movements through Asian, European and American time zones. Transactions

in foreign exchange increased rapidly from nearly $70 billion a day in the

1980s, to more than $2 trillion a day two decades later..

Margin !!!

Banks and/or online trading providers need collateral to ensure that the

investor can pay in the event of a loss. The collateral is called the “margin”

and is also known as minimum security in Forex markets. In practice, it is a

deposit to the trader's account that is intended to cover any currency trading

losses in the future.

Margin enables private investors to trade in markets that have high minimum

units of trading, by allowing traders to hold a much larger position than their

account value. Margin trading also enhances the rate of profit, but similarly

enhances the rate of loss, beyond that taken without leveraging.

Maintenance Margin

Most trading platforms require a “maintenance margin” be deposited by the

trader parallel to the margins deposited for actual trades. The main reason

for this is to ensure the necessary amount is available in the event of a “gap”

or “slippage” in rates. Maintenance margins are also used to cover

administrative costs.

When a trader sets a Stop-Loss rate, most market makers cannot guarantee

that the stop-loss will actually be used. For example, if the market for a

particular counter currency had a vertical fall from 1.1850 to 1.1900 between

the close and opening of the market, and the trader had a stop-loss of 1.1875,

at which rate would the deal be closed? No matter how the rate slippage is

accounted for, the trader would probably be required to add-up on his initial

margin to finalize the automatically closed transaction. The funds from the

maintenance margin might be used for this purpose.

Important note: Easy-Forex™ does NOT require that traders deposit a

maintenance margin. Easy-Forex™ guarantees the exact rate (Stop-Loss or

other) as pre-defined by the trader.

Leverage

Leveraged financing is a common practice in Forex trading, and allows traders

to use credit, such as a trade purchased on margin, to maximize returns.

Collateral for the loan/leverage in the margined account is provided by the

initial deposit. This can create the opportunity to control USD 100,000 for as

little as USD 1,000.

There are five ways private investors can trade in Forex, directly or

indirectly:

• The spot market

• Forwards and futures

• Options

• Contracts for difference

• Spread betting

Please note that this book focuses on the most common way of trading in the

Forex market, “Day-Trading” (related to “Spot”). Please refer to the glossary

for explanations of each of the five ways investors can trade in Forex.

A spot transaction

A spot transaction is a straightforward exchange of one currency for another.

The spot rate is the current market price, which is also called the “benchmark

price”. Spot transactions do not require immediate settlement, or payment

“on the spot”. The settlement date, or “value date” is the second business

day after the “deal date” (or “trade date”) on which the transaction is agreed

by the trader and market maker. The two-day period provides time to confirm

the agreement and to arrange the clearing and necessary debiting and

crediting of bank accounts in various international locations.

Risks

Although Forex trading can lead to very profitable results, there are

substantial risks involved: exchange rate risks, interest rate risks, credit risks

and event risks.

Approximately 80% of all currency transactions last a period of seven days or

less, with more than 40% lasting fewer than two days. Given the extremely

Spreads !!!

It is the difference between BUY and SELL, or BID and ASK. In other words,

this is the difference between the market maker's "selling" price (to its

clients) and the price the market maker "buys" it from its clients.

If an investor buys a currency and immediately sells it (and thus there is no

change in the rate of exchange), the investor will lose money. The reason for

this is “the spread”. At any given moment, the amount that will be received

in the counter currency when selling a unit of base currency will be lower

than the amount of counter currency which is required to purchase a unit of

base currency. For instance, the EUR/USD bid/ask currency rates at your

bank may be 1.2015/1.3015, representing a spread of 1,000 pips (percentage

in points; one pip = 0.0001). Such a rate is much higher than the bid/ask

currency rates that online Forex investors commonly encounter, such as

1.2015/1.2020, with a spread of 5 pips. In general, smaller spreads are better

for Forex investors since they require a smaller movement in exchange rates

in order to profit from a trade.

Prices, Quotes and Indications

The price of a currency (in terms of the counter currency), is called “Quote”.

There are two kinds of quotes in the Forex market:

Direct Quote: the price for 1 US dollar in terms of the other currency, e.g. –

Japanese Yen, Canadian dollar, etc.

Indirect Quote: the price of 1 unit of a currency in terms of US dollars, e.g. –

British pound, euro.

The market maker provides the investor with a quote. The quote is the price

the market maker will honor when the deal is executed. This is unlike an

“indication” by the market maker, which informs the trader about the market

price level, but is not the final rate for a deal.

Cross rates – any quote which is not against the US dollar is called “cross”. For

example, GBP/JPY is a cross rate, since it is calculated via the US dollar. Here

is how the GBP/JPY rate is calculated:

What is Forex trading? What is a Forex deal?

The investor's goal in Forex trading is to profit from foreign currency

movements.

More than 95% of all Forex trading performed today is for speculative purposes

(e.g. to profit from currency movements). The rest belongs to hedging

(managing business exposures to various currencies) and other activities.

Forex trades (trading onboard internet platforms) are non-delivery trades:

currencies are not physically traded, but rather there are currency contracts

which are agreed upon and performed. Both parties to such contracts (the

trader and the trading platform) undertake to fulfill their obligations: one

side undertakes to sell the amount specified, and the other undertakes to buy

it. As mentioned, over 95% of the market activity is for speculative purposes,

so there is no intention on either side to actually perform the contract (the

physical delivery of the currencies). Thus, the contract ends by offsetting it

against an opposite position, resulting in the profit and loss of the parties

involved.

Components of a Forex deal

A Forex deal is a contract agreed upon between the trader and the marketmaker

(i.e. the Trading Platform). The contract is comprised of the following

components:

• The currency pairs (which currency to buy; which currency to sell)

• The principal amount (or "face", or "nominal": the amount of currency

involved in the deal)

• The rate (the agreed exchange rate between the two currencies).

Time frame is also a factor in some deals, but this chapter focuses on Day-

Trading (similar to “Spot” or “Current Time” trading), in which deals have a

lifespan of no more than a single full day. Thus, time frame does not play

into the equation. Note, however, that deals can be renewed (“rolled-over”)

to the next day for a limited period of time.

The Forex deal, in this context, is therefore an obligation to buy and sell a

specified amount of a particular pair of currencies at a pre-determined

exchange rate.

Forex trading is always done in currency pairs. For example, imagine that the

exchange rate of EUR/USD (euros to US dollars) on a certain day is 1.1999

(this number is also referred to as a “spot rate”, or just “rate”, for short). If

an investor had bought 1,000 euros on that date, he would have paid 1,199.00

US dollars. If one year later, the Forex rate was 1.2222, the value of the euro

has increased in relation to the US dollar. The investor could now sell the

1,000 euros in order to receive 1222.00 US dollars. The investor would then

have USD 23.00 more than when he started a year earlier.

However, to know if the investor made a good investment, one needs to compare

this investment option to alternative investments. At the very minimum, the return

on investment (ROI) should be compared to the return on a “risk-free” investment.

Long-term US government bonds are considered to be a risk-free investment since

there is virtually no chance of default - i.e. the US government is not likely to go

bankrupt, or be unable or unwilling to pay its debts.

Trade only when you expect the currency you are buying to increase in value

relative to the currency you are selling. If the currency you are buying does

increase in value, you must sell back that currency in order to lock in the

profit. An open trade (also called an “open position”) is one in which a trader

has bought or sold a particular currency pair, and has not yet sold or bought

back the equivalent amount to complete the deal.

It is estimated that around 95% of the FX market is speculative. In other

words, the person or institution that bought or sold the currency has no plan

to actually take delivery of the currency in the end; rather, they were solely

speculating on the movement of that particular currency.

Exchange rate

Because currencies are traded in pairs and exchanged one against the other

when traded, the rate at which they are exchanged is called the exchange

rate. The majority of currencies are traded against the US dollar (USD), which

is traded more than any other currency. The four currencies traded most

frequently after the US dollar are the euro (EUR), the Japanese yen (JPY), the

British pound sterling (GBP) and the Swiss franc (CHF). These five currencies

make up the majority of the market and are called the major currencies or

“the Majors”. Some sources also include the Australian dollar (AUD) within the

group of major currencies.

The first currency in the exchange pair is referred to as the base currency.

The second currency is the counter currency or quote currency. The counter

or quote currency is thus the numerator in the ratio, and the base currency is

the denominator.

The exchange rate tells a buyer how much of the counter or quote currency

must be paid to obtain one unit of the base currency. The exchange rate also

tells a seller how much is received in the counter or quote currency when

selling one unit of the base currency. For example, an exchange rate for

EUR/USD of 1.2083 specifies to the buyer of euros that 1.2083 USD must be

paid to obtain 1 euro.

How do I start trading?

If you wish to trade using the Easy-Forex™ Trading Platform, or any other, you

must first register and then deposit the amount you wish to have in your

margin account to invest. Registering is easy with Easy-Forex™ and it accepts

payment via most major credit cards, PayPal, Western Union. Once your

deposit has been received, you are ready to start trading.

How do I monitor my Forex trading?

Online, anywhere, anytime. You have full control to monitor your trading

status, check scenarios, change some terms in your Forex deals, close deals,

or withdraw profits.

Forex? What is it

The market

The currency trading (foreign exchange, Forex, FX) market is the biggest and

fastest growing market on earth. Its daily turnover is more than 2.5 trillion

dollars. The participants in this market are central and commercial banks,

corporations, institutional investors, hedge funds, and private individuals like

you.

What happens in the market?

Markets are places where goods are traded, and the same goes with Forex. In

Forex markets, the “goods” are the currencies of various countries (as well as

gold and silver). For example, you might buy euro with US dollars, or you

might sell Japanese Yen for Canadian dollars. It’s as basic as trading one

currency for another.

Of course, you don’t have to purchase or sell actual, physical currency: you

trade and work with your own base currency, and deal with any currency pair

you wish to.

“Leverage” is the Forex advantage

The ratio of investment to actual value is called “leverage”. Using a $1,000 to

buy a Forex contract with a $100,000 value is “leveraging” at a 1:100 ratio.

The $1,000 is all you invest and all you risk, but the gains you can make may

be many times greater.

How does one profit in the Forex market?

Obviously, buy low and sell high! The profit potential comes from the

fluctuations (changes) in the currency exchange market. Unlike the stock

market, where share are purchased, Forex trading does not require physical

purchase of the currencies, but rather involves contracts for amount and

exchange rate of currency pairs.

The advantageous thing about the Forex market is that regular daily

fluctuations – in the regular currency exchange markets, often around 1% - are

multiplied by 100! (Easy-Forex™ generally offers trading ratios from 1:50 to

1:200).

How risky is Forex trading?

You cannot lose more than your initial investment (also called your “margin”).

The profit you may make is unlimited, but you can never lose more than the

margin. You are strongly advised to never risk more than you can afford to

lose.