At these times, less money goes to the market makers facilitating currency trades, which means traders can pocket more. Traders can benefit from knowing when the trading hours overlap. During overlapping forex market hours, volatility tends to increase. Forex traders often commit their hours to memory, paying particular attention to the hours when two exchanges overlap. Note When more than one market is open at the same time, this increases trading volume and adds volatility which is the degree to which equity or currency prices change.
The volatility can benefit forex traders. While some investors fear market volatility because of the increased risk, forex traders generally prefer greater volatility because they have the potential to earn higher profits. Worldwide Forex Markets Hours The forex is fully electronic and open somewhere in the world between 5 p. Sunday and 4 p. Each region has major exchanges with unique trading hours from Monday through Friday. Sydney: 5 p. While each exchange functions independently, they all trade the same currencies.
So, when exchanges in two markets are open, the number of traders actively buying and selling a given currency greatly increases. The bids and asks in one forex market exchange immediately impact bids and asks on all other open exchanges. That reduces market spreads and increases volatility, including in the following windows: 8 a. On the flip side, from 5 p. There can be exceptions, and the expected trading volume is based on the assumption that no major news will come to light. Political or military crises that develop during otherwise slow trading hours could potentially spike volatility and trading volume.
Certain economic data that can move the market has a regular release schedule. What happens in a Bear Market? A bear market denotes a negative trend in the market as the investor sells riskier assets such as stock and less-liquid currencies such as those from emerging markets. The chances of loss are far greater because prices are continually losing value. Investor or traders are better off short-selling or moving to safer investments like gold or fixed-income securities.
Because a trader can earn great profit during bull and bear market considering you are trading with the trend. As forex trading is always done in pairs, buy the strength and sell the weak should be your trade. What is Lot size? Let us now learn what a lot size is.
A lot is a unit to measure the amount of the deal. Trading with the proper position or lot size on each trade is key to successful forex trading. The position size refers to how many lots micro, mini or standard you take on a particular trade. The standard size for a lot is , units of base currency in a forex trade, and now we have mini, micro and nano lot sizes that are 10,, 1, and units respectively.
What is long in forex trade? Whenever you purchase buy a currency pair, it is called going long. When a currency pair is long, the first currency is purchased indicating, you are bullish while the second is sold short indicating, you are bearish.
What is short in forex trade? When you go short on a forex, the first currency is sold while the second currency is bought. To go short on a currency means you sell it hoping that its prices will decline in future. What are Pending Orders in Forex Trade? A pending order in any trade is an order that was not yet executed thus not yet becoming a trade.
Generally, while trading we place the order with a limit, means our order pending trade will not get executed if the price of a financial instrument does not reach a certain point. Pending order will automatically get executed once price reaches to the pending order position. Buy Stop A pending order to buy a currency at a higher price whatever price trader wants to execute than the current one. Sell Limit A pending order to sell a currency pair at a higher price whatever price trader wants to sell than the current price.
Sell Stop A pending order to sell a currency pair at a lower price buy high, sell low. What is Leverage and Margin? In this chapter, we will learn about leverage and margin and how these influence the financial market. What is Leverage?
Forex trading provides one of the highest leverage in the financial market. Leverage means having the ability to control a large amount of money using very little amount of your own money and borrowing the rest. Your leverage, which is expressed in ratios, is now In such case, the trade goes in your favor. Therefore, risk management of leverage position is very important for every trader or investor. What is Margin? Your broker to maintain your position uses it. Margin is expressed as a percentage of the full amount of the position.
Based on the margin required by your broker, you can calculate the maximum leverage you can yield with your trading account. Hedging Hedging is basically a strategy which is intended to reduce possible risks in case prices movement against your trade. To protect against a loss from a price fluctuation in future, you usually open an offsetting position in a related security. Traders and investors usually use hedging when they are not sure which way the market will be heading.
Ideally, hedging reduces risks to almost zero, and you end up paying only the broker's fee. This allows you to offset some of the potential risks of your position while not depriving you of your profit potential completely. One of the classic example would be to go long say an airline company and simultaneously going long on crude oil. As these two sector are inversely related, a rise in crude oil prices will likely cause your airline long position to suffer some losses but your crude oil long helps offset part or all of that loss.
If the oil prices remain steady, you may profit from the airline long while breaking even on your oil position. If the prices of oil goes down, the oil long will give you losses but the airline stock will probably rise and mitigate some or all your losses. So hedging helps to eliminate not all but some of your risks while trading. This strategy may come handy where you do not want to directly trade with your portfolio for a while due to some market risks or uncertainties, but you rather not liquidate part or all of it for other reasons.
In this type of hedging, the hedge is straightforward and can be calculated precisely. Stop Losses A stop-loss is an order placed in your trading terminal to sell a security when it reaches a specific price. It is commonly used with a long position but can be applied and is equally profitable for a short position.
It comes very handy when you are not able to watch the position. Stop-losses in Forex is very important for many reasons. One of the main reason that stands out is no one can predict the future of the forex market every time correctly. The future prices are unknown to the market and every trade entered is a risk. Forex traders can set stops at one fixed price with an expectation of allocating the stoploss and wait until the trade hits the stop or limit price.
Stop-loss not only helps you in reducing your loss in case trade goes against your bet but also helps in protecting your profit in case trade goes with the trend. You expect there will be a lot of volatility and USD will rise. Announcement comes and USD starts falling and suppose you have put the stop-loss at To protect your profit you can set stop-loss at If your stop-loss hit at Major Currencies In this section, we will learn about the distinct features of six major currencies.
The US Dollar is the base or universal currency to evaluate any other currency traded on forex. Almost all currencies are generally quoted in US dollar terms. Most commodities metals, oil etc. As US dollar is considered as the safe-haven currency. Therefore, investors move towards the dollar when economic conditions deteriorate. This restricts the dominance of Euro in the global forex market. In the event of problems, EU leaders have a hard time finding common solutions that are beneficial to both the large and small economies.
The natural demand to trade the Yen comes mostly from the Japanese Keiretsu, the economic and financial conglomerates. The Japanese stock market,. Because the Japanese economy is mostly an industrial exports economy, the Japanese currency JPY among traders and investors is considered as a safe-haven currency in periods when risk aversion hits the market.
Low interest rates in Japan allows traders to borrow at low cost and invest in other countries. Because japan is an export oriented economy, the central bank is constantly trying to weaken its currency. Until the end of World War II, the pound continued to have the same dominance in forex market what is US dollar today and was the currency of reference. The currency GBP is heavily traded against the euro and the US dollar but has less presence against other currencies.
The fundamental factors that affect the pound are as complex and varied as the British economy and its influence on the world. Inflation, country GDP and the housing market influence the pound value. It is also, the only currency of a major European country that neither belongs to the European Union nor to the G-7 countries.
Though the size of the Swiss economy is relatively small, the Swiss franc is one of the four major currencies traded in the forex market, closely resembling the strength and quality of the Swiss economy and finance. The CHF prices depend on the central bank policy. The CHF tends to be more volatile compared to other major currencies due to lack of liquidity. This is because the Canadian economy is exportoriented and the main product of export is crude oil. Therefore, the Canadian Dollar prices are influenced by the price of crude oil.
Global economic growth and technological progress help to make the CAD attractive to investors. Different Trade systems on Forex There are different ways in which trading is done in the global forex market. The main role of these brokers is to serve banks. They act as intermediaries to buy and sell currencies at commissioned rates. Before the dawn of Internet, a majority of the FX brokers executed orders via phone using an open box system.
This way, banks also received all the business orders. In an open box system used by brokers, a trader is able to hear all the prices quoted; whether the bid was executed or the offer ask taken; and the price that followed. What is hidden from the trader is the amounts of particular bids and offers and the names of the banks showing the prices. The prices were confidential, and the buyers and sellers were anonymous.
In this age of Internet, many brokers have allowed clients to access their accounts and trade through electronic platform mostly through their proprietary software and computer applications. Direct Dealing Direct dealing is based on the economy of mutuality.
What is the BOP indicator? Igor recommends that: A period moving average is recommended for daily charts. Although the number of periods may vary depending on the nature of the market and timeframes. The level at which it clusters its bottoms and tops is considered one of the most important properties of the BOP indicator. During uptrends, its highs often touch the upper limits and never go back to the bottom level and the situation reverses during the downtrend.
Traders take a change in the BOP trend as a warning and it is wise to confirm by a change in the direction of the price. How does the Balance of Power indicator work? The Balance of Power indicator is a unique indicator although it may look like an average indicator.
This indicator is not an oscillator despite rapidly oscillating above and below Zero Line. It has a very unique logic of its own. This is the main principle behind the functioning of the BOP indicator. The working of the BOP is interesting in the sense that it miraculously traces market conditions in real-time.
What does the Balance of Power indicator tell traders? The Balance of Power indicator tells traders about the underlying activity in the trading market. More specifically, it shows whether the systematic buying is going on or the systematic selling activity is on the boom.
The ability to contradict price movements is the most fascinating of the BOP. Its movement totally against the price is a normal scenario. For example, when the prices make new highs, the BOP may well be making new lows at the very same time. It has the remarkable potential to trace divergences in the market. It is this aforementioned characteristic that is unmatched by any other simple indicator. The price and the BOP tend to move side by side.
When the price reaches a new high but the BOP indicator fails to confirm this movement, it is an indication of a market divergence. Moreover, its movement above and below the Zero Line does not follow the price. It has its own very unique mechanism. As a general rule, movement above the Zero Line indicates systematic buying and movement below the Zero Line shows the systematic selling. How to use the Balance of Power indicator?
The Balance of Power measures the strength of buyers against sellers in the market by assessing the ability of each side to drive prices to an extreme level. The Balance of Power BoP can be used in three ways in order to provide trading signals: First, identifying the direction of the trend.
When the indicator tends to be rising, this is evident that the market is in a bull trend. When the indicator tends to be decreasing, this is evident that the market is in a bear trend. In addition, crossovers of the zero line provide trading signals. When the BoP crosses above zero, this is considered as a signal to buy. When the BoP crosses below zero, this is considered as a signal to sell.
Second, searching for divergences between the price and the BoP in order to identify a potential trend reversal or trend continuation setup. There are two types of divergences — regular and hidden.
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