WHAT IS FOREX CURRENCY TRADING?

If you read about investing, you've seen the word forex trading. But because forex doesn't get much publicity in the major publications and websites, many investors don't know that forex is just short for "foreign exchange". So trading the forex market is simply trading foreign currencies.

As recently as ten years ago, currency trading had high barriers to entry, so only large banking and institutional firms had access to the tools and systems required to play in the forex trading game. Recently, however, technology has developed to the point that any individual investor can hop right in and trade with one of the many online platforms.

When buying and selling in the forex currency trading system market, you'll see that there are four "currency pairs" that dominate the percentage of trades. Those four are the Euro vs U.S. Dollar, US Dollar vs Japanese Yen, US Dollar vs Swiss Franc, and US Dollar vs British Pound.

he goal when investing in currency is to be holding a currency that appreciates in value in relation to the other currencies. To use an overly simplistic example, if you bought 50 British Pounds for 100 US Dollars, held the Pounds for 1 week, and in that period the value of Pounds increased in relation to US Dollars, you could then convert those Pounds back into dollars for, say, $120.

Unlike the domestic stock markets, the forex currency trading is open for trades 24 hours a day. Much like the phrase "it's always noon somewhere," it's always business hours at some region of the globe. Since every country trades on the FX market, and it's open all day, the daily volume is roughly $1.2 trillion, which dwarfs that of the NYSE. Another comparison to make in order to truly realize the magnitude of the forex market is with the currency futures market (which has around 1% of the daily volume).

One other important distinction to make is that forex currency trading is not centered on an exchange like the NYSE or NASDAQ. There is no central body or organization required to act as middleman. Trading circulates between major banking centers around the world.

Until recently, there were strict financial requirements and massive minimum transaction sizes which prevented individual investors from trading. But with the advent of the internet came the FX brokers. A forex currency broker is similar to an online stock trading account such as etrade.

Anybody can open an account and buy and sell in any quantity. Because the brokers have thousands of investors placing orders through them, they are able to meet the large minimum transaction size by purchasing in large blocks and distributing currency amongst the purchasing investors.

Although it is now easy to start trading forex, it is a complicated and complex market. While it offers fantastic opportunity for wealth, it is also very easy to lose your shirt in a hurry. Before trading forex, do your homework and read as much as you can find before investing your hard earned money.

British Pound Speculative Shorts (COT) Highest on Record

According to the most recent COT numbers, US dollar bullish sentiment is at an extreme, which makes the buck vulnerable to a sharp decline in the weeks ahead. Notably, the difference between speculative and commercial positions for the British Pound is the greatest it has ever been. This is the kind of dynamic we would expect to see at a turning point.

Latest CFTC Release Dated August 19, 2008:



Discuss Trader Sentiment and Positioning at the DailyFX Forum

08-25-08cot1

The COT Index is the percentile of the difference between net speculative positioning and net commercial positioning measured over a specific number of weeks (either 52 or 13). A reading close to 0 suggests that a bottom is forming and a reading close to 100 suggests that a top is forming. The readings are for the actual currency, not the currency pair. For example, a reading of 100 on the Canadian Dollar suggests that the Canadian Dollar is close to a top (USDCAD close to a bottom).



Readings of 95 and higher as well as 5 and lower are in boldfaced red type to indicate potential market extremes. For example, an increasing index is bullish until the index is extreme (near 100), at which time the risk of a reversal or pause in the trend increases.

US Economic Indicators: DJ Survey Of Forecasters-Aug 25

Forecasts based on the projections from 20 economists as of Friday,
Aug 22. NA = not available. E = estimate. R = revised. **** = tentative.


Time --Forecast--
Date EDT Indicators Median Low High Prev Actual
08/25 :1000: Jul Existing Home Sales : 4.92 4.80 5.00: 4.85R: 5.00
08/25 :1000: % change : : -2.8R: 3.1
08/26 :1000: Jul S/F Home Sales : 520 500 540: 530 :
08/26 :1000: Aug Consumer Confidence : 53.5 52.0 55.0: 51.9 :
08/26 :1000: Jul Preliminary Steel Impo: NA NA NA : 9.1% :
08/27 :0830: Jul Durable Goods (% chg) : -0.4 -1.0 0.3: 0.8 :
08/28 :0830: Unemploy Clms p/e Aug 23 : 420 325 430: 432 :
08/28 :0830: Q2 Pre GDP : 2.7 2.5 3.0: 1.9
08/28 :0830: Final Sales Dom Prchsr : NA NA NA : 5.0 :
08/28 :0830: PCE Defltr : 0.3 0.2 0.3: 1.5 :
08/28 :0830: Price Defltr : NA NA NA : 1.1 :
08/28 :0830: Q2 Pre Corp Profits : : 2.5 :
08/29 :0830: Jul Personal Inc (% chg) : -0.4 -1.0 0.1: 0.1 :
08/29 :0830: PCE (% chg) : 0.2 0.2 0.3: 0.6 :
09/02 :1000: Aug ISM : NA NA NA : 50.0 :
09/02 :1000: Employment : : 51.9 :
09/02 :1000: Prices : NA NA NA : 88.5 :
09/02 :1000: Jul Constrcn Spdg(% chg) : NA NA NA : -0.4 :
09/03 :1000: Jul Factory Ord (% chg) : NA NA NA : 1.7 :
09/04 :0830: Q2 Fin Productivity : NA NA NA : 2.3 :
09/04 :0830: Unit Labor Costs : NA NA NA : 1.5 :
09/05 :0830: Aug Jobless Rate : NA NA NA : 5.7 :
09/05 :0830: Jobs (chg) : NA NA NA : -51 :
09/05 :0830: Private (chg) : : -76 :
09/05 :0830: Manufac (chg) : NA NA NA : -35 :
09/05 :0830: Avg Hourly (% chg) : NA NA NA : 0.3 :
09/08 :1500: Jul Consumr Crdt (bln$) : NA NA NA : 14.3 :
09/11 :0830: Jul Trade Balance : NA NA NA : -56.8 :
09/11 :0830: Goods Total : NA NA NA : -70.0 :
09/11 :1400: Aug Treasury Budget Stmt : NA NA NA : -102.8 :
09/12 :0830: Aug Retail Sales (% chg) : NA NA NA : -0.1 :
09/12 :0830: Ex-Auto (% chg) : NA NA NA : 0.4 :
09/12 :0830: Aug PPI (% chg) : NA NA NA : 1.2 :
09/12 :0830: PPI Core (% chg) : NA NA NA : 0.7 :
09/12 :1000: Jul Busin Invty (% chg) : NA NA NA : 0.7 :
09/15 :0915: Aug Industl Prod (% chg) : NA NA NA : 0.2 :
09/15 :0915: Capacty Util : NA NA NA : 79.9 :
09/16 :0830: Aug CPI (% chg) : NA NA NA : 0.8 :
09/16 :0830: CPI Core (% chg) : NA NA NA : 0.3 :
09/17 :0830: Aug Housing Starts : NA NA NA : 0.965 :
09/17 :0830: % change : : -11.0 :
09/17 :0830: Housing Permits : NA NA NA : 0.937 :
09/17 :0830: % change : : -17.7 :
09/18 :1000: Aug LEI (% chg) : NA NA NA : -0.7 :
10/31 :0830: Q3 07 ECI : NA NA NA : 0.7 :
10/31 :0830: ECI Annual : NA NA NA : 3.1 :
-By Rodney Christian; Dow Jones Newswires; 202-646-1880;
csstat@dowjones.com
Related fixed stories:
84698 US Economic Indicators: Latest 6 months data
80055-57 US Economic Calendar

US ECONOMIC INDICATORS: Housing Data, Latest 6 Months

Data seasonally adjusted except actual, which is not seasonaly adjusted.
Median and average prices for existing and single family homes in dollars.
Housing construction and homes sold in 1,000 units. R = revised.
(*) data reflect the increase in the universe of permits-issuing places
from 19,000 to 20,000 places. tbr = To Be Released.

HOUSING CONSTRUCTIO Jul Jun May Apr Mar Feb
Housing Starts 1,066 : 1,066R: 977R: 1,004 : 988 : 1,107
% change 0.0 : 9.1R: -2.7R: 1.6 : -10.7 : 4.0
Actual (NSA) 99.7 : 99.7R: 91.2R: 89.5 : 82.2 : 78.4
% change 0.0 : 9.3R: 1.9R: 8.9 : 4.8 : 10.7
Permits Issued(*) 1,138 : 1,138 : 978 : 982 : 932 : 981
% change 0.0 : 16.4 : -0.4 : 5.4 : -5.0 : -6.7
Actual (NSA) 108.1 : 108.1 : 90.3 : 89.5 : 77.4 : 73.4
% change 0.0 : 19.7 : 0.9 : 15.6 : 5.4 : -3.3
Units Completed 1,167 : 1,167R: 1,153R: 1,033 : 1,192 : 1,251
% change 0.0 : 1.2R: 11.6R: -13.3 : -4.7 : -6.0
Actual (NSA) 102.3 : 102.3R: 96.8R: 79.6 : 89.8 : 87.0
% change 0.0 : 5.7R: 21.6R: -11.4 : 3.2 : -7.0
Under Constr 965 : 965R: 983R: 1,006 : 1,013 : 1,024
% change 0.0 : -1.8R: -2.3R: -0.7 : -1.1 : -1.0
Actual (NSA) 977.8 : 977.8R: 990.3R: 999.9 : 988.6 : 989.6
% change 0.0 : -1.3R: -1.0R: 1.1 : -0.1 : -1.3

EXISTING HOME SALES Jul Jun May Apr Mar Feb
Total Homes Sold 5,000 : 4,850R: 4,990 : 4,890 : 4,940 : 5,030
% change 3.1 : -2.8R: 2.0 : -1.0 : -1.8 : 2.9
Median Prices 212.4 : 215.1R: 207.9 : 201.2 : 200.1 : 195.6
Average Prices 254.0 : 257.9R: 252.6 : 247.2 : 247.1 : 242.0
S/F Homes Sold 4,390 : 4,260R: 4,410 : 4,340 : 4,360 : 4,470
% change 3.1 : -3.4R: 1.6 : -0.5 : -2.5 : 2.8
Median Prices 210.9 : 213.6R: 206.0 : 199.6 : 197.6 : 193.6
Average Prices 252.9 : 256.8R: 251.2 : 246.2 : 245.4 : 240.7

NEW S/F HOMES Jul Jun May Apr Mar Feb
Homes Sold tbr : 530 : 533R: 542R: 513R: 572
% change tbr : -0.6 : -1.7R: 5.7R: -10.3R: -4.2
Actual (NSA) tbr : 49 : 51R: 49R: 49R: 48
% change tbr : -3.9 : 4.1R: 0.0R: 2.1R: 9.1
Median Prices tbr : 230.9 : 227.7R: 243.4R: 229.3R: 245.3
Average Prices tbr : 298.6 : 298.9R: 314.1R: 287.6R: 301.2

FHLB Jul Jun May Apr Mar Feb
Avg Arm Rate tbr : 6.23 : 6.04 : 5.97 : 6.03 : 5.87
-By Rodney Christian; Dow Jones Newswires; 202-646-1880;
csstat@dowjones.com
Related fixed story numbers:
84697 US ECONOMIC INDICATORS: FWN Survey of Forecasters (STATS)
84698 US ECONOMIC INDICATORS: Latest 6 months (STATS)
80055-57 US MONTHLY ECONOMIC CALENDAR

USD Mixed Following Upbeat Data

The greenback was mixed at the start of a holiday-shortened week, with the UK market closed in observance of the summer bank holiday today – relinquishing earlier session gains above the 110-level against the yen and easing from the 1.47-handle versus the euro. The US economic data released this morning saw a higher than expected increase in July existing home sales, which reversed the 2.6% decline in June, increasing by 3.1% to 5.0 million units.

Traders will also digest several key reports slated for release on Tuesday, including the S&P/Case-Shiller home price index, the Conference Board’s August consumer confidence survey, July new home sales and the Richmond Fed manufacturing survey. The June Case-Shiller 20mm home price index is seen declining by 0.8% from -0.9%, while the 20-yy is expected to decline by 16.2% from a 15.8% fall previously. The Conference Board’s August consumer confidence survey is seen improving to 53.0, up from 51.9 in July. Meanwhile, new home sales for July are expected to remain steady, unchanged from June at 530k units.

Factors affecting currency trading

Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.

Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.



Economic factors
These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.

Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).

Economic conditions include:

Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.

Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.

Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.

Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.


Political conditions
Internal, regional, and international political conditions and events can have a profound effect on currency markets.

For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.


Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:

Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The Swiss franc has been a traditional safe haven during times of political or economic uncertainty.[8]

Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends. [9]

"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[10] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.

Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns.

Trading characteristics

There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called FxMarketSpace opened in 2007 and aspires to the role of a central market clearing mechanism.

The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.

There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.