12 December 2012

Zimbabwe: Basics of Forex Trading

IN the past few months we have had major swings in the financial markets, mostly driven by data as the markets have become a slave to market sentiment. In this instalment I will focus on how to trade the financial markets. The main focus is to go through the basics of forex trading.

Trading is 20 percent technical and 80 percent psychological. With the psychological side of trading it is important to understand the sentiment of the market and have good management skills.

In the forex markets currencies are always priced in pairs and all trades result in simultaneous buying of one currency and selling of another.

The objective of currency trading is to buy the currency that increases in value relative to the one sold.

For example, if you buy a currency and the price appreciates in value you must then sell the currency back in order to lock in the profit.

Currencies are quoted in pairs and remember the first listed currency is called the base currency and the second is called the counter or quote currency.

Currencies are quoted using five significant numbers, while the last place holder is called the point or pip.

For example EUR/USD quote US$1,3014/US$1,3020. Like all financial products, forex quotes include a "bid" and "ask" or a "sell" and a "buy" price.

By quoting both the bid and ask in real time, brokers ensure that traders always receive a fair price on all transactions.

As in traded instrument, there is an immediate cost in establishing a position. The cost will vary between brokers and cost is called the spread.

For example, USD/JPY one of the most liquid pairs may bid at 81,35 and ask at 82,25, this nine-pip spread defines the traders cost which can be recovered with a favourable currency move in the market.

The foreign currency is a seamless 24-hour market and is open five days a week.

At 5pm Sunday, New York time, trading begins as markets open in Sydney and Singapore.

At 7pm the Tokyo market opens, followed by London at 2am and finally the New York market opens at 8am. (Time is based on New York)

As a trader this allows you to react to favourable/unfavourable news by trading immediately using your trading platforms.

Like most financial institutions in Zimbabwe they use Reuters trading system, which to me is lagging behind in terms of real time data, Meta trader is by far a better trading system.

The forex market rakes in approximately US$4 trillion a day and is by far the most liquid market in the world.

This market can absorb trading volumes and transactions that can dwarf the capacity of any other market.

The forex market is always liquid, meaning positions can be liquidated and stop orders executed without slippage.

These are the most liquid currency pairs on the market EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CHF.

As a trader the most boring currency pair is the USD/CHF and the rest are fair.

For a while I have been tracking GBP/USD and the cross-currency pair between EUR-GBP where pound sterling nearly 15 percent up on a broad-based basis since the beginning of 2009.

Sterling pound has really made the Bank of England chief to lose patience as a strong pound is making UK exports harder to sell within Europe as most of their neighbours are ravaged by sovereign debt crisis.

Sterling is trading above US$1,60 against the dollar and swinging between gains and losses to the euro.

Commodity markets

On the commodities market we are likely to see a subdued trading in key commodity markets.

For the past three weeks geo-political risk premium rose on Israel-Gaza and debt issues in the US and Europe.

US and Europe worries continue to erode positive sentiment on base metals prompting precious metals like gold and silver to be haven metals. Gold continues to hold gains trading around US$1 705,20 an ounce.

For more information contact Prodigy Chinanga on 0772753594 or email on chinangaprodigy@yahoo.co.uk.

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