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Foreign Exchange

FOREX

Instructor: Saeed Ebrahimijam

Lab. Lecture 1. FINA417- Technical Analysis and Algorithmic Trading

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Introduction FOReign EXchange The foreign exchange market assists international trade and investment by

enabling currency conversion. In the past only banks and huge brokers could trade in this market but

today's by the expansions happen in the Internet and computer technologies, individuals also find the opportunity to trade in this market.

Why the currencies should be traded? For example, it permits a business in the United States to import goods from

the European Union member states and pay Euros, even though its income is in United States dollars.

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Introductions The market for converting currencies 24 hours, from 00:00 (GMT) Monday till 23:00(GMT)

Friday. It daily opens with New Zealand, Sydney, Singapore,

… and close with US market. High Liquidity, daily 1.5 Trillions of $ Bidirectional profit making (rising and falling of the

rates) Low margin, compare to the other markets. Less asymmetric Information (just by searching

through the internet) Tax free

FOREX market architecture

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Changing of the market demand and supply curves of the countries.

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Foreign exchange (dollars)

Exchange rateJPY/$

SDSupply of Dollars by people who want JPY

Demand for Dollars by people who have JPY

Why do the exchange rate changes frequently?

People favorites to domestic or external products. Different economic growth rate Different inflation rate Different interest rate Banks and Monetary policies Political issues

So these fluctuations affect the FOREX markets.

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Why do the exchange rate changes frequently?

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Do 90% of Investors in FOREX market lose their money?

Of course trading in the FOREX is not a gambling, but, traders with few information and not experienced in the market analysis are doomed to failure.

More than 50% of loss is mostly because of the leverage. Annually many people enter to this market with the dream of

getting rich overnight., but 90 % of them leave the market defeated in a short.

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Pair :

EUR/USD=1.5001 All the pairs are shown with 4 digits of

floating point (except JPY) The first currency (EUR) is called the base

currency that is quoted relative to the second currency (USD), called the counter currency. For instance, the quotation EURUSD

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Tradable pairs of currencies:

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

USD/AUD

, …

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300 Large financial institution throughout the world determines the exchange rates

1 PIP is called to the 0.0001 unit of the changing.

Ask price: the rate that you can buy. Bid price: the rate that you can sell. Spread= Ask – Bid Spread is between 2-7 PIPs in FOREX

(normally 5 PIPs) EUR/USD : bid=1.5001 ask=1.5006

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1 lot = The smallest amount that you can trade in FOREX

1 lot = 100000$ in Forex Mini lot= 10000$ Question : suppose you bought 1 lot of

EURUSD. how much you will loose if you sell it at the same time?

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Margin Account (Leverage)

To empower the trader 20 to 400 times of your deposit as credit Common leverage is 1:100 You can just trade with the amount of

leverage and no right of withdrawal.

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The average exchange rate intra-day fluctuations:

EUR/USD 120-90

GBP/USD 120-90

USD/JPY 60-40

USD/CHF 60-40

USD/AUD 60-40

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Swamp of loss

You can compensate 1% of loss with 1% of profit. You can compensate 20% of loss with 25% of profit. In order to compensate 50% of loss you need 100%

of profit. But, 100% of loss can not be compensated.

Imagine a trader who take profit of 100% continuously 1000 days and increase her wealth to milliards of dollars but on the 1001 day she loose 100%. Of course she is a unique trader because she did wrong once in

1000, but it is not solely enough, because she lost all her money!!!!

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Find a good Broker( Americans are proffered) Trade on Demo for a while before getting to a real

account. Find the best and appropriate time of trading according

to your country time zone. If a position was not closed for 2 working days, the

money will be charged to your bank account. You will need a currency account. The broker will pay monthly interest on your deposit.

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Available software (platforms) IntelliChart, ProCharts,Tradestation,Esignal

Metastock, Wealth-Lab, Amibroker,VT TraderNeoTicker, NinjaTrader, MetaTrader

Advanced subsystem tools

- Emotion management system (fear, greed, confidence)

- Money management system (controls how much you

risk when you get an entry signal from your forex trading system, overtrade,

overleveraged)

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Technical Analysis tool in

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