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Introduction

FOREX OVERVIEW

First, the Foreign Exchange Market is generally referred to as FOREX or FX. It is the largestfinancial network in the whole world with a DAILY average turnover now of over 4 Trilliondollars!!

This is just tremendous growth. Just a few years ago it was under 2 Trillion dollars, and now it is at4 Trillion and growing.

The largest part of that network is comprised of Banks, governments, and other huge financialinstitutions, with a smaller part being the retail business (like you and me). When it all add up, theretail customers have the opportunity to enjoy the same trading opportunity as these majorinstitutions. (approx. 10 years ago it was not possible for you and me to trade this market since itwas closed).

What is FOREX all about ? It is simply the simultaneous buying of one currency and the selling of another, as I will show you in a moment.

Forex is trading in pairs, For an example, you have the U.S. dollar, Japanese yen pair (USD/JPY) orthe Euro,U.S. dollar pair (EUR/USD). The most common, most liquid currencies are referred to asthe majors. There are seven currencies, actually six pair as you will see, and those seven currenciesare the U.S Dollar,Euro,Japanese yen,British pound, Swiss franc, Canadian dollar, and Australiandollar.

The most commonly traded pairs are as follows: the Euro/US dollar (EUR/USD), the British

Pound/US Dollar (GBP/USD), the US Dollar/Japanese Yen (USD/JPY), the US Dollar/Swiss Franc(USD/CHF), US Dollar/Canadian Dollar (USD/CAD), and then Australian Dollar/US Dollar(AUS/USD) pair.

These are the high volume pairs. These are the ones you want to trade. This is where the spreadbetween the bid and ask is smallest. If you get into that they call the exotics where you havedifferent pairings of currencies, the volume drops off with those and the spreads can get rather largeand are not nearly as suitable for trading.

The FOREX is a 24-hour market. Actually, from Sunday, 5.00 pm EST, New York (+6 = hoursCentral European time), to Friday 5.00 pm EST, New York (+6 = hours Central European time),you can actively trade the forex market. Even on the weekend you can make trade (although will

not recommend it). The markets do not move on weekend, but your broker would allow you to getin and out of a trade. The sessions start at one point in the world and the rotate around the globe.

The Forex Market is actually an over-the-counter market, meaning no centralized exchange. Thismeans that currencies are traded directly through networks of banks and brokers via electronicsnetwork or the telephone. This means the banks and brokers act as their own market makers!!

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For day trading (def.: people who open trades and close them on same day short term) , the besthours are shown on below. They are the best hours because the various financial centers around theworld will overlap in their trading volume, and during these hours by each of these currencygroupings, you tend to get the highest volume and most activity going on in those markets.

You can trade any time around the clock, but I believe these are the best times:

For EUR/USD, GBP/USD, and USD/CHF that would be 3.00 am EST (9 am Central Europeantime), to 3:00 pm (9 pm Central European time)

FOREX QUOTES

o Format: YYY/ZZZ First currency is the base

Second currency is the counter o Quotes are expressed as the value of unit of the base Currency in term of thecounter currency as following:

EUR/USD 1.3790 means 1 EURO = 1.3790 US Dollars GBP/USD 2.0304 means 1 British Pound = 2.0304 US Dollars USD/JPY 108.02 mean 1 US Dollar = 108.02 Japanese Yen

Pipo Smallest price change a given exchange rate can makeo Example: EUR/USD changes from 1.3690 to 1.3691.o Most mayor pairs are priced to 4 decimals.o Equivalent of 1/100 th of one percent.o Exception: Japanese Yen, only trades to 2 decimals.

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Leverage & Margin Forex markets offer very high leverage

o Both potential return & risk are higher as a result. Lot sizes

o Pairs are usually traded in 100.000 unit standard lots or 10.000 unit mini lots.o Example for a standard lot purchase: If the EUR/USD quote was 1.3764/1.3767, thenbuying an EUR/USD pair means buying 100,000 Euros and selling short 137,670US dollars.

Pip Valueo For a standard lot in which the USD is the counter currency, 1 pip will equal $10 ($1

for a mini lot). For other major counter currency pairs 1 pip will range from $8 to$10.

Lets talk about leverage and margin. This is a very unique aspect of the Forex markets where themarkets offer very high leverage. Both potential return and risk are higher as a result, so you have tobe very, very careful when trading the forex markets and only trade with a good trading method and

with discipline.

The high leverage, while it can really help you with tremendous profits, can also work against youwith tremendous risk. You really have to have a good method, good risk management principles,and good discipline, If you do not have that, you should not be trading to begin with. By the timeyou are done with my course , we are going to make sure that you do have there importantelements.

With regard to lot sizes, pairs are usually traded in 100000 unit standard lots or 10000 unit minilots. For example, for a standard lot purchase, if the EUR/USD quote was 1,3764-67, then buying aEUR/USD pair means you are buying $100000 Euros, and you are simultaneous selling short$137.670 US dollars.

The pip value for a standard lot in which the US dollar is the counter currency, as it is in theEUR/USD pair, one pip will equal ten dollar. For a mini lot, one pip will equal one dollar.

For other major counter currency pairs, one pip will range from eighth to ten dollars. This would bethe case for the USD/JPY or the USD/CHF or the USD/CAD.

Leverage and Margin o Forex dealers offer leverage as high as 50:1 (USA) and 100:1 (non-US), please note that higher

values do exist as high as 500:1 but lets stay with the two common: 50:1 and 100:1 as examples. 1 standard lot pair in which the USD is the base currency would require:100:1 - $1000 in margin ($100.000/100)50:1 - $2000 in margin ($100.000/50)

1 mini lot pair would require:100:1 - $100 in margin ($10.000/100)50:1 - $200 in margin ($10.000/50)

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If the account value falls below the margin requirement, the dealer will close out the tradeautomatically.Forex dealers offer leverage offer leverage as high as 50:1 in accordance with CFTC regulations inthe United States ( other countries have other regulations) and even higher. 100:1 outside US. Thatone standard lot pair in which the U.S Dollar is the base currency would require $1000 in margin -

$100.000 divided by $1000 if trading through a broker outside of the United States.

If trading within United State (We living in Europe do not need it),one standard lot would require$2000 in margin because at that point, the $100.000 value of a standard lot would be divided by 50.So if youre within U.S, its 50:1, $2000 margin; outside the U.S. could be 100:1, $1000 margin.

One mini lot pair would require $100 in margin when trading outside the U.S. through a non-U.Sbroker. That would be $10.000, which is the value of one mini lot divided by 100. For tradingthrough U. S. brokers at a 50:1 leverage, one mini lot would require $200 in margin, or $10.000divided by 50.

Regardless, when trading Forex the way I will teach you, you will not need 100:1 leverage, nor willyou need 50:1 leverage because any trader trading at those levels will be overtrading and exposingthis/her account to needless risk, and you never want to do that.

Never think that youre going to trade at 100:1 or 50:1. Youre more than likely going to be at 4:1or 5:1, or maybe as high as 10:1, thats it.

Thats good news. Youre not concerned about the leverage except that you dont want to overtrade.Here is where so many traders get into real trouble because they do overtrade. Im not going to letyou do that.

If the account value falls below the margin requirement, which would only happen if you wereovertrading, the dealer will close out trade automatically. What does that mean? It ensures that atleast your account will not go negative.

As I said, Were not interested in getting anywhere near that, so dont let the leverage issue becomean issue because it is not trading with the prudent style that we teach you. Youll never have toworry about leverage.

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Calculating Profit & Loss The currency bid/ask quote for EUR/USD is 1.3602/1.3605 and you want to buy

the pair because you think the Euro is going to gain on the U.S. dollar. So you buy 100.000 Euros (1 standard lot) for $136.050 US dollars (100.000 x

1.3605). At 100:1 leverage, you initial margin deposit would be $1.361 for thistrade.

Sure enough the Euro pair goes up and is now trading at 1.3665/1.3668 and youdecide to sell and take profits.

You would sell 100.000 Euros (1 standard lot) for 136.650 US dollar (100.000 x1.3665).

Since you bought 100.000 Euros for $136.050 and sold them for $136.650, youmade a profit of $600 or 60 pips.

If on the other hand the Euro pair went down to 1.3575/1.3578 and you sold at1.3575, you would have a loss of $300 (136.050-135.750).

If the account equity fell below the margin requirement, the trade would beautomatically liquidated.

With that background, I want you to stop right there. It seems like a lot of arithmetic, but it is verysimple, really. You just look at the fact that you bought at 1.3605, and you sold at 1.3665 (first caseexample). The difference is 60 pips, and you know that for the EUR/USD pair, each pip for onestandard lot is worth ten dollars, so 60 times ten is $600. It is that simple.

Order Types

There are different order types for different trading needs. Market order: used to enter or exit the market immediately at the currentquoted price. If you want to buy you will be filled at the asking price.

Limit order: used to buy or sell a pair at a predetermined price. A buylimit order will only be filled if the market trades (ask) at or below thelimit price. A sell limit order will only be filled if the market trades (bid)at or above the limit price.

Stop order: used to buy or sell a pair at a predetermined price. A buy stoporder will only be filled if the market trades (ask) or above the stop price.A buy stop order will only be filled if the market trades (ask) at or abovethe stop price. A sell stop order will only be filled if the market trades(bid) at or below the stop price.

I want to briefly review the different order types you will be using when you trade. There aredifferent order types for different situations, and there are three of them.

First is the market order. The market order is used to enter or exit the market immediately at thecurrent quoted price. If you want to buy, you will be filled at the asking price, and if you want tosell, you will be filled at the bid price.

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A limit order is used to buy or sell a pair at a predetermined price. A buy limit order will only befilled if the market trades at or below the limit price. This means the market ask price would have totrade at or below the limit price, and only then would you get filled on that order.A sell limit order will only be filled if the market trades at or above the limit price. In the case of selling, you would be selling at the bid, and the bid would have to be at or above the limit price in

order to sell that order.

The stop order is kind of the reverse of the limit order. It is used to buy or sell a pair at apredetermined price just like the limit order, but in this case a buy stop order, for example, will onlybe filled if the market trades at or above the stop price. This means when you are buying, it wouldbe ask that would have to be at or above the stop price.

A sell order would only be filled if the market trades at or below the stop price. When you areselling, it would be the bid that would have to be at or below the stop price.

As we apply these order types to the trading rules, it will become clearer why these different ordertypes are necessary.