FX level 2
Agenda • • • • •
Who and what drives the FX market? How to trade using orders intelligently When to trade Why trade Good trading habits
Who and what drives the FX market? • • • •
Central banks Hedge funds News Politics
Using orders intelligently •
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Order types – Market – Limit – Stop if Bid – Stop if Offered – Trailing Stop if Bid – Trailing Stop if Offered Orders can be placed in the – Trade modules – Order module – Account Summary
Entry order s
A 3-way order Entry
Take profit order
Take profit Entry/Buy
Stop-loss Stop-loss order
Trailing stops • • •
Distance to Market Step size Slippage
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EUR is bought at 1.2145 A trailing stop order placed at 1.2115. Distance to Market is defined as 45 pips
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Step is set at 5 pips.
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A traditional, non-trailing, stop order would have been executed when the market price of EUR reaches the original order level of 1.2115, at a 30 pip loss (entry at 1.2145, exit at 1.2115).
When to trade FX • There are two means of deciding when to trade FX – Fundamental analysis – Technical analysis
Fundamental: News •
Non-Farm payrolls – Here you can see the movement after the employment figures were announced in the US
Fundamental: Politics Here you can see the USD decreases in value when Bush declares war on Iraq in March 2003
Fundamental: Central Banks Here you can see the USD lose value as the Fed decide to cut interest rates by 0.5% to help the economy
Technical Analysis (TA) - A simple definition: • The systematic study of charts of a security’s past price action in an effort to determine future price action. • Also – used to find ”levels of significance”
Technical analysis:
Sell signal
Buy signal
Simple moving average
Buying at the support level
Technical: There are many technical analysis tools available through Saxo’s award winning platform
Why trade FX? •
Speculation – Taking advantage of volatility for profit – Interest rate arbitrage - Swap/Carry trading
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Hedging – Covering exposure of foreign stock trading – Reducing corporate, foreign trade liabilities – Portfolio diversification - A fundamental element of risk management
Speculation •
Speculation for profit is now a multi trillion dollar business
Sell Sell Profit Profit Buy Buy
Speculation Interest rate arbitrage: •
This is done by ‘buying’ a high yielding currency and ‘selling’ a low yielding one, thus profiting from the interest rate differential – –
Example: TRY (Turkish Lira) interest rates are currently 17% vs. JPY (Japanese Yen) at 0.5% But you should be aware of the volatility, which is usually higher on highyielding currencies such as the TRY
Example of hedging •
Companies that trade internationally – Without hedging: • • • •
Business A buys 1 million USD worth of goods, which are to be paid for in 3 months The Dollar is at that time worth 5.20 DKK, so business A earmarks 5.2 million DKK for buying the goods 3 months later 3 months later the Dollar is worth 5.40 DKK So business A now have an extra expenses of 200,000 DKK
– With hedging: • • • • •
Business B buys 1 million USD worth of goods, which are to be paid for in 3 months – but chooses to hedge the FX risk The Dollar is at that time worth 5.20 DKK, so business A earmarks 5.2 million DKK for buying the goods 3 months later The USD-interest is at 5 %, while the DKK-interest is at 4.5% The difference is 0.5% in your favour. Your gain on interests = 6500
Hedging: • People trading the international stock markets, will always have a foreign exchange risk
Good trading habits • • • • • • •
Discipline! Set long-term goals Don’t overextend your finances and manage your margins Diversify, portfolio management Trade with your head, not with your heart Trade your plan: If you fail to plan, you plan to fail. Stick to your strategy. Plan the trade, trade the plan. Manage your positions and orders diligently
Thank you