This blogpost summarizes some of the main points from the book titled “Forex for Beginners”, by Anna Coulling

An Introduction to the Forex Market

Trading techniques in the book are based on chart analysis, backed by view of broader fundamentals and related market sentiment
There are only two risks in trading. The first is the financial risk, and the second is the risk of the trade itself. The first is way to quantify and manage. The second one is more difficult to assess
Forex market has no centralized exchange. All the trading is conducted OTC
The primary purpose of the forex market is to provide an easy and straightforward way for companies to conduct international trade, allowing businesses, banks, governments and countries, to convert from one currency to another easily and quickly
There are five main participants in the market - market makers, multinationals, speculators, central banks and retail traders
Prices are set by interbank trading, and this is ofter referred to as the interbank liquidity pool.
The interbank liquidity pool is the starting point for the market, and from here the rates are delivered via a number of live feeds
Forex markets run 24 hours a day and almost six days a week
Liquidity on various markets for different currencies are drastically different. Whilst it is certainly a 24 hour market, it is not one that remains constant. Trading volumes in the various currencies change dramatically as the market moves around the world
Financial turmoil in 2007 has changes the forex market significantly
Central banks will do anything and everything in their power to protect their economy first
Traders watch US dollar index and USDOLLAR chart to get an indicator of where the world’s stable current is headed

The Principal Currencies Explained

Euro has only survived thanks to the support from ECB and Germany
Euro is a political currency
JPY is considered by the market to be a safe haven
BOJ will step in to the currency markets any time, should it feel that its export markets are under threat from a strong yen
Japan is heavily dependent on imports of commodities as it has few natural resources of its own
Australian Dollar, Canadian Dollar and New Zealand Dollar are tightly coupled with commodities
- The way to analyze these currencies is to look at the commodities that the country produces and exports. One can then delve in to several questions such as
  - Which countries import from these countries ?
  - What macro events from the importing countries have an effect on the local currency ?
  - What are the steps taken by the government to make sure that the exports are competitive in nature ?
Swiss franc can be summed up in one word - safety

The Currency Quote

Quoting conventions
- EURUSD - How many dollars you can buy using Euros ?
- If Euro is involved in a pair, Euro is always the base currency ?
- If CHF and Euro are involved in the pair, Euro is always the base currency
- GBP is the base currency unless there is Euro
- Aussie Dollar and New Zealand Dollar are the base currencies against the dollar
- Aussie dollar takes precedence if it is against Kiwi
If you apply the above rules, the following standard quotes make sense
- Euro cross currency pairs
  - EUR/JPY
  - EUR/GBP
  - EURAUD
  - EURCAD
  - EURNZD
  - EURCHF
- Yen cross currency pairs
  - EURJPY
  - GBPJPY
  - AUDJPY
  - CADJPY
  - NZDJPY
  - CHFJPY
- Pound cross currency pairs
  - EURGBP
  - GBPJPY
  - GBPAUD
  - GBPCAD
  - GBPNZD
  - GBPCHF
- Australian dollar pairs
  - EURAUD
  - AUDJPY
  - GBPAUD
  - AUDCAD
  - AUDNZD
  - AUDCHF
- Canadian dollar pairs
  - EURCAD
  - CADJPY
  - GBPCAD
  - AUDCAD
  - NZDCAD
  - CADCHF
- New Zealand pairs
  - EURNZD
  - NZDJPY
  - GBPNZD
  - AUDNZD
  - NZDCAD
  - NZDCHF
- Swiss pairs
  - EURCHF
  - CHFJPY
  - GBPCHF
  - AUDCHF
  - CADCHF
  - NZDCHF
Carry trade used to dominate all forex trade when there was interest rate parity across countries
Forward curve reflects the current interest rate differential between countries
The most popular carry trade is the USDJPY trade when Japan had higher interest rate regime as compared to US
Until recently currency pairs were quoted to four decimal places, where the last digit was the most significant for us as forex traders. However, the quoting conventions have changes and has now extra digit

Forces that drive Forex markets

Central Banks
Market makers
Interest rate differential
Economic data and news
- Leading indicators
- Lagging indicators
- Coincident indicators

Trading Approaches

Fundamental Analysis + Technical Analysis + Relational Analysis
Most of the indicators revolve around three categories - employment, consumer spending and business
Candlestick approach
- Hammer candle
- shooting star candle
- doji candle
- tweezer top candle and tweezer bottom candle

Volume Price Analysis

Looking at candle sticks in conjunction with volume as leading or lagging indicators
If we think of effort as volume, for a market rise, takes just as much effort as for a market to fall
If there is an effort, the result must be in proportion to that effort and cannot be separated from it. if it is not, it is an indication of other principles in action. Think of effort as the volume on a move, and the result is the corresponding price action. These two should be in harmony. If you have a lot of volume, you should see a lot of move, if you don’t … why ? what is happening ? This is where we become the detective, use our tools evaluate that price action with the corresponding volume, and make some deductions based on the balance of probabilities
Price is validated by volume
Using VPA to a chart, we are investigating two aspects - is there an agreement or disagreement between the two ?
ACTIVITY = VOLUME relationship
Support and resistance bands
Congestion phase and trend phase

The Mechanics of Trading

You need to trade both sides of the market
You will make money far more quickly in a falling market than a rising one
Once you start trading both sides, you do develop a bias to one side or the other. This can be dangerous as you will begin to see trading opportunities in your direction of bias
A good example of leverage is the use of property. A property speculator uses mortgages to increase leverage, to buy more properties to add to his or her portfolio
CFTC and NFA have tightened the regulations for US brokers considerably since the early days with leverage now capped with 50:1
Leverage is the loan element of the contract and is the money advanced by the broker whilst margin is the money you put into the asset or account and represents the cost of entry.
Acceptable level of leverage for retail investors is 5:1 or 10:1
Leverage offered on equities is usually not more than 2
Some online brokerages such as Robinhood offer a very high level of brokerage even for equities trading
Let’s say you fund your account with $1000 with a leverage of 25. If you take a position worth @20000, then margin used up would be 20000/25, i.e. $800 and unused margin in your account $200. This means that if 1 pip is $1 then you have a leeway of 200 pips before a margin call
When the equity value of the position becomes equal to the used margin, the broker will liquidate the position
Whenever the balance is lower than the used margin, then the position is liquidated by the broker
Pip to cash conversion
- $100,000 is equivalent to $10 per pip
- $10,000 is equivalent to $1 per pip
- $1,000 is equivalent to $0.1 per pip
When we buy or sell currencies, we are in reality buying or selling a contract to deliver or take delivery of the amount of currency we have bought or sold.
In the currency futures world, the contract being bought or sold specified the underlying amounts of currency, the agreed price and in addition, a delivery date for settlement of the contract.
The spot forex contract is settled in a short period, normally 2 days or less
100,000 units is called a LOT, 10,000 units is mini lot, 1000 units is called micro lot
If the exchange rate is 1 then the pip value is the same as for a EURUSD or GBPUSD pair. When it moves above 1, the pip value will be less than a dollar and when it is below 1:1 exchange rate, then it will be higher
In a spot transaction, the position is rolled over daily at 5 PM EST
Each time a contract is rolled over to the next day, there is a cost involved to one party or another and the position will either earn you interest, or you pay interest
If the interest rate on the currency you bought is higher than the interest rate on the currency you sold, then you will earn interest in the position.
Trading Capital
- This must be the money you can affort to lose, and which does not affect your lifestyle, your family or your circumstances in any way
- Never ever borrow either from bank or from friends, family or acquaintances
Every forex traders concentrates on cash return on each trader and not percentage return
If your initial investment is between $500 and $5000 then you should start your forex trading using a micro lost account, but trading multiple contracts up to a maximum of none. Start with one. You are then train real money, and you will then learn quickly how to manage your emotions, manage your positions and close out when necessary. From there, you can start to increase the number of contracts, and rather than close out a position, simply take off one contract and leave the others in place. Always trade in micro lots
Consistency is the key to success
If you can be consistent in trading in micro lots, you can consistent in trading full lots
Trading Consistency and Percentage returns equates WEALTH
Leverage and Margin
Minimum leverage offered by most forex brokers is 50 to 1. Legislation is being drafter to make it 10:1
Conversion of pips to cash. One needs to convert so that one can put in stop losses in a particular currency
Rollover is when a contract rolls over into a new period, and in the futures market this happens regularly as the traders move from one contract period to another, as each contract reaches expiry
Trading capital that needs to be put in place
- This must be the money you can afford to lose, and which does not affect your lifestyle your family or your circumstances in any way
- This money is never ever borrowed either from a bank, or from friends and family. Nor is it raised by releasing equity from a property or other assets

Risk and Money Management

In the chapter on Risk and Money Management, the author tries to emphasize the importance of playing the trading game with pips. For any currency that you are trading, it is important to keep in mind the pip equivalent for each unit of currency invested. Whatever scale you are interested in trading, one should start noting down the range of movement in pips and then use the range to set stop losses. To make this concrete, the author walks through three examples of investing in a pair, one at 5 minute interval, one at hourly interval and one at daily interval.
Never risk more than 1% or 2% of your trading capital. However if you are a beginning trader, you might have to have a 5% max cut off. In fact if your account is very small, then to grow it you might have to take consistently around 5% risk of your capital and then as you build your trading account, you can bring down the risk
Managing losses is of far greater significance than making money
You have to learn to lose before you can learn how to win
Not to risk more than 1% of your trading capital on any one trade
Trading success is not simply a question of being right more times than you are wrong. It is also about sizing the trades correctly so that 2 winning trades
When your capital is low, you can risk about 5% and as you build your capital, you can reduce the risk to 1%
There are two risks in trading - the monetary risk of trading and risk on the trader itself. The latter part is most difficult, and comes from analyzing all the information from a technical fundamental and relational perspective and then making a decision based on th collective information,
Trading success is not simply a question of being right more times than your are wrong. It is far more complex, and those traders who succeed and produce consistent results over an extended period, will do so by keeping their losses very small.
How much trading capital should be exposed at one time ? 10% is the guideline suggested

Your Trading Plan

No one has, and no one ever will develop a black box system that works consistently to produce profits in all markets, and in all market conditions
It may be very easy to produce a black box to signal an entry, but what about the exit, which is much harder ?
Most black box systems will simply reverse the initial entry rule which is why none of them work. They might work for a time, but then fail, and this is no great surprise since it is impossible for anyone to design a mechanical system which has the flexibility to adapt to different market conditions
Car Journey as an analogy for having a trading plan. If you have to move from A to B, then we get in our car and start driving. But we are not driving the car at a constant speed. There are many conditions based on which we vary our speed. There are two specific rules that we have to follow
- Drive on the correct side of the road
- Stop at red traffic lights
- Virtually every other decision is discretionary
Two Rules of trading
- Every position will have a stop loss
- Maximum loss on any position to be x%
How does one choose which trading horizon to trade ?
- There is no right or wrong way to trade - it is your way
- Short term trading is more stressful than longer term trading
- Trading success as you start is about consistency, not money
- Your approach will be based on many factors, such as time available, personality, attitude to risk
If you have a job, keep the job - don’t jump in to trading full time until you have traded for sometime and have understood the life style that goes with it if you do full time
Analogy of giving runners a head start in a race - Analogy of bid-ask. In the race you are already giving a head start to the market maker. This means that market should move in your direction so that you can catch up with others and earn money
What entails doing scalping day in day out ?
- You need to be able to commit the time to spend in front of your screen
- It is very hard to combine this approach with a fill time job
- Intra day trading can be much more stressful as you are watching positions move up and down
- You will be restricted to those currency pairs with narrow spreads as the maths simply does not work otherwise
- Issue of over trading
Be fundamental and technical trader as both approaches can give you insights in to your trading
Set yourself realistic, simple and achievable targets which should be non-financial. Do not set monetary targets. Trading success is about two things - consistency and money management
Amount of trading capital - min is 1% and max is 5%
Execute your trading with minimum contract size

The Psychology of Trading

Trading is really a question of how well you can manage your mind
Trading is the mirror which reflects an internal world which we rarely consider or examine. Trading forces us to face up to these inner thoughts and feelings. It is the mirror which we rarely view
Trinity of trader fears
- Fear of loss
- Fear of missing a trade
- Fear of losing a profit
Reptilian brain , Limbic brain and Neocortex - three parts of our brain
For traders the area of the brain which can cause so many problems lies in the limbic system, and is known as amygdala
Trying to suppress the emotions does not work, and in fact will make things much worse. It is important to have an appropriate plan to manage out emotions
If it only needs a single repetition of a stressful experience to form a lasting memory, is it any wonder so many traders find it so difficult to pull a trigger on a trade
Plan your trades so that you do not get ambushed in events of stress
Trade in terms of unit size. Think only in terms of trading units. In FX, always think of pips
Never refer to positions as winning or losing. Use up/down instead of profit/loss
Use the word interesting and be curious about the events when things move against the position you have put in

Choosing your Broker

Dealing desk at a broker is fully staffed by dealers, whose sole job is to manage orders, and to ensure that they make a profit for the broker
dealer can reject your order and issue a ’re-quote'
Another alternative to interbank market is that broker takes the other side of the trade
Every forex broker will segregate their clients into two groups. The first group orders are passed straight through the interbank market. The second group orders are counter traded in the house
Volatile market conditions provide the perfect opportunity for price manipulation and stop hunting
Three are many types of trading brokers
- ECN Forex trading brokers: These brokers usually charge a small trading fee and sends the order to the central exchange where your order can participate against everyone in the market
  - These brokers usually display DOM
  - Advantages
    - Trade using the best bid and ask
    - Tightest spreads
    - ECN broker will not take a position against you
    - prices quoted are likely to be more volatile and therefore better for scalping strategies
  - Disadvantages
    - Platform might be complex
    - ECN broker may not provide free charts
    - commission for each trade
- STP Forex Brokers
  - STP forex brokers will display his or her own quotes most of the time, which are based on the interbank rates, in much the same way as a market maker. However the orders are routed in two ways, either they are sent to the centralized pool or traded within the internal pool
- Non Dealing Desk - Forex Brokers
  - NDD forex broker has no dealing desk and has more in common with an ECN broker than a market maker broker
  - No dealing desk
  - Real time quotes from the interbank liquidity pool
- Market Makers
Don’t use a demo account
What to consider while choosing a forex platform ?
- What type of broker?
- Leverage and margin rules
- Cost of trading
- Support
- Charting facility
- Trading style
- Type of account
- Hedging trades
- Rollover

Choosing your Currency pairs

EUR/USD
- We have US dollar on one side being managed by the Fed and on the other, the euro being managed and supported by the ECB
- Difficult to predict the pair
GBP/USD
- This is a more measured pair
- Unlike the euro, the british pound has a few political influences, and therefore any economic data, or comments from the central bank has a more predictable response in the exchange rate
USD/JPY
- when traders are happy to take on risk, then they sell the Japanese yen and buy a high interest rate currency such as Aussie, where the difference in interest rates between the two currencies might be a few percentage point
- this is most technical of all currency pairs
CAD/JPY
- This pair has a high correlation to the price of oil
- Canada is a major exporter and the Japanese are major importers
- If the oil prices are rising, at the same time as yen is being weakened by ‘risk on’ or politics, then the pair will move quickly.
Exotic currencies
- Better that newbies do not touch these pairs

Lets get Started

I found this chapter very interesting as the author walks through a few trading setups and illustrates various aspects that a newbie trader needs to keep in mind.

Start with major currency indices, and consider the timeframe most appropriate to your trading strategy
Check the fundamental news releases for the trading day ahead, and also for the week
Look at currency strength indicator matrix
Use VPA to take positions in the relevant pair
Look at various time intervals
Look at the currency matrix
Put in the position with relevant stoploss

Analogy of a three lane highway or motorway. You have three lanes of traffic, the slow, the medium and the fast. If you are driving in the middle lane, your medium speed chart, then on either side you have your fast and slow lanes, which will give you a perspective on the market

There are two golden rules mentioned in this chapter that a trader must always follow

Never open a position without a stop loss
Never move a stop loss in the opposite direction to the position

It is better to place the stop loss based on what the market is telling us, and not what we think

After putting in the position, it is better to switch off the screen the displays monetary value. Pips and money are very different and as you get started, you will find it much less stressful to focus on the pips and not the money

Getting Started with MT4

Using MT4 to trade
Basic walk through of MT5 platform

Takeaway

I have never traded FX till date. I do know a lot of theoretical aspects of FX markets including pricing and valuation techniques. From a practical experience point of view, I have built volatility surface models, helped structured product desks in valuation efforts, looked at valuing options based on FX and multi-asset classes involving FX. But on the trading front - somehow have never ever traded until now. Have started venturing in to trading out of pure intellectual curiosity to understand microstructure patterns. Instead of going the usual route of crunching data and analyzing patterns, I have taken a different route - trade to understand the microstructure patterns. Don’t know how far this approach is going to be useful to help me in the modeling part. Having said that, this book has been absolutely gem in helping me understand various practical aspects of trading. Thanks to this book, I have started Forex trading.

Forex For Beginners - Anna Coulling

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