Learn How to Trade Forex From a Professional

Dave: Welcome to Real World Trading, Andrew.

Andrew: Thank you for having me, Dave

Dave: Let’s get started by going over the basics of Forex. Please tell me exactly what the Forex market is.

Andrew: The SPOT Currency market, or Forex market, is the exchange rate of one country's currency against another. It is where the exchange rate is at that specific point in time. We trade that exchange rate.

Dave: OK, so the market is made up of currency pairs. The trader is buying one currency in the pair and selling the other all in one transaction. There seems to be many pairs available to trade. What are considered the major pairs?

Andrew: There are 4 majors all against the USD: EUR/USD, USD/JPY, GBP/USD and USD/CHF. Some other interesting pairs we trade are the USD/CAD, AUD/USD, NZD/USD, EUR/JPY and EUR/GBP

Dave: Is it the first currency or the 2nd currency in the pair that is sold?

Andrew: The primary currency is always the first in the pair and the counter currency is the second. When you trade a pair you are always long the primary if you buy and short if you sell. Important to note that you make and lose in the counter currency. So if you are long USD/JPY and make money you make in JPY.

Dave: An example of this is, should one buy or sell the EUR/USD pair if they are expecting a weaker dollar?

Andrew: One should buy the pair if they expect a weak dollar, sell the pair if the dollar strength is expected.

Dave: When you train the traders at your firm, do you teach them technical analysis?

Andrew: Of course. It is more than half, if not more, of how we trade.

Dave: Are there any technical patterns that seem to work better than others in Forex?

Andrew: We have found that channel trading is extremely effective. Other patterns we use are basic but very profitable. Double Bottoms, Wedge formations, flag patterns, Cup with handles to name a few.

Dave: How about technical indicators? Do you use any when making trading decisions and if so, which ones?

Andrew: We do use the 10 Exponential Moving Average with the 20 to identify a change in trend. The 5 minute, hourly and daily are the time periods we use.

Dave: Do fundamentals come into play? I know we would be talking about macro-fundamentals—the overall economic health of countries.

Andrew: Fundamentals are very important to trading the currency markets. Capital flows dictate the direction of a pair. If a country’s economy is doing well or there is a perception that it will in the near future, investors will want to invest in that country. This will cause demand for the currency as the first thing an investor must do in order to invest in a country is to convert their currency with the country that they want to invest in. If a country's economy is not doing well or if there is a perception of a lack of future growth then there will be a lack of investment from the worldwide community. This usually means that the value of that country's currency will go down.

Dave: What exactly do you look for in the fundamental picture before you place a trade?

Andrew: Market expectations of a specific economic number, the pattern before the number and market reaction to the number. Lately the numbers have not mattered very much as the USD has gone down even with good USD data. A trader must change with the market in order to survive, so it looks like it will be this way until the end of the year.

Dave: I know the Forex market trades 24 hours a day--is there a best time to trade?

Andrew: That is hard to say, as important economic, political and other important news comes out all the time, but in general we have found that there are waves of activity. The mornings in Japan, Europe and the US tend to have good action.

Dave: Can Forex be scalped or is it strictly longer term? What do you consider a scalp?

Andrew: The SPOT FX market is the most liquid in the world so, yes, scalping is a lot easier than in other markets. It is great for longer term as well, as many investors have a good idea of the general health of their economy and can benefit if they are right. In equities, you have to know the company very well--in FX you need to know the country’s economy.

Dave: I noticed that there are super wide spreads on some currency pairs. Why is this, and can this type of pair be successfully traded?

Andrew: Spreads in currency pairs are based on volatility and liquidity. If a market maker has no liquidity in a certain pair he must widen the spread so he doesn’t get killed making a market in it. One of the reasons the EUR/USD has very good spreads in our community is that it is the most traded and has minimal volatility compared to other pairs and on percentage terms.

Dave: I understand that you have perfected a unique trading system that is only traded once a week. Something to do with interest rates….Please explain this trading system and how it works.

Andrew: It really developed from observation. Since we are a daytrading firm and usually use high leverage, we do not get the “rollover fee” one can make trading FX. Our traders must exit the position prior to 5pm EST so that they do not incur the charge. After a while we noticed that there tended to be a sell-off after 5pm on the higher yielders such as the GBP. Since the UK rates are very high compared to the other G7 nations, the interest fee or “rollover” is higher in that pair. We noticed that 85 to 90% of the time there was a sell-off of at least 20 pips from the high from 5pm EST to 8pm on Wednesday during triple rollover. Triple rollover occurs due to the weekend. There are many factors that will dictate when we put the trade on, but we look to sell it after 5pm and make 15 to 20 pips. Certain times we sell it right after 5pm and other times we look for strength to sell into. An example would be, if the pair is at the high of the day at 5pm , we sell immediately. If it's in the middle of its range, we wait for a pop to sell into. As the Asian session usually is not extremely volatile we give the trade much more latitude than we usually do as the success of it is very high.

Dave: What’s your current opinion on the US dollar?

Andrew: I think the market is in a trending mode and the USD will most likely go out the year near or at the lows. The market seems to be consumed with the US current account deficit and are looking to sell the USD on and rally or good news. When the last NFP report came out so good and the USD took a nose dive that was the indicator that the market is going to trade on economics other than Jobs, rates and inflation. Once a trend in FX gets going it can last for quite a while. Take a look at what the EUR/USD did for the last 2 years from November to January. It basically went straight up, slowly but in a tight uptrend right until the end of the year. If 1.3000 can hold, as of now it has backed off from 1.3000, I could see it close the year in the 1.3200 – 1.3500 range. Of course, there are other factors that can change the market landscape, such as capturing Osama Bin laden or the elections in Iraq but barring any change in sentiment this should be the outcome for the rest of the year. We also have a G20 meeting this weekend and there may be a statement that could help the USD in the short term as Europeans are not very happy with the rise of the EUR as it hurts exports. Longer term I would think the EUR would test 1.2400 in the months after the new year.

Dave: I have heard a lot of talk about the advantages of Forex over CME type currency futures. What are some of the advantageous?

Andrew: The only disadvantage I see is the spreads and depth of market/size. Spreads in the futures markets are very tight during market hours but widen out on GLOBEX. If you only trade in the mornings when the CME is open than your fine but if you like to trade 24 hours than SPOT is the way to go. You also pay a commission in futures where in SPOT it is built into the spread. Volume is another disadvantage to trading SPOT; you do not have a centralized market maker, you basically are the one that you are trading with and that’s it unless you have multiple accounts with many others. We use FXCM, Forex Capital markets and are very happy with them. But traders that need volume for confirmations or other signals might not take well to spot. In Forex, you know the volume is there, its like a leap of faith. With our market maker we can sell a 10k mini lot or 20 million on a single pip or “tic”. The size is there you just don’t see it. 1.9 trillion a day!!!!

Dave: Is there anything you would like to leave our members with?

Andrew: Only that the SPOT FX market continues to grow and the spreads and market makers continue to improve from a platform standpoint and an execution one. The fact that you have liquidity 24 hours a day means that anyone can trade this market, even traders with full time jobs. Plus if you pay a lot in commissions you will love this market. We offer training and funding for traders that are looking to learn to trade or ones that are looking for more capital to trade with. Visit www.globalfxllc.com for more info.

Dave: Thank you for joining us today. It’s been very enlightening.

Andrew: My pleasure.