Support and Resistance in Forex

When professional forex traders think about entering a position, their trading system may use either fundamental analysis or technical analysis. If their system uses only technical analysis, there is a very high chance their system uses supports and resistances.

A support is a price or exchange rate that prices do not go under. This happens because of big buying orders waiting at these levels. If there are many buy orders at the 1.5 exchange rate for EUR/USD, it will be hard to go below that price.

A resistance is the opposite of a support. It's a price or exchange rate that make an "upper bound" for currency pairs. This occurs because of big sell orders awaiting on these prices. If there are many sell orders on the 1.55 exchange rate for EUR/USD, it will be hard for the exchange rate to go above this level.

Supports and resistances come in many shapes and forms. However, there are two common forms for them. One is horizontal lines, which means the exchange rate does not go above or below a specific price. The other one is diagonal lines, which means prices are moving in a "tunnel", either upwards or downwards.

Good luck with your trades,
Nadav

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Forex Bid and Ask

When you trade the forex market, your forex broker is going to give you two important numbers: the bid rate and the ask rate. Both of these rates are very important in making trading decisions and estimating how good the broker is.

The ask price is how much the broker is asking to "buy" a pair of currencies. The bid price is how much the broker is bidding to buy back a pair of currencies (in other words, it's your selling price). Since the broker wants to profit, the ask price is always higher than the bid price. The broker buys (bids) low and sells (asks) high.

The difference between the bid and ask price is the spread, and this is where a good broker is measured. A good broker will give you a good spread of 2-3 spreads on the major currencies. More exotic currencies will probably suffer from high spreads, sometimes even 10 pips or more.

Also, when you get yourself or develop a good forex trading system, make sure it can handle the bid-ask spread, otherwise, you set yourself to losses.

Good luck with your trades,
Nadav

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Currency Arbitrage

.diIf you are trading in any financial market, you probably heard the term "arbitrage". This term means buying an asset at one market and selling it on another market, where the price is higher. Usually, this price gap is closed very quickly, but people who find arbitrage opportunities can make some quick, safe, profit.

Arbitrage is also possible at forex, but the high liquidity of the forex market makes it almost impossible to take advantage of such opportunity. Here is an example of a forex arbitrage you can use if you find (in this example there is no spread, but remember most forex brokers have).

There are three fictional currencies: ABC, DEF, GHI (original, right?). Their exchange rates are the following:
ABC/DEF = 2
GHI/DEF = 5

From these two exchange rates you can determine the exchange rates of all three pairs. Since the rate is a ratio between currencies, you can treat is as a mathematic proportion. That means the exchange rate ABD/GHI is 2/5 = 0.4.

Now, let's say that the direct trading of ABC/GHI reached a rate of 0.3. In this case, you can profit from the opportunity you got: if you trade from ABC to DEF to GHI, the rate is 0.4. If you trade from ABC directly to GHI, the rate is 0.3. A smart trader would do this (this example assumes the trader has 3000 GHI):

Buy ABC/GHI at 0.3 - sell 3000 GHI and buy 10000 ABC
Sell ABC/DEF at 2 - sell 10000 ABC and buy 20000 DEF
Buy GHI/DEF at 5- sell 20000 DEF and get 4000 GHI

As you can see, with three simple, risk free, orders, you created 1000 GHI out of nothing. Fortunately, this even is really rare, so people are not able to abuse such situations.

Hope you learned something,
Nadav

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Short Selling

Sometimes you want to enter a trade, but you don't have the right currencies. For example, your accound is funded with US dollars, and you think the dollar is going to rise over the Euro, so you want to "sell" the EUR/USD pair, meaning selling Euros and buying dollars. However, you don't have Euros to sell.

To get over this problem, your forex broker allows you to do "short selling". This means you sell something you don't have, and you agree to buy it later. This enables you to profit when something is going down. You sell it now, at a high price, and buy it when the price is lower. "Buy low, sell high". You do exactly that, but in reverse.

This order is common also on the stock market, so people can profit from a down market. However, it is not always available, and the risks are much greater (in theory, there is an unlimited loss). Also, if the price suddenly goes up, you may not be able to buy back the stock, and you'll be left with a huge loss.

Most good forex systems "know" that short selling is possible. This way you can benefit both ways - when a currency goes up, and when it goes back down.

Hope you learned something new today.
Nadav

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What the Forex Market is All About

Yesterday I briefly introduced the forex market. Today I want to go a little bit more in detail.

As you know, the forex market is where currencies are being bought and sold via a forex broker. After you sign up with a forex broker you make a deposit and you can start trading.

Forex trading is about selling one currency and buying another one. This is why forex price quotes go in pairs. For example, EUR/USD means how many US dollars are worth one Euro. When you use the "buy" command on this pair, you sell US dollars and buy Euros. Your main objective here is that the price of the Euro will rise in terms of US dollars, so you will make a profit.

After you achieved (or not achieved) your price objectives, you can "sell" the EUR/USD pair: you sell your Euros and get them in US dollars. If the price of the Euro increased, you get more US dollars. A profit!

Now that you understand how this works, sign up with a forex broker, ask the broker to open a demo account for you, and start demo trading. Don't put money right on the start. Get the feeling of the market first.

Enjoy,
Nadav

nadavs

So, What is Forex?

Welcome to my new forex blog!

I will be giving here short posts about the world of forex. It'll be mainly about the important parts of forex, like spreads, buying, selling, short selling, options, and so on. Forex is a big subject, and I'll give it to you in small bits, for an easier understanding.

Today I will start with the most important thing: what is forex?

Forex is a short way to write Foreign Exchange, or foreign currency exchange. The forex market is where currencies are being bought and sold for other currencies, mostly to make a profit.

I hope you will enjoy and learn from this new blog.
Yours,
Nadav

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