A Primer on FOREX for Stock Traders
Last week I attended the 17th annual AIQ seminar at Lake Tahoe in Nevada. I have been attending the AIQ seminars as both a student and as a presenter since the mid 1990’s and this year’s presentations were among the best I have seen. I participated in the Traders’ Panel and also helped attendees with AIQ EDS coding of their trading ideas.
Steve Hill, CEO of AIQ Systems, presented a primer on FOREX trading. Most attendees are stock traders so his presentation was a valuable primer on the ins and outs of trading FOREX. The advantages of trading FOREX or foreign currency pairs include:
• Extreme liquidity
• 24 hour trading
• Small spreads
• No commissions
• Extremely high leverage available (100:1)
• Very few currency pairs to follow
A currency pair, such as the Euro & US Dollar, symbol EURUSD, is just the exchange rate with the first listed currency being the base currency and the second being the counter or quote currency. FOREX is traded in 100,000 units of the base currency. So if you buy one unit of EURUSD you are buying 100,000 Euros and simultaneously selling the equivalent amount in U.S. Dollars. The minimum unit of movement is 1 pip, which usually is worth $10. A one pip move is equal to a 1/10000th change in the exchange rate price (0.0001) for an exchange rate like EURUSD, where the minimum movement is .0001. This is the norm, but with some cross rates, such as USDJPY, the pip amount is the smallest amount the rate can move, in this case .01. Although there are no commissions, there is a cost to trade based on the bid to ask spread which the broker keeps. The spread is usually 3 pips so it costs about $30 to trade one unit of FOREX per side or $60 round trip. As I am writing this, the EURUSD is quoted at 1.2531, which means that I must pay $1.2531 for each Euro if I want to change dollars for Euros. One unit of FOREX on this pair is worth $125,310 and to buy this you need a minimum in your FOREX account of $1,253. FOREX brokers will automatically close out your positions if your account equity drops too low (there are no margin calls).
The following are 60 minute and daily charts and a quote screen for three FOREX pairs:
(Click to enlarge.)
The EURUSD move on the daily chart from 1.2800 (9/22/06) to the current value of 1.2531 (10/18/06) is a negative 269 pip move worth $2,690.
Number of Pips (269) = (1.2800 – 1.2531)*10000
Total Amount ($2,690.00) = [(1.2800 – 1.2531)*10000]*$10 per pip
Lets says you use a formula that you will never be more leveraged than 5 times the minimum margin requirement, selling the EURUSD at 1.2800 on 9/22/06 would have made $2,690 on a deposit of $6,400 (5 x $1,280) for a 42% profit in 19 days.
I am primarily a stock trader but I have traded futures of all types. My current interest in futures and FOREX is to develop an auto trading system that could be used in conjunction with my Tradestation account. The idea behind auto trading and mechanical system trading in general is to spend time developing and testing a complete system (more on this later) and then use the automatic trade entry and exit feature to allow the system to run continuously with minimal trader intervention. I don’t like spending my working hours watching a chart screen, so auto trading appeals to me. Trading systems are much like casino games where the good ones have an edge for the house. The longer and more often that a casino game is played, the odds or edge will come out and favor the house. Applying this concept to trading systems that have an edge (meaning the winning trades make more than the losing trades lose), FOREX would have a great advantage over stock trading or e-mini futures trading because the overnight markets are just as active as the day sessions whereas in stocks there is no overnight market and in e-mini futures, the market is usually very inactive in the overnight sessions. In auto trading FOREX, we could run our systems(s) 24 hours a day with almost no monitoring. More opportunities plus a system edge equals more profits.
Rich
Steve Hill, CEO of AIQ Systems, presented a primer on FOREX trading. Most attendees are stock traders so his presentation was a valuable primer on the ins and outs of trading FOREX. The advantages of trading FOREX or foreign currency pairs include:
• Extreme liquidity
• 24 hour trading
• Small spreads
• No commissions
• Extremely high leverage available (100:1)
• Very few currency pairs to follow
A currency pair, such as the Euro & US Dollar, symbol EURUSD, is just the exchange rate with the first listed currency being the base currency and the second being the counter or quote currency. FOREX is traded in 100,000 units of the base currency. So if you buy one unit of EURUSD you are buying 100,000 Euros and simultaneously selling the equivalent amount in U.S. Dollars. The minimum unit of movement is 1 pip, which usually is worth $10. A one pip move is equal to a 1/10000th change in the exchange rate price (0.0001) for an exchange rate like EURUSD, where the minimum movement is .0001. This is the norm, but with some cross rates, such as USDJPY, the pip amount is the smallest amount the rate can move, in this case .01. Although there are no commissions, there is a cost to trade based on the bid to ask spread which the broker keeps. The spread is usually 3 pips so it costs about $30 to trade one unit of FOREX per side or $60 round trip. As I am writing this, the EURUSD is quoted at 1.2531, which means that I must pay $1.2531 for each Euro if I want to change dollars for Euros. One unit of FOREX on this pair is worth $125,310 and to buy this you need a minimum in your FOREX account of $1,253. FOREX brokers will automatically close out your positions if your account equity drops too low (there are no margin calls).
The following are 60 minute and daily charts and a quote screen for three FOREX pairs:
(Click to enlarge.)
The EURUSD move on the daily chart from 1.2800 (9/22/06) to the current value of 1.2531 (10/18/06) is a negative 269 pip move worth $2,690.
Number of Pips (269) = (1.2800 – 1.2531)*10000
Total Amount ($2,690.00) = [(1.2800 – 1.2531)*10000]*$10 per pip
Lets says you use a formula that you will never be more leveraged than 5 times the minimum margin requirement, selling the EURUSD at 1.2800 on 9/22/06 would have made $2,690 on a deposit of $6,400 (5 x $1,280) for a 42% profit in 19 days.
I am primarily a stock trader but I have traded futures of all types. My current interest in futures and FOREX is to develop an auto trading system that could be used in conjunction with my Tradestation account. The idea behind auto trading and mechanical system trading in general is to spend time developing and testing a complete system (more on this later) and then use the automatic trade entry and exit feature to allow the system to run continuously with minimal trader intervention. I don’t like spending my working hours watching a chart screen, so auto trading appeals to me. Trading systems are much like casino games where the good ones have an edge for the house. The longer and more often that a casino game is played, the odds or edge will come out and favor the house. Applying this concept to trading systems that have an edge (meaning the winning trades make more than the losing trades lose), FOREX would have a great advantage over stock trading or e-mini futures trading because the overnight markets are just as active as the day sessions whereas in stocks there is no overnight market and in e-mini futures, the market is usually very inactive in the overnight sessions. In auto trading FOREX, we could run our systems(s) 24 hours a day with almost no monitoring. More opportunities plus a system edge equals more profits.
Rich
posted by Traders Edge Systems at 5:02 PM
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