How to Trade Foreign Currencies With Market Participants

In the financial sector, the business of how to trade foreign currency has become one of the most promising and much sought after money-making endeavor. This is mostly because the business can give you immediate results depending on how much time you devote on it and what types of networks you have.


But getting into the foreign currency trading business requires you some thorough knowledge first before you get right down to it. You should first understand what it is and why there is a need to conduct such business. Foreign currency trading happens primarily because countries around the world have differing monetary values. If you look at it closely, you will realize that currency trading is really just as the name suggests-you swap your currency with that of another.


The world of foreign currency trading is very dynamic and involves different market participants. These participants are the people who are vital to making the entire business of foreign currency trading work. They involve all crucial aspects from both the private and public side. Each of these entities has a say in how currencies are exchanged and priced based from current market values:


1. Centralized Banks - These institutions are often tied up with the government. Some are even the main financial institutions in a particular country. Although they do not often directly buy or sell the currencies, they are still known to actively participate in the market. The main purpose of central banks is to provide a practical influence over the course of the trade. You can use these institutions to refer your current values and take advantage of low-priced currency trades as soon as they hit their values.


2. Actual Customers - These are directly the people who would most likely need the aid of new currencies. Aside from considering individuals who might need immediate currencies in exchange for what they have, you should also direct your attention to big businesses involved in the financial services industry. You can also try targeting those who are publicly listed companies which are known to be heavily involved in making stock investments.


3. Foreign Currency Trading Brokers - These are people who live and breathe the market. They are key persons because they are the go-to professionals when you want all the help you need to make fast and big currency transactions. They are more than just your average currency trader. They also make use of a combination of many other foreign currency trading methods such as scalping the market, day trading, to name a few. However, if you choose to work with them you must be prepared to let them in on the profits you make as they mostly require a certain amount of commission in every sell.


Getting along with these market participants is pretty easy to do. You just need to learn about their ways and read about them as much as you can. These market participants can also have a big impact on how your currency trading business will profit.

Use Market Mechanics to Your Advantage

The markets will tell you where they want to go, if you let them. What it comes down to is understanding the market mechanism which underlies price moment. When you operate with that in mind you can see how it plays out in determining the course of price action and use it to identify the likely course of action.

So what is this market mechanism? Well, it’s no secret. It’s just something most traders don’t give much thought to, even though they are a part of it. The markets are facilitators of financial transactions. Some involve stocks, some futures, some forex, but all operate with one primary objective - to create the largest amount of transaction volume possible. The exchanges are motivated to do this for the fees they receive and the market markets do it so they can make the bid/offer spread as frequently as possible. And since it behooves them to have liquid markets where they can readily transaction business, all other market participants support this structure, allowing the exchanges and market makers their profits.

Now, how do the markets create the largest possible transaction flow? By having prices at the levels which most participants at a given point in time agree to as value. That is to say, when a buyer and seller come together they have agreed to the value of the thing they are exchanging, even if it’s just for a split second. The market’s interest in maximizing volume is to ensure that prices at any given time best reflect the value perspectives of both buyers and sellers. As a result, price will always move to find the levels at which the most volume because the market makers, in response to the market environment, will move them there.

This continuous pursuit of value by the market makers is what we see playing out on the charts. If we know what to look for we can identify the levels at which the market most found that value - meaning the market spent more time at those levels and/or did more volume there. There are two “high value” areas on the chart below.

At the left of the chart we can see a market searching for value. It is moving rapidly in one direction. Then it finds that value and spends about 10 periods there. Something happens to change trader’s perceptions eventually and the market goes back into a period of trying to find value again. Notice that twice it runs through the first “value area” along the way before settling at a slighly higher value. That is what markets do - move from periods of stable value to ones where it’s trying to find where the value is and back. It shows up on any chart in all timeframes and markets.

Candlestick and bar charts don’t always make it easy to really spot the finer points of where the market has established value, though. For that we can turn to a different style of charting based on the distribution of prices during a time period. This is sometimes called Market Profile®. Others call it volume at price, TPO charting, and other variations. The basic idea in all cases is what you see at right below.

The graphic above shows 1 day’s worth of trading in two fashions. At left we see 30 minute bars in the classic style. At right we see the distrubtion chart which shows, for lack of a better description, how often the market passed through a certain price level. It’s kind of like crunching the bar chart together. Count the number of bars at left which included the 1400 level, then notice that it matches the number of letters you can see across at the 1400 level on the distribution chart. The thicker the distribution at any given price level, the more value was found there by market participants. The thinner the distribution, the less value.

Now, knowing that the market makers are going to try to move price to where the buyers and sellers most percieve the value to be, doesn’t it make sense that when the market is in a transitional phase and is trying to find a new equilibrium they will see former value area as likely areas for that? It’s like when you find yourself in an uncomfortable position you go back to what you remember as being a comfortable one. In that way, areas were there was a lot of value before become attractors - targets.

The application of these value areas and rejected levels is relatively straightforward. One of the most useful is in determining the potential of a given trade. When you can look at a graph and see where the market is likely to go, you can better identify trades likely to produce the type of reward/risk profiles for which you are looking.

Let’s use this chart to shape an example.

Each one of the distributions above (S&P 500 index) represent one day’s trading. If a trader were looking at things on or after the second day with an idea of selling the market, the high count part of the first day’s distribution at 1466 becomes a very clear target. If the market starts moving lower, it would be very likely to at least approach that level. It’s an area where the market spent a lot of time the first day (established value), therefore will become an attractor for future price movements.

Of course that doesn’t mean the market will necessarily stop right there, as things are rarely that precise. Sometimes it will nail it on the button, but other times it will come up a bit short and others it will go further (maybe even much further). But that is part of the value discovery process.

Naturally, there is a bit more to it, but this provides a good start point. If nothing else, it should give you a different perspective on the idea of support and resistance.

If you would like to learn more about how you can identify price targets in this fashion, you’ll want to take a look at the course I prepared on the subject.

Trading Timeframe Assessment

Trading requires time in a couple of ways. The first is the time dedicated to developing a trading system. This can be thought of as a one-off thing, but in reality it is more an on-going process. Once a system is in place, time is required in terms of monitoring the markets for signals, executing transactions, and managing positions. How much time all these different elements require depends on the trading system. The trading system, in turn, needs to take in to account the amount of time the trader has available.

With that in mind, the first question to be answered is how much time each day/week/month (whichever is most appropriate) can you dedicate to the various requirements of trading and managing a trading system? Different trading styles require different time focus. As a rule, the shorter-term the trading, the more specifically dedicated time required. A day trader, for example, runs positions which are opened and closed during the same session. This normally means a lot of time spent watching the market for entry and exit signals. An intermediate or longer-term trader who holds trades for weeks or more does not have to dedicate the same amount of time to watching the markets. He or she can usually get away with only spot checking from time to time. Of course there is a whole array of possibilities in between.

At this point it is also important to consider distractions. There is a major difference between having 6 hours per day of uninterrupted time to watch the markets and having 6 hours of time during which you will be making and receiving phone calls, having meetings, and otherwise not being able to focus on the markets and make trades when required. In the former case one could day trade. In the latter, however, day trading would probably be a disaster as the trader would most likely miss important trading situations on a frequent basis. This sort of thing needs to be taken in to account.

The basic decision one has to make is in what timeframe the trader can reasonably expect to operate on a consistent basis. The individual must be able to do all the data gathering, research, market analysis, trade execution and monitoring, portfolio management, and any other functions required of her or his trading system. That means a trading timeframe has to be selected which allows the trader to handle all of these duties without the kinds of disruptions which can cause poor system input from the user, and therefore poor system performance.

Ten New Trader Pitfalls

So you want to trade, eh? Or have you already started? What drew you to it? Was it the huge profit potential? Maybe it was the excitement. Or perhaps you’re like me and love the challenge of solving a big, multi-dimensional puzzle. Whatever the case, there’s certainly a number of things that make trading the financial markets worthwhile. At the same time, however, there are some huge obstacles along the path to profits and success. In this article I will give you ten ways to avoid trouble in the markets. They will help protect your capital and increase your chances of success. Ready? Let’s jump right in!

#1 Avoid Errors in Order Entry!
The quickest way to lose money in the markets is to make mistakes when you place your orders. Fortunately, this is something very easy to fix. PAY ATTENTION! It’s as simple as that. Every trade entry system you could use has some kind of order confirmation mechanism. Take the extra two seconds and check to make sure everything is correct. I can assure you this will save you money, not to mention a little stress and high blood pressure.

#2 Use Only Risk Capital!
New traders often get so caught up in the excitement and anticipation of trading that they let common sense go on holiday and trade with money they have no business putting at risk. Any money you put in to the markets must be risk capital, money you can afford to lose and not impact your basic financial situation. It’s hard enough to be successful as a fledgling trader. You do not want the added pressure of having to make money and/or not being able to afford losing it.

#3 Start With Enough Capital!
It takes money to make money. You’ve heard that often enough. Accounts that are too small can be a major hindrance to trading success. They suffer from transactions costs that are proportionally higher than is the case for larger accounts, which hinders returns. They also restrict the number of positions you can have at one time, which means you cannot always take good trades that come along and you may not be able to diversify as you should.

#4 Trade Small!
When in doubt, put less money at risk. There is no more swift way to lose huge chunks of money than to trade too big. Your trading size should be determined by your account size based on the risk being taken. If you are risking an amount of your account that potentially puts your long-term ability to keep trading in question, your position is too big. If this means you cannot trade certain instruments, find something else.

#5 Avoid Trading Too Often!
Trading can be fun, exciting, and profitable. It is also an intermittent reward system, like gambling. That means it’s easy to get hooked and in a dangerous cycle. The feeling you have after a winning trade will make you want to do it again. This can lead to sloppy trading. I personally try not not to make any additional trades the same day as I close out a position when trading short-term. That helps me get some time and space to ensure I am making good decisions based on my system, not my emotions. Do whatever you must to ensure you always trade in control.

#6 Have a System!
You will not be a successful trader if you do not have a system. They come in all different shapes and styles, but there are a couple of common elements. A system has both entry and exit determinants. A system can also be described. If you cannot verbalize your system, it’s not a system. If you don’t have rules for both entry and exit, it is not a system.

#7 Take the Time to Learn!
Many, many dollars can be saved by new traders if they take the time to learn and practice. There are so many resources so readily available today that there is no excuse for not entering the markets prepared to do battle. Demo accounts can be found for all major markets. That means you can practice your order execution, and you can paper/demo trade your system to confirm its viability before putting a single dollar at risk. To do otherwise is foolish.

#8 Trade in the Right Time Frame!
You have a life beyond trading. May be you have a job or go to school. You have family and social commitments. All of these things combine to determine the timeframe you can use. It does not make sense, for example, to try day trading when you cannot not monitor the markets almost continuously. In my own trading, there are times when I can day trade or swing trade (1-3 day position durations), but there are others when I know I won’t be able to dedicate as much time to the markets and therefore have to take longer-term positions. You must find a trading time frame that fits your lifestyle.

#9 Trade the Right Market(s)!
What often happens with new traders is that they get in to trading because of some experience they had which introduced them to the thrill of the game. That experience probably also got them in to a certain specific market, like stocks or foreign exchange. An emotional attachment is established. Needless to say, this isn’t the best way to pick the market you should be trading. The various markets have different trading profiles. Some are more volatile than others. Some are good for trading intraday, while others are better for longer-term action. The process of deciding to begin trading should include a hard look at what market(s) you should trade based on your account size, trading time frame, personal knowledge and interests, and risk tolerance.

#10 Understand the Risks!
Every market has different risk factors. In fact, each trade has its own distinct risk profile. You need to be aware of what they are. You may have a general awareness that the market may not go the way you thought. That is certainly true, and that is why stop loss orders are advocated. It is how the market can go against you, though, that is important. In the major markets, things like economic releases, earnings reports, and statements by government officials can influence prices. Some cannot be avoided, like a natural disaster, but others can be by simply being aware of the calendar and taking measures to guard against an adverse data release or speech by someone like the Fed Chairman.

As a new trader, you will make mistakes. If you take the advice of this article you can avoid some of the bigger potential pitfalls. That could both save your money in avoidable losses, and potentially lead to more profits.

Start Trading: Throw the Excuses Out the Window!

People make all kinds of excuses as to why they cannot get involved in investing or trading the financial markets. In this article, some of the most prominent are debunked.

”I don’t have time”
Despite being one of the most frequently heard, this is probably the most pathetic excuse for not trading there is. Why? Because the availability of technology and information in the modern day means that we can operate in literally any time frame we want. Many people, when they hear “trading”, think it means sitting in front of the computer all day. While that certainly is one form of trading, most of us do not have the schedule to allow us to dedicate hours each day to monitoring the markets. The good news is that we don’t have to in order to trade effectively.

I will use myself as an example. My college coaching position has me frequently in the gym, in meetings, and on the road. What’s more, I run a club program and a couple of businesses on the side. In 2004, even though there were long periods when I did not trade at all, and I probably only put on a dozen total positions all year, I was still able to make 200%+ in the stock market. If I can trade given my schedule, and have performance like that, anyone can.

“I don’t have the money”
In the past, this was a pretty viable excuse for not trading. These days, though, one can trade with relatively little money. Transaction costs have dropped dramatically over the last decade and there are more trading options than ever before. There is one particular trading platform which allows an individual to put on trades of at little as $1 in value, and they have no minimum account size requirement.

Is it better to have more money? Absolutely. The more capital you have at your disposal, the better are your available options and the more actual money you can make in raw dollar terms.

Having more money is not always a good thing, though. For the inexperienced trader, it is better to have only a little money at risk. Why? It is the same as anything else. Just like anyone new to a skill make mistakes as they are learning, so do new traders. And just as a coach would not willingly throw a new player in to a championship game against experienced opponents, neither should those new to the markets to take on large trades and put significant portions of their assets at risk. It’s common sense. Better to make the inevitable mistakes when there is relatively little at risk.

“It’s too risky”
Trading is only as risky as you make it. If you take risky trades, then trading is risky. If you don’t, then it isn’t. There will always be the risk of losing money on a trade. That is completely unavoidable. But that could be said about all of life.

Driving is one of the most risky things in the modern world, but we still do it. We reduce the risk by obeying traffic rules, planning our route, wearing seatbelts, paying attention, and all that. Does that completely eliminate the risk that of ending up in an accident? No, it doesn’t. Nor does it necessarily keep us out of traffic jams or from getting lost. We understand the risks, though, and weigh them against our need to get places in a timely fashion.

Trading is the same. We do it because it helps get us where we want to go, in this case financially. There are going to be hiccups along the way, but if we are focused and conscientious, we can minimize the risks, and potentially the damage an unfortunately turn inflicts, and remain on course.

“It’s too complicated”
Technology and competition have combined to make trading so much easier than it has ever been before. All it takes is a couple of clicks and you can execute a trade, check your positions, get news, and anything else you need to do. The fact that you are reading this article says you have all the basic skills necessary to trade or invest.

Can trading be complex? Sure it can. There are those in the markets who use complicated software, mathematical algorithms, even artificial intelligence. None of that is necessary, though. Some of the best traders use little more than price quotes or a simple bar chart. How intricate you get is strictly a matter of personal preference, not necessity.

Is there a learning curve? You bet. Trading is like anything else. There are things you need to know. The good thing, though, is that there are loads of resources out there to help you learn.

How the Financial Markets Can Grow More than Just Your Bank Account

The financial markets provide us with the opportunity to grow in ways that most people probably do not even think about. We all know of the gains in wealth to be had buying and selling stock, bonds, commodities, currencies, and other instruments. One need not look far to find stories about the riches to be had. Successful traders, investors and portfolio managers like George Soros, Peter Lynch, and Warren Buffet have become household names. What is less commonly talked about is the personal development which takes place along the way.

Trading and investing, like any worthwhile pursuits, provide more rewards than just the obvious accomplishments. To paraphrase the old saying, the destination is not always as important as the path taken to get there and the things seen along the way. While it is true that the expansion of one’s portfolio is what ultimately indicates success or failure in the markets, how those gains are achieved can provide outstanding opportunities to learn important lessons about ourselves with far reaching value. These lessons reach across all areas of our lives.

Playing to Your Strengths
We all have our strengths and weaknesses and a kind of structure in which we operate based on the demands on our time, education, experience and an array of other factors. In the markets we need to make assessments about these things to help us decide what to trade, the timeframe in which to operate, and how to make our trading and investing decisions. Why? Because it is unlikely that we will achieve our objectives if we do not honestly judge ourselves and how best we can operate. For example, I am unlikely to be a good day trader if I cannot dedicate my days to watching the markets for long stretches and frequently buying and selling. I must either choose another course or alter my schedule to accommodate the demands of being a day trader.

It is the same in the rest of life. We must constantly consider our personal inventory and life situation. They dictate what we can do and how we can do it. That said, these are not static things. Just as I noted above that I could alter my schedule to allow for day trading, so too can we change things to expand our options. Education, in all its forms, is part of that equation. So too is seeking out new experiences, meeting new people, and even consciously changing our attitude toward things. If a goal is important enough, there are things we can do to make achieving it possible. Part of that is knowing what we have to work with and how to most efficiently apply it. The other part is knowing how to open up new avenues.

Knowing Who to Listen To
In the markets there is a vast array of information available. It comes in every form imaginable, from data released by the government to commentary by analysts to tips from Uncle Joe. Some of this information is useful to us. Some is not. A great deal of what came out in the aftermath of the stock markets collapsing in 2000 and after was the number of conflicts of interest those who provided “expert” opinions had. These people did not have the interests of those they spoke to about this stock or that at heart, but rather their own and/or their firm’s. Many, many people listened to these pundits to their detriment. Clearly, a hugely important element of successful trading is knowing what information is of value and which sources can be trusted, and what should be taken with a grain of salt.

The same holds true in all other areas of our life. All of us are constantly provided with information and advice. Some is solicited. Much is not. Before we can decide whether to make use of it all we must be able to assess the veracity of the source. Some people are trustworthy and wise. We can depend on what they say. Others do not have our best interests in mind. We must carefully consider what they say and the motivations behind it, before deciding whether it is worthwhile or should be ignored all together. Being able to effectively judge the input we receive from sources such as our family, friends, and peers is a priceless skill.

Being Disciplined
Success in the markets is achieved by doing what we know is the right thing to do. The single biggest reason people fail to consistently produce the returns they seek is that they fail to maintain a disciplined approach. Sound familiar? It is the same as anything else we do. Want to lose weight? You must be disciplined about diet and exercise. Want to learn how to play guitar? You must exercise the discipline required to practice the hours required to attain the skill.

Understanding Why You Fail, Knowing How to Succeed
Perhaps the single greatest thing about trading and investing in a meaningful fashion is that it provides a fantastic opportunity to see what you do which causes you to fail and what leads to success. The conscientious trader/investor has a plan and thereby a way to make evaluations. Whether things go to plan and profits accrue, or they do not go well, he or she knows why and what needs to be done going forward.

Achievement in life requires that one follow a similar course. No matter the objective or pursuit, we must understand what it takes to succeed and have ways we can judge whether we are doing those things or not. To do otherwise is to act in a random fashion, never sure if we are doing what is right and necessary.

These are just some of the valuable life lessons that trading and investing can provide. There are plenty more as worthwhile, to go along with the more commonly thought of value in understanding how the markets can be used to improve your financial well-being. And these lessons need not come at great expense either since modern trading and investing can be done with very small amounts of money – even none at all in the case of demo accounts. All the more reason to make the markets a source of both financial and personal growth.

Behind the Trade

OK. So we’ve done a trade, but what does that mean? The financial markets bring together buyers and sellers. Some transactions are very straightforward, as in the stock market. The buyer pays the seller money and receives shares in return. Even when using leverage and margin, the basics of the transaction remain very simple. This is not always the case.

The stock market is what can be referred to as a cash market. That means the buyer gives the seller cash now to receive an asset immediately. It may take a period of time for the actual exchange of the assets to take place (three days in the U. S. stock market), which is referred to as settlement, but the buyer is considered to have taken ownership at the time of the trade.

The forward market is a kind of deferred cash market in that the traders agree to exchange assets at some future time, generally with a set of specific terms (price, date, transaction size, asset quality). An example could be a gold transaction. The agreement could be that Trader A commits to buy 100 ounces of certified gold bullion from Trader B at a price of $400/oz for delivery in three months. Note that when the agreement is made, no exchange of assets takes place. Trader A does not own the gold yet. That will not happen for three months when he gives Trader B $40,000 and takes delivery.

The buyer of stock is considered to be long because ownership generates benefits through price appreciation. When entering in to a forward or futures trade, however, no asset changes hands until some future time. Even so, the party who agrees to be the buyer takes on a long position. In the above example, Trader A will be the buyer. He is therefore considered to be long due to the fact that he will benefit from a rise in the price of gold. If gold were to rise to $410 by the time he has to buy those 100 ounces from Trader B, he could take possession and immediately turn around and sell for a $1000 profit ( 100 x $10 ). Trader B, on the other hand, would be short. Were gold to fall in price to $380, she would benefit in that she could buy the gold in the market and turn right around to deliver it to Trader A under the contract terms and make $2000 ( 100 x $20 ).

In most cases (all for the individual trader) forward/futures agreements require margin. This is to protect the counter-party against default of the agreement (for futures the exchange is the counter-party)

The options market differs from the forward/futures market in one very meaningful way. Like a forward contract, an option is an agreement to exchange assets at some future time. The difference, however, is that in options one of the parties—the buyer of the option—does not have to fulfill the contract—hence the “option”. The option market, however, is a cash market in its own right. Options are bought and sold in the same manner as stocks, with the buyer paying the seller for the right to conclude a future transaction or force the seller in to a future agreement (forward/futures for example).