FOREIGN

EXCHANGE 101
Presented by: Jervin S. De Celis, CSR, CFMP
 WHAT IS FOREIGN EXCHANGE?

• It is the conversion of one currency to another.

• It is a bilateral agreement
• to buy or sell one currency against another
• at an agreed price and
• at a specific settlement date
 WHO TRADES FOREX
• Bankers and Private Institutions
• Governments and Public entities
• Individual Investors
• Speculative Traders
• Ordinary people
 DIFFERENCE BETWEEN FOREX
AND STOCKS
• Stock Market is a centralized market while Forex is Decentralized.
 DIFFERENCE BETWEEN FOREX
AND STOCKS
• Forex is offered by different banks, market makers, brokers.
• No commissions
• No middlemen
• Low transaction costs
• A 24-hour market
• No one can corner the market
• Leverage
• High Liquidity
 VOLUME TRADED
• The volume of currencies traded in one day is approx. $5.3 trillion dollars
versus the $22 billion dollars in the New York Stock Exchange.
 PURPOSES OF FOREIGN
EXCHANGE
• Commercial transaction is
one that is backed by an
underlying economic activity
such as payment for an
import or a foreign loan
• Speculative transaction is
one undertaken purely to
make a profit from currency
movements
 MAJOR CURRENCIES

• The United States Dollar (USD)

• The Euro (EURUSD)
• The Japanese Yen (USDJPY)
• The Great Britain Pound (GBPUSD)
• The Swiss Franc (USDCHF)
• The Australian Dollar (AUDUSD)
• The Canadian Dollar (USDCAD)
 INTERNATIONAL CCY CODES
• Three letter currency codes are used to represent currencies
• First two letters of the currency code represent the country
• Last letter represents the currency
 PARTS OF AN FX QUOTE
• WHAT ARE PARTS OF AN FX QUOTE
Example:
USD/JPY 110.15 / 17
EUR/USD 1.1380 / 81
110 The BIG figure for USD/JPY
1.13 The BIG figure for EUR/USD
15/17 The SMALL figure for USDJPY
80/81 The SMALL figure for EUR/USD
 
 HOW TO READ CURRENCY PAIRS
• The exchange rate tells you
how much you have to pay
in units of the quote currency
USD/PHP =
to buy one unit of the base
currency
47.7065
• or how many units of the
base currency you will get
when you sell a unit of the Base
base currency. Currency
Quote
Currency
 HOW TO READ CURRENCY PAIRS
Bid/Long = Buy
Ask/Short = Sell
Spread = Difference between Bid Price and USD|PHP
Asking Price 2
Ask Bid
Percentage in Points or “Pip” =
smallest tick or change in price of the
currency 47.70 65 63
47.70

Bid Price - The price you are willing to pay

to get a unit of the base currency
Asking Price/Offer Price - The price you
will get when you sell a unit of the base Pip
currency
 HOW TO READ CURRENCY PAIRS
• How many
pips?
USD|PHP
• 4 pips
-
Ask Bid

47.70 05 47.70 01
 HOW TO READ CURRENCY PAIRS
• How many
pips?
USD|PHP
• 200 pips
Ask Bid

47.75 10 47.73 10
 TYPES OF FOREIGN EXCHANGE
PRODUCTS
• FX Spot
• purchase and sale of one currency against another currency
• i.e. USD/PHP, EUR/USD and EUR/PHP
• value date is trade date plus 2 business days
• FX Forwards (or Outrights)
• Purchase and sale of one currency against another currency
• Value date is anything beyond spot date (1w, 1m, 1y from trade date)
• FX Swap
• A simultaneous buying and selling (or selling and buying) of one currency
versus another with different maturities.
 RULE OF 2
• 2 PARTIES
• CALLING and QUOTING PARTY
• 2 CURRENCIES
• Commodity and Terms Currency
• 2 WAY QUOTE
• Bid and Offer
• 2 Figures
• Big fig and small fig
 QUOTING AND CALLING PARTY
CALLING PARTY
- The person who needs or asks for price
- “Price taker”
- buys at offer rate and sells at bid rate of the other price maker
- Clients, Corporates, Individuals and other traders or other banks

QUOTING PARTY
- The person showing his price to the calling party
- “Price maker” or “Market maker”
- buys at his bid rate and sells at his offer rate
- Usually traders /bankss
 POSITION
• FOREIGN EXCHANGE POSITION – monitored and controlled by the FX
Trading Desk
• FX Overbought Position – “LONG” Commodity currency
• exist if the total Foreign currency assets exceed the total foreign currency
liabilities
• FX Oversold Positions- – “SHORT” commodity currency
• exists if the total foreign currency liabilities exceed the total foreign currency
asset

• LIQUIDITY POSITION –monitored and controlled by the liquidity desk

• Positive Liquidity – exists when there is a positive balance in the cash
account
• Negative Liquidity – exists when there is a negative balance in the cash
 SIMPLIFIED CROSS RATE
FORMULA:
a.) Indirect VS Indirect = Commodity CCY / Terms CCY

EURUSD 1.0900 GBPUSD 1.5100

EURGBP = ?
EURGBP = 1.0900 / 1.5100
EURGBP = 0.7219

b.) Direct VS Direct = Terms CCY / Commodity CCY

USDPHP 47.00 USDJPY 125.00

JPYPHP = ?
JPYPHP = 47.00 / 125.00
JPYPHP = 0.3760

c.) Direct VS Indirect = Commodity CCY * Terms CCY

USDPHP 47.00 EURUSD 1.0900

EURPHP = ?
EURPHP = 1.0900 * 47.00
EURPHP = 51.23
 SHORT GAME
• Look for the Currency pairs in EMEA
• What is the OHLC of Mexican peso
• What is the probability of an interest rate hike for March 2017?
• What is the inflation rate for China?
• What’s the rating for Long term Currency issues of Colombia
• What is the Forward rates for USD PHP in 2021
 24/7 TRADING HOURS

FX Markets Trading Hours

(Philippine Standard Time)

Sydney 5 AM through 2 PM

Tokyo 7 AM through 4 PM

London 3 PM through 12 AM

New York 8 PM through 5 AM

 SAMPLE EXERCISE

Profit
• Compute for Symbol Bid Ask High Low Open Change
/Loss
the trading
gains at Bid EUR / USD 1.3389 1.3391 1.3497 1.3363 1.3374 .0015
Price sold at
High.
USD / CAD 1.0052 1.0056 1.0109 1.0043 1.0080
-.0028

• LONG POSITION - EUR/USD = 1.3389 * 100,000 UNITS = _______

• SHORT POSITION – EUR/USD = 1.3497 * 100,000 UNITS = ________
 DEALING PROPER
Bank W Bank S
“Calling Party” “Quoting Party”

A)Hi good day A)Hi there

What’s your 10 - 15
Price for
5mio USD/PHP pls.
B) Okay yours at 47.15 for
B) Mine for $5mio at 15 $5mio.Thank you

C) Confirmed. Will send C) Okay thanks for the

ticket. Thanks. deal. Bye
 WHO BENEFITS?
Strong
1 USD = P45 Good For Importers

Dolla
r
Weak 1 USD = P50 Good For Exporters
and OFWs
 WHAT MOVES CURRENCIES?

• Interest rates – this makes currency value

appreciate or depreciate
• Inflation – this affects the purchasing power
of consumers.
• Trade – used by private and public entities
to exchange goods and services
• Other economic factors
 WHY DOES THE US FEDERAL
RESERVE SO IMPORTANT?
• It sets the interest rates for the largest economy
in the world
• It manipulates dollar to manage the US economy
• It sets target inflation to create a stable economic
condition in the USA
• It can also be used to depress other
economies
PART II
 MARKET ANALYSIS

• SENTIMENT ANALYSIS
• FUNDAMENTAL ANALYSIS
• TECHNICAL ANALYSIS
 FUNDAMENTAL ANALYSIS
• The analysis of the probable future directional movement through the
use of Macro and Micro Economic data released by Private and Public
entities.
• When we use Fundamental Analysis, we use data reports such as
Inflation, Employment Reports, GDP, Monetary policies, Interest rates,
Commodity prices etc.
 KEY ECONOMIC INDICATORS
Gross Domestic Product (GDP)
Increasing GDP growth rate means positive
economic growth and brings optimism in the
business climate.

Trade Balance
Compares the total value of imports to the
total value of exports for a reporting period.
Appreciation of local currency is beneficial to
importers while depreciation is beneficial to
exporters. If the balance of trade shows
a surplus or declining deficit, then there may
be an increased demand for the currency.
 KEY ECONOMIC INDICATORS
Unemployment Rate
the high rate of
unemployment is a negative
economic indicator.

Retail Sales
An increase in the Retail Sales
Report is likely to be seen as
positive for the currency as it
suggests growing consumer
confidence.
 KEY ECONOMIC INDICATORS
Interest Rates
Causes higher returns on the
assets of the currency,
increasing the demand for
the currency.

Inflation
Inflation decreases the
purchasing power per unit of
money
Asian Financial Crisis

From P26 to P44

2008 Financial Crisis
US Federal Reserve sets interest
rates at near zero level
US Federal Reserve hinted the
buy back of bonds, increased
interest rate.
PH GDP started slowing down.
 KEY ECONOMIC INDICATORS
Producer Price Index
Increasing PPI values indicate
inflation.

Consumer Confidence
Optimism would ultimately encourage
spending as stability is expected.

Political Stability
Any threat to the balance of national
leadership gives great fear and
uncertainty to consumers and
investors alike.
 KEY ECONOMIC INDICATORS
Industrial Production Index
Shows the monthly change in production
for the major industrial sectors including
mining, manufacturing, and public
utilities.
An increase in IPI suggests continued
growth which is seen as a positive for the
economy.

Commodity Price Index

Tracks the changes in the average value
of commodity prices such as oil,
minerals, and metals.
For commodity exporters, an increase in
this index suggests greater potential for
earning higher prices from these exports.
 KEY ECONOMIC INDICATORS
Ratings
Countries are given ratings by firms such as
Fitch, Moody’s and Standard and Poor’s by
their capability to repay debts, known as
“credit worthiness.”

Natural Disasters
These events disrupt industrial production and
businesses resulting to high economic and
social costs that devaluates a country’s
currency.

Seasonal Trends
In many countries, spending is highest during
the Christmas season since workers typically
receive bonuses.
 WHY IS US
INTERESTED
WITH MID EAST?
US and Saudi oversupplied
the world with Oil; US
Federal reserve started
buying back the bonds it
sold before to stimulate
the US Economy ( this was
a hint of US recovery and
soon stronger dollar).
With this move, the US enemies such
as Russia, Iran, Syria, Brazil, Iraq
suffered losses from the lower Oil
prices. Stronger Dollar makes you pay
more to import oil, thus making the
enemies’ economy weaker.
Gold Goes up when Dollar is weak.
When Dollar is weak, investors
flock to safer assets like gold.
Because gold is rare, cannot be
reproduced easily and is
durable.
ECONOMIC CALENDAR

Date of Event – Indicates when

the announcement will take place

Time Left – Tells when the

announcement will be made

Event – Name of the anticipated

subject

Impact – Indicates the

influence or weight effect of the
subject to the market

Previous – The past recorded

data
Consensus – The expected
average estimate of analysts

Actual – The official figures

released by the government
 TECHNICAL ANALYSIS
• Fundamentals of Technical Analysis
• Charting
• What are charts and its types
• Trends
• Support and Resistance
• Indicators
• Patterns
 TECHNICAL ANALYSIS
• The study of Charts using past closing prices to predict the probable
directional movement of a tradeable financial instrument.
• Technical Analysis (TA) deals with PROBABILITY. It does not guarantee a
100% accuracy in gaining profits from a trade.
• Uses trend lines, Indicators, patterns and other tools to anticipate a trend
or predict a direction
• Used by traders (Swing Traders, Position Traders, Intraday Traders)
 THE PRINCIPLE OF TECHNICAL
ANALYSIS
Price Discounts Everything – fundamental, economic
and news events are reflected in charts
Price Move in Trends – Prices move in directions and
form patterns
History tends to repeat itself – As investors tend
toward a patterned behavior, history tends to repeat
itself
• INSERT CHART HERE FULL CYCLE
 WHAT ARE CHARTS
• Charts are the
graphical illustration of
the price action of a
particular security.
• A price chart is a
sequence of prices
plotted over a specific
time frame. In
statistical terms,
charts are referred to
as time series plots.
 TYPES OF TRENDS

Upward Sideways Downward

 TYPES OF CHARTS

• Line Chart
• Bar Chart
• Candlesticks Chart
 TECHNICAL TOOLS
• Trend lines –a straight line that connects two or more price points and
then extends into the future to act as a line of support or resistance
• Support – the price level at which demand is thought to be strong enough
to prevent the price from declining further.
• Resistance – the price level at which selling is thought to be strong
enough to prevent the price from rising further.
• Indicators – tools derived from prices that are used to forecast the future
movement of a security. It is also used to signal for buy and sell
transaction as well as overbought and oversold levels
• Patterns –a formation in charts that signifies a particular interpretation
that can affect the future directional movement of the security
 ADVANCED
TRADING
STRATEGIES AND
TACTICS
 STRATEGIES AND TACTICS
• In trading, we can use strategies and tactics through indicators, trend
lines and patterns to spot an entry and exit position.
• Indicators such as Moving Averages, Relative Strength Index, Stochastics,
DMI etc. are used in trading securities to confirm an entry and exit as well
as project the probable movement of the security.
• Trading Breakouts and spotting bullish and bearish divergences in Prices
and indicators are also used by seasoned traders.
TREND LINES
Trend lines –a straight line that
connects two or more price points and
then extends into the future to act as
a line of support or resistance

Upward trend is characterized by plotting

the Higher highs and higher lows
Downward trend is characterized by plotting
the Lower highs and lower lows
SUPPORT AND RESISTANCE
Support – the price level at which demand is
thought to be strong enough to prevent the price
from declining further.
Resistance – the price level at which selling is
thought to be strong enough to prevent the price
from rising further.
Resistance is plotted above the price

Support is plotted below the price

 TECHNICAL TOOLS
• Indicators – tools derived from prices that are used to forecast the future
movement of a security. It is also used to signal for buy and sell
transaction as well as overbought and oversold levels
• Patterns –a formation in charts that signifies a particular interpretation
that can affect the future directional movement of the security
MOVING AVERAGE
Moving Average is the mean of the closing
prices of a security from a specific timeframe
in the past.
Used for Buy and Sell Signal as well as
Support and Resistance or validation of a
trend.
Used for Buy and Sell Signal as well as
Support and Resistance or validation of a
trend.
 MOVING AVERAGE
CONVERGENCE / DIVERGENCE
Invented by Gerald Appel

MACD cross above Signal line = Buy

MACD cross below Signal Line = Sell
Distance between MACD and Signal Line is represented by Histogram
MACD is used for Buy and Sell signal when
the Lines converge or diverge
MACD is also used to spot Bullish and Bearish
Divergences.
Bearish Divergence
Bearish Divergence
Bullish Divergence
RELATIVE STRENGTH INDEX
Relative Strength Index – used to
indicate overbought or oversold
levels
Invented by Welles Wilder
Level 70 – overbought
Level 30 - Oversold
Level 70 – overbought
Level 30 - Oversold
STOCHASTICS
 Invented by George Lane
Stochastics – works almost
the same as RSI but it
gives signal when to buy
or sell.

During strong uptrends or downtrends,

Overbought and Oversold level may be
considered as strong buying/selling pressure
%K moves faster than %D. rather than signals of trend reversal
STS uses current closing price and compares it to previous highs and lows of a
period to come up with numbers that will translate to overbought or oversold levels

Important points:
Divergence – opposite direction of Price vs.
Indicator
Extremes – reaching overbought/sold levels may
signify trend reversal
Hinges – flat movement after extreme trend
movements
RETRACEMENTS
• Retracements – a set of different levels used for
support and resistance which is based on the principle
that after price moves in one direction, it will soon
retrace a certain portion of the move before proceeding
to its original direction.
Retracements give projected major support lines for an upward
trend that suffers a market correction or profit taking.

• Measuring how low can a price go using retracements

requires plotting the Tool at the top or peak of the trend
and dragged down to the base of the trend.
Measuring how high can a price go using
retracements requires plotting the Tool at the bottom
of the trend and dragged up to the peak of the trend.

Retracements give projected major

resistance levels for an a downward
trend