X-Trade Brokers Dom Maklerski S.A.

Introduction to the Forex market

Adam Narczewski X-Trade Brokers Dom Maklerski S.A.

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The financial market can be divided into:

The money market The capital market The currency market

The derivatives market

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The currency market

What is an efficient market?

efficient market..?

The market is efficient if competition between its participants leads to a situation, where at any time the current asset price reflects the full impact of all relevant information, which has already been published and the one that the market expects. In other words, if the market is efficient if, at any time the current price of the assets is equal to its intrinsic value.

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The currency market

efficient market..?

Basic assumptions of an efficient market by Eugene Fam A large number of reasonably thinking, actively competing with each other investors, each of which is to achieve the greatest profit. Symmetric information - all investors have unlimited, free access to all information relevant for determining the price of the assets. There are no transaction costs (commissions, fees, taxes)

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The currency market

efficient market..?

The forex market as an example of a market close to an efficient market

Practically any information relevant for asset prices on the forex market is also available to all participants, and is almost immediately reflected in the price of the asset. Multiplicity and diversity of participants in the forex market The world's largest volume of turnover Effective and very flexible mechanism

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The OTC market

OTC Over the Counter Market

Not having a physical market place, which means that transactions take place between market participants: banks, companies, currency brokers, individual investors, communicating via the Internet and telephone lines. The basis of the market are transactions, carried out 24 hours a day, between banks and financial institutions that make up the interbank market. This market operates 24 hours a day from Sydney, Tokyo, London and New York. Daily turnover over $4.5 trillion (3 times larger than stocks and bonds put together) forex, indeksy, towary. masz x mo liwo ci
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Currency market participants: Central banks Commercial banks Mutual funds Brokers and brokerage houses Participate as hedgers, speculators, arbitargeurs or market makers
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The great number of participants makes FOREX the most liquid financial market in the world and practically impossible to manipulate even for central banks of the most developed countries. For this reason, traders who are able to properly predict future price movements can achieve significant profits on the market. To date this currency market was accessible only to major players like banks, investment funds, large companies or wealthy private investors. Nowadays, thanks to licensed electronic trading brokers like XTrade, even individual investors can take a part in trading FOREX worldwide.
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Transactions on the FOREX market include: Settlement of international transactions Interbank loans Speculation Hedging of currency risk

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Contract for Difference (CFD) as derivatives CFD - Contract for Difference, non delivery spot transaction gives an opportunity to make profit on changes in currency rates, commodity, stock market indices or share prices. The transaction gives an opportunity to buy or sell a specified amount of asset involving only limited amount of money for initial margin - the percentage of the nominal price of the CFD contract. Typically, initial margin is intended to represent the maximum one-day net loss you could reasonably be expected to incur on the position.

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Sample quotes of exchange rates

Symbol EURUSD USDPLN USDJPY

Base Euro Dolar Dolar

Quoted Dollar Z oty Yen

BID 1.3601 2.9514 90.16

ASK 1.3603 2.9554 90.19

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1) Commodities market
oil gold silver industrial commodities soft commodities

2) Currency market(Forex)
largest market in the world open 24h a day, 5 days a week.

XTB-Trader Markets

3) Equities market
stocks and bonds (stocks of US companies, bonds from the US and German markets); contracts for indices: USA, UK, France, Hong Kong, Tokio, Warsaw and many more.

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Financial Leverage

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Leverage allows investors to open a significant market position with the need to deposit only - as a percentage of the nominal- margin. Investors by depositing margins may therefore maximize the achievable rate of return. On the other hand, leverage carries the risk of incurring losses in excess of the standard investment losses through such instruments like ex. stocks.

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Margin (initial deposit)

margin blocked when opening a transaction; it allows the use of leverage; margin amount (standard): 1% of nominal for currencies 2% of nominal for indices 3% of nominal for commodities 7% of nominal for equities 3% of nominal for W20PLN allows you to open a large number of trades with a small commitment of capital.

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Margin Calculation Find in Regulations : Derivatives Specification table

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An example of a currency contract on EURUSD

Margin for currency contracts is 1% of the nominal value of the contract (check in the Table of Margin Levels). Then, for a contract of 1 lot:

MARGIN= 100 000 EUR * 1% = 1 000 EUR

Interpretation: In order to make a trade with a nominal value of 100 000 EUR, we only need 1000 EUR.
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PIPS

the smallest possible price change

The procedure of calculating the value of 1 pip (EURUSD example):

(Attention: The value of the pip is calculated using the second currency in the pair!!!) Size of one pip EURUSD: 0,0001 (
Derivatives Specification )

1 Pip = 0,0001 * 100 000 USD = 10 USD

Interpretation: how much will investor s profit/loss change if the price moves by 1 pip (0,0001).

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Terminal

the Trade tab, the most important parameters of the account

Balance - the value of the account with no open trades; Equity the value of the portfolio including open trades; the amount of capital that can be used as margin in trades;

Free margin

Margin Level (ML) built-in indicator. If ML drops below 30%, the transaction with the biggest loss will be closed.

ML =

Equity Margin

*100%

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Example 1: Contracts for Difference (CFD) Buy 1 lot EURUSD at 1,3600 long position
Profit

1,3600 1,3500 1,3700 Quote

1 pip = 10 USD

Loss At 1,3700 the result of the buyer of the contract = + 0,0100 pips At 1,3500 the result of the buyer of the contract = - 0,0100 pips

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Example 2: Contracts for Difference (CFD) Sell 0.5 lots EURUSD at 1,3550
Profit

short position

1,3450

1,355 0

1 pip = 5 USD 1,3650 Quote Loss

At 1,3450 the result for the seller of the contract = + 0,0100 pips At 1,3450 the result for the seller of the contract = - 0,0100 pips

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Work it out through an example My capital is 10,000 USD, investor s capital involvement 30%, maximum loss 2%, eur/usd market; (EURUSD = 1.3600) How many lots can I buy? How far my stop loss should be (in points)? Tips:
Calculate the amount that has to be used as deposit and compare it with the amount needed to purchase 1 lot. Calculate the amount of losses in USD, calculate the value of 1 pip at that nominal.
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Solution Amount for deposit = 3,000 USD (the 30%) Amount for 1 lot of EURUSD (1000 eur) = 1,360 USD 3,000/1,360= 2.2 lots Value of 1 pip with 2.2 lots = 22 USD Amount of acceptable loss 2%*10000=200USD 200/22=9 pips

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Factors affecting prices

The price of a financial instrument may be influenced by such factors as: political stability economic cycles public finances central bank s monetary policy aversion/appetite for risk

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The most important factors affecting prices

U.S labor market report Interest rate decisions Gross Domestic Product - GDP Inflation (PCE, CPI, PPI, deflator) Current Account Trade Balance Institute of Supply Management (ISM)

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Where to look for macro publications

www.xtb.in Markets and Instruments tab then ECONOMIC CALENDAR + important macro publications marked * www.xtb.in main site, lower right-hand side www.reuters.com www.forexfactory.com www.wsj.com

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The most important factors affecting prices

The most important element in shaping the market price is the attitude of investors towards the asset (the bias). Whatever the macroeconomic data will appear, often times may have no effect on the asset price. On the currency market the most important are the expectations of its participants as to the future value of the assets and the supply and demand for them. Therefore, this market is considered the most technical of all the financial markets.

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Market Correlations: currencies-currencies

EUR/USD vs. USD/PLN

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Market reaction (EUR/USD)

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Market reaction(USD/PLN)

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Justification of reaction
Rapid strengthening of the USD versus the PLN was due to the EURUSD drop because of the review of the August data of the number of new jobs in non-agricultural sector (from -4 thousand to 89 thousand). Also, better than expected were September's news (110 thousand against the forecast of 100 thousand.). Strengthening of the U.S. Dollar, however, was short-lived, which resulted from a general anti-dollar attitude of the market. This was due to the overall situation of the Amercian economy and published earlier data from the manufacturing and service sectors (manufacturing ISM and services ISM).

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Market Correlations (commodities - example)

Commodities are quoted in U.S. dollars, thus the weakening of the U.S. currency increases the interest in commodities, because they are cheaper for investors having other currencies, ex. USD or GBP (negative correlation).

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Basics of TECHNICAL ANALYSIS

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Trend the basis of technical analysis Never play against the trend
Intuitive: market direction. Upward trend: market direction, in which lows and peaks are located higher.

Downward trend:

following peaks and lows are located lower.

Horizontal trend:

following peaks and lows located horizontaly.

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UPWARD TREND

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DOWNWARD TREND

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Trend

support and resistance levels

resistance Support: level from which lows bounce back Resistance: level from which consecutive peaks bounce back support

Application: Natural levels where the market shows its strength or weakness of the signals to open a position. support

resistance

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Practical advice for investors on the forex market

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Elements of an investment strategy Stop Loss: loss minimalization Setting the S/L based on capital management (1-5% of capital) Setting the S/L based on the chart (support and resistance levels) Setting the S/L based on volatility.
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Elements of an investment strategy Capital management: loss minimalization Involvement of capital in a single transaction(ex. no more than 10%) Setting the maximum potential loss (ex. A percentage of the invested funds)

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Elements of an investment strategy Control over your trades Choose 2-3 markets Investing in avariety of instruments makes the investor lose control of his/her open positions.

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Thanks for your attention Aditya Myana support@xtb.in X-Trade Brokers Services India Pvt. Ltd. A-703, 215 Atrium , Andheri-Kurla Road, Andheri East, Mumbai - 400059 tel. +91 22 67 13 13 13/22 www.xtb.in

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