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Squire38
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Forex vs. Equities

If you are interested in trading currencies online, you will find that the Forex market offers several advantages over equities trading.

Lower Transaction Costs

It is much more cost-efficient to trade Forex in terms of both commissions and transaction fees. Most brokers charge NO commissions or transaction fees, while still offering traders access to all relevant market information and trading tools. In contrast, commissions for stock trades range from $7.95-$29.95 per trade with online discount brokers up to $100 or more per trade with full service brokers.

Another important point to consider is the width of the bid/ask spread. Regardless of deal size, forex dealing spreads are normally 3-4 pips (a pip is .0001 US cents) in the major currencies. In general, the width of the spread in a forex transaction is less than 1/10 that of a stock transaction, which could include a .125 (1/8) wide spread.

Trade on Your Schedule

Forex is a true 24-hour market, which offers a major advantage over equities trading. Whether it's 6pm or 6am, somewhere in the world there are always buyers and sellers actively trading foreign currencies. Traders can always respond to breaking news immediately, and P&L is not affected by after hours earning reports or analyst conference calls.

After hours trading for U.S. equities brings with it several limitations. ECN's (Electronic Communication Networks), also called matching systems, exist to bring together buyers and sellers - when possible. However, there is no guarantee that every trade will be executed, nor at a fair market price. Quite frequently, traders must wait until the market opens the following day in order to receive a tighter spread.

Superior Liquidity

With a daily trading volume that is 50x larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets. The liquidity of this market, especially that of the major currencies, helps ensure price stability. Traders can almost always open or close a position at a fair market price.

Because of the lower trade volume, investors in the stock market are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.

100:1 Leverage

100:1 leverage is commonly available from online FX dealers, which substantially exceeds the common 2:1 margin offered by equity brokers. At 100:1, traders post $1000 margin for a $100,000 position, or 1%.

While certainly not for everyone, the substantial leverage available from online currency trading firms is a powerful, moneymaking tool. Rather than merely loading up on risk as many people incorrectly assume, leverage is essential in the Forex market. This is because the average daily percentage move of a major currency is less than 1%, whereas a stock can easily have a 10% price move on any given day. Of course, trading on margin magnifies both your profits and your losses.

The most effective way to manage the risk associated with margined trading is to diligently follow a disciplined trading style that consistently utilizes stop and limit orders. Devise and adhere to a system where your controls kick in when emotion might otherwise take over.

Profit Potential In Both Rising And Falling Markets

In every open FX position, an investor is long in one currency and short the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. This means that potential exists in a rising as well as a falling market.

The ability to sell currencies without any limitations is another distinct advantage over equity trading. In the US equity markets, it is much more difficult to establish a short position due to the Zero Uptick rule, which prevents investors from shorting a stock unless the immediately preceding trade was equal to or lower than the price of the short sale.

Source

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Before you criticize someone, try walking a mile in their shoes, then when you do, you'll be a mile away and have their shoes.

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Squire38
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The Benefits of Forex Trading

No Short Selling Restrictions

Forex trading always involves buying one currency and selling another, so traders can easily trade in a rising or falling market. There is no Zero Uptick rule or any other restriction against shorting a currency.

At $1.9 Trillion Per Day, Forex is the Largest, Most Liquid Market in the World

The sheer volume of Forex facilitates price stability, with less slippage. What's more, almost 90% of all currency transactions involve the 7 major currency pairs. As a result, these currencies exhibit smooth trends and enjoy the tightest dealing spreads and highest level of liquidity.

Trade on Your Schedule; Respond to Changes in the Market Immediately

Forex is a true 24-hour market, open continuously from 5:00pm ET on Sunday to 4:30 pm on Friday. With three distinct trading sessions in the US, Europe and Asia, you can trade on your own schedule and respond to breaking news immediately.

Keep 100% of Your Trading Profits

Most brokers charge NO commissions or transaction fees, while still offering free access to real-time quotes, news, charts, research, and more. Also, dealing spreads as low as 3 pips (.0003) are available in currency trading. Even at a penny ($.01), the bid/ask on a stock trade is 30x wider, in addition to the brokerage commission.

Control Up to 200:1 Leverage

With more buying power, you can increase your total return on investment with less cash outlay. For example, with $1,000 cash in a margin account that allows 200:1 leverage (.5%), you can control up to $200,000 in notional value. Of course, trading on margin magnifies both your profits and your losses.

Source

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Before you criticize someone, try walking a mile in their shoes, then when you do, you'll be a mile away and have their shoes.

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Squire38
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Introduction to the Forex Market

The Foreign Exchange market, also referred to as the "Forex" or "FX" market is the largest financial market in the world, with a daily average turnover of US$1.9 trillion — 30 times larger than the combined volume of all U.S. equity markets.

"Foreign Exchange" is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation.

For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.

The FX market is considered an Over The Counter (OTC) or 'interbank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets.

More information

For more background about the Foreign Exchange market, review the Federal Reserve Banks' "All About the Foreign Exchange Markets in the United States".

Source

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Before you criticize someone, try walking a mile in their shoes, then when you do, you'll be a mile away and have their shoes.

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Squire38
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Understanding Forex Quotes

Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.

The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.

In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.

When trading forex you will often see a two-sided quote, consisting of a 'bid' and 'ask':

The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency).
The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).

What is a pip?

In the Forex market, prices are quoted in pips. Pip stands for "percentage in point" and is the fourth decimal point, which is 1/100th of 1%.

In EUR/USD, a 3 pip spread is quoted as 1.2500/1.2503

Among the major currencies, the only exception to that rule is the Japanese yen. In USD/JPY, the quotation is only taken out to two decimal points (i.e. to 1/100 th of yen, as opposed to 1/1000th with other major currencies).

In USD/JPY, a 3 pip spread is quoted as 114.05/114.08

Source

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Before you criticize someone, try walking a mile in their shoes, then when you do, you'll be a mile away and have their shoes.

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Squire38
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Leverage & Margin

The leverage available in forex trading is one of main attractions of this market for many traders. Leveraged trading, or trading on margin, simply means that you are not required to put up the full value of the position.
Forex provides more leverage than stocks or futures. In forex trading, the amount of leverage available can be up to 200 times the value of your account.

There are several reasons for the higher leverage that is offered in the forex market. On a daily basis, the volatility of the major currencies is less than 1%. This is much lower than an active stock, which can easily have a 5-10% move in a single day. With leverage, you can capture higher returns on a smaller market movement. More importantly, leverage allows traders to increase their buying power and utilize less capital to trade.

Margin Trading: Stocks vs Forex

The word "margin" means something very different in forex than it does in stocks.

With stocks, trading on margin means that a trader can borrow up to 50% of a stock's value to buy that stock. This can be a costly move because the investor must pay interest to the brokerage firm on the amount borrowed. This is not the case in forex trading.

[*] For example, at $400/share, 100 shares of Google are valued at $40,000 ($400 x 100 shares). To trade this stock on margin, the money required for the trade is 50%, or $20,000. The remaining $20,000 is borrowed and interest must be paid on that amount. Margin interest is different from broker to broker, but a good rule of thumb is typically Prime plus 1-3% or more.

In forex, margin is the minimum required balance to place a trade. When you open a forex trading account, the money you deposit acts as collateral for your trades. This deposit, called margin, is typically 1% of the value of the position.

[*] For example, if you want to purchase $100,000 of USD/JPY at 100:1 leverage, the money required is 1%, or $1000. The other $99,000 is collateralized with your remaining account balance. You pay no interest.

It is very important to remember that leverage magnifies your profits AND your losses. You should monitor your account balance on a regular basis and utilize stop-loss orders on every open position to limit downside risk.

However, leverage is an exceptionally good tool that can be utilized to increase your buying power and return on capital — as long as you have a solid risk management plan in place.

Here's a hypothetical example that demonstrates the upside of leverage:

With a US$5,000 balance in your account, you decide that the US Dollar (USD) is undervalued against the Swiss Franc (CHF).

To execute this strategy, you must buy Dollars (simultaneously selling Francs), and then wait for the exchange rate to rise.

The current bid/ask price for USD/CHF is 1.2322/1.2327 (meaning you can buy $1 US for 1.2327 Swiss Francs or sell $1 US for 1.2322 francs)

Your available leverage is 100:1 or 1%. You execute the trade, buying a one lot: buying 100,000 US dollars and selling 123,270 Swiss Francs. At 100:1 leverage, your initial margin deposit for this trade is $1,000.

As you expected, USD/CHF rises 50 pips to 1.2372/77. Since you're long dollars (and are short francs), you must now sell dollars and buy back the francs to realize any profit.

You close out the position, selling one lot (selling 100,000 US dollars and receiving 123,720 CHF) Since you originally sold (paid) 123,270 CHF, your profit is 450 CHF.

To calculate your P&L in terms of US dollars, simply divide 450 by the current USD/CHF rate of 1.2372. Your profit on this trade is $364.3

SUMMARY
Initial Investment: $1000
Profit: $364.31
Return on investment: 36%

If you had executed this trade without using leverage, your return on investment would be less than 1%.

Source

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Before you criticize someone, try walking a mile in their shoes, then when you do, you'll be a mile away and have their shoes.

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Squire38
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Calculating Profit and Loss

For ease of use, most online trading platforms automatically calculate the P&L of a traders' open positions. However, it is useful to understand how this calculation is derived.

To illustrate a typical FX trade, consider the following example.

The current bid/ask price for EUR/USD is 1.2320/23, meaning you can buy 1 euro with 1.2323 US dollars or sell 1 euro for 1.2320 US dollars.

Suppose you decide that the Euro is undervalued against the US dollar. To execute this strategy, you would buy Euros (simultaneously selling dollars), and then wait for the exchange rate to rise.

So you make the trade: to buy 100,000 euros you pay 123,230 dollars (100,000 x 1.2323). Remember, at 1% margin, your initial margin deposit would be $1,232 for this trade.

As you expected, Euro strengthens to 1.2395/98. Now, to realize your profits, you sell 100,000 euros at the current rate of 1.2395, and receive $123,950.

You bought 100k Euros at 1.2323, paying $123,230. You sold 100k Euros at 1.2395, receiving $123,950. That's a difference of 72 pips, or in dollar terms ($123,950 - $123,230 = $720).

Total profit = US $720

(TIP: When trading any USD counter currency pair, each pip is worth $10, per 100,000 trades).

Source

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Before you criticize someone, try walking a mile in their shoes, then when you do, you'll be a mile away and have their shoes.

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COOLORANGEFREEZE
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I'm not in the FOREX arena but thanks for posting this. Very informative.
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Hannibull
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I'm afraid I still lack the insight to predict when currencies go up or down in value, what it is that makes the US Dollar go up or down against the Euro.
I know I could use google but do you personally know of a good website that offers good and clear information on how to become educated and gain insight in this market?
TIA

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Squire38
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Unfortunately I do not read too much into what really makes the market. I usually just "day-trade". I watch the charts on about 4 pairs when I see a reversal (either after a huge spike or dip) then I either sell it short or buy it long. Then I make my money a few minutes or hours later. I just stick to the 15 min chart.

But to answer your question, I guess it would be nice to know. Same as with stocks, perception.

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Before you criticize someone, try walking a mile in their shoes, then when you do, you'll be a mile away and have their shoes.

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littleman
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Squire, can you give me a website to set a paper trading account up with? I would really like to learn. Thanks you
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littleman
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Squire, got through pip school. I have set up a demo account. I have another question. My tools or indicators i use on stocks i get form e-trade.Where do i go to set my system in place for currencies. Seems so hard, but i am determined to do this thing. Your help is greatly appericated. thanks
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Squire38
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Man, I know nothing about etrade, I just use the stuff from forex.com

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Before you criticize someone, try walking a mile in their shoes, then when you do, you'll be a mile away and have their shoes.

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littleman
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Squire, took a littie time, but i got it. Thanks again.
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Hitman
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I am begining paper trades now at Oanda.com. The website looks a little difficult at first then when you download the FXTrade Game You can adjust it for a simple set up. The sight seams to be the most user frieldly... That is after you make adjustments..... There are other sights but lots more complicated. Oanda.com has pip spreads at 1.8 EUR/USD currency pairs ect... Let me know what you think?
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Hitman
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You will like the sight once you get it figured out. I set up several bogus accounts to see which sight was the easiest to figue out and Oanda.com is it. I now have set buy/sell configurations set up so i can trade really quick in and out without having to refigue how much money I will be using on each buy/sell .. If I get in and the tick goes the wrong way... I have an automatic sell set up {I dont have to ever reset my figures unless later choose to: Also If i sell out because I bought/sold in the wrong direction .... One click and I am OUT and BACK In in the other position...
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Squire38
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Good stuff, hitman. Play around with the stuff. Some of the best learning I received was a margin call.

My 1st paper account I think I lost $30,000 over a few hours. Eye-opening. I learned a sh!t-ton though. My 2nd paper account (starting at $5,000) I more then tripled it (in a month) only doing it a few minutes a night after I came home from work. My real account, I'm doing pretty good, those 1st 2 months paid off big time.

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Before you criticize someone, try walking a mile in their shoes, then when you do, you'll be a mile away and have their shoes.

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Hitman
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Thanks for your info.... Do YOu trade using the Elliot Wave Pattern? I just found out about it but it will take some time to get an understanding of how to use it, Found some info at ElliotWave.com they have a free onlone course?
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Squire38
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quote:
Originally posted by Hitman:
Thanks for your info.... Do YOu trade using the Elliot Wave Pattern? I just found out about it but it will take some time to get an understanding of how to use it, Found some info at ElliotWave.com they have a free onlone course?

No, I readit, but it wasn't for me. I just wait until I see a huge dip or rise then either go long or short. EUR/USD just now is a good example. IT dove all night and looks like it has settled, so I bought some at 1.2955. I have a pretty tight stop limit on it and hopefully it will pop up today.

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Before you criticize someone, try walking a mile in their shoes, then when you do, you'll be a mile away and have their shoes.

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Zsartell
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Squire38,

What is the stratagy you use? Do you wait for major dips or spikes and get in there, hopeful of a turn around? Also I was wondering what you set your stop loss at if you bought at 1.2955?

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Money is good

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Squire38
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quote:
Originally posted by Zsartell:
Squire38,

What is the stratagy you use? Do you wait for major dips or spikes and get in there, hopeful of a turn around? Also I was wondering what you set your stop loss at if you bought at 1.2955?

All I do is watch for dips and spikes. Once I see it I watch and wait until the 15-min chart confirms a reversal in the trend, then I either buy it or short it.

Today I knew I would be away from the computer so I put my stop loss at 1.2950 and my sell at 1.2965. 10 Pips is good enough for me today.

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Before you criticize someone, try walking a mile in their shoes, then when you do, you'll be a mile away and have their shoes.

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Hitman
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Squire38 Can you share who you trade with. I am almost ready to fund an account?
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Squire38
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Forex.com

I had my $50k play account with them for the 1st month, had my $5k play account for the 2nd month, then I open my real account with them the 3rd.

To be honest I had a few play accounts the 1st month, I lost the most on forex, but that was only because that was the one I wound up using the most.

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Before you criticize someone, try walking a mile in their shoes, then when you do, you'll be a mile away and have their shoes.

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Hitman
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Thanks for the info.... I am play trading the same way your are.... I buy/sell after a big move then set exit positions with very little loss.. then hope i am in for the $$$$ if not the sell order hits and my loss is small.... Still working on paper trader for a while.... FOREX is without a doubt where the money is..... Skill and the 24hr trader have major potential.
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littleman
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Squire, went long GBP/CHF this morning, up 31 pips. Trading is a blast. Playing extreme high/lows. Having a little trouble placing my stops. Practice.................Hey, thanks again!
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Squire38
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I just do my stops based on the resistance/support according to the charts. Nice on GBP/CHF, I've never played that pair.

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Before you criticize someone, try walking a mile in their shoes, then when you do, you'll be a mile away and have their shoes.

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Zsartell
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I have been told that the EUR/USD frequently makes a massive change in direction at 2:00AM EST, when another market is opened. From what I can see it has done so pretty consistently for the past three mornings. I am still paper trading and have been doing pretty good so far, but I think I am going to take this into account from now on and see what happens. Has anyone else had any luck trading on this?

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Money is good

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littleman
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Zsartell, went both long and short EUR/USD early this morning. Closed my short position when it broke. Managed to pull 26 pips off the trade. Mighty early, but worth ever pip. Thanks for the tip.
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Zsartell
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Yeah, I tried to go short, expecting it to turn in direction, but I should have gone long. I was actually staying up to watch it after I went short at 1.3032, and was going to manually go long if it went that way, but I fell asleep only to wake up at 3:30 and 50 + pips in the hole. Oh well. If I was playing with real money, I would have either made darn sure I was awake for it or I would have setup a stop loss and an automatic long play. In the end I think I would have ended up with at least 30 pips up. I'm really starting to think Forex is for me. So far that is 4 days in a row that EUR/USD has spiked right at 2:00AM EST.

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Money is good

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Machiavelli
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Squire .. instead of putting up those beginning posts.. would of just been easier to recommend the site:

www.babypips.com

lol ... let them visit the site and learn... Babypips recommends good brokers and it's not called "papertrading" but "demo" trading or account...

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Let the world change you... And you can change the world.

Ernesto "Che" Guevara de la Serna

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Zsartell
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I recently found Babypipsdotcom and have learned quite a bit from them. I would recommend anyone starting out to start reading their entire site. Lots of good info there...

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Money is good

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Squire38
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quote:
Originally posted by Machiavelli:
Squire .. instead of putting up those beginning posts.. would of just been easier to recommend the site:

www.babypips.com

lol ... let them visit the site and learn... Babypips recommends good brokers and it's not called "papertrading" but "demo" trading or account...

I got the beginning posts off of Forex.com, the source was at the bottom of each post if anyone wanted to visit.

Call it demo trading, call it paper trading, potatoe, potato, its all the same. Since this is a primarily stock BB, calling it papertrading in my eyes, would led to a bit less confusion, or maybe not, who cares it gets the job done.

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Before you criticize someone, try walking a mile in their shoes, then when you do, you'll be a mile away and have their shoes.

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Chart walker
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This is a great thread you all have here board!

So, being into charts...
Are there symbols I can look up at stockcharts.com or are they different?
How does that work? ~

I'd love to throw the indicators on the Forex that I use and see what happens and post the results!

-my 2 cents...

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The "BIG PICTURE" http://www.businessjive.com/nss/darkside.html

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Machiavelli
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quote:
Originally posted by Chart walker:
This is a great thread you all have here board!

So, being into charts...
Are there symbols I can look up at stockcharts.com or are they different?
How does that work? ~

I'd love to throw the indicators on the Forex that I use and see what happens and post the results!

-my 2 cents...

As far as I know you can't get any charts for FOREX currencies on stockcharts.com but yes you can put any indicator you like that you use for stocks on Forex currency pairs... your best bet is to open a "demo" account with a Forex broker and use the account's charts/platform.. But FOREX is definetly a different monster then stock trading and you should learn about it first .. below is a site i recommend to learn about FOREX as well as recommended brokers with demo accounts and such...

Recommended Learning site:

www.babypips.com

Recommended brokers:

www.forex.com

www.gftforex.com

www.moneyforex.com

www.fxcm.com

www.itradefx.com

www.ac-markets.com

www.efxgroup.com

Open several demo accounts if you wish and see which one you like best. The demo accounts are free and are in real time with "play" money that calculates your gains/losses in real time. But i suggest you read up on FOREX on the babypips site first in their "School" section.

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Let the world change you... And you can change the world.

Ernesto "Che" Guevara de la Serna

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Chart walker
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Machiavelli - thank you!

Excellent info.
I have "snooped" around FOREX but would like to test drive it, your suggestions are solid. I think I'll do just that [Smile]

WHAT IS EVERYONE'S FAVORITE DEMO SITE, -AND WHY?

-I'm thinking of opening 3 of them...
Thanks in advance Board!!

Chart ~

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The "BIG PICTURE" http://www.businessjive.com/nss/darkside.html

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T e x
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good to see this new forum--and my ol' buddy making informative posts...

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Nashoba Holba Chepulechi
Adventures in microcapitalism...

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