Getting down to business
First of all it’d be a good idea to open an account with a bank/broker. You need a new friend; you know the one, the one who will watch over your interests and desires. You have to support your friendship with material proof in the shape of a deposit (let’s begin with a few hundred Dollars). Now we are sorted and you are ready to become a true knight of the currency market. Or a queen of course, the empress of everything as far as the eye can see. Long may you reign! Now let’s clean the computer, polish up the phone: a work place should be comfortable and easy on the eye. After all, you’re going to spend a fair amount of time here. Josef K You’ll be watching over your own interests here at any time you wish over the twenty four hours in the day. When will you make your entry onto the market? It will be a solemn moment: the beginning of a glittering career. You decide. We are waiting! Theory is only truly illustrated by real examples and so we’ll respect this tradition by describing in detail how a client of ours, Josef K worked one day. The date: 28th October 2002.
Joseph K: a working day Trading account: $800 Consequently, bearing leverage in mind, that makes $800 x 100 = $80000. Good enough to be getting on with! And they say that the people are impoverished. Would that we were all so impoverished… Note that according to the rules Josef could select a lot of any standard volume: $10000, $20000 and so on up to $80000. However, Josef is an experienced and circumspect man. He never pushes his luck and limits himself to lots of $10000. This is part of Josef’s risk management strategy. Now let’s look over Josef’s shoulder and read fragments of his diary 2pm (GMT) Josef K: So, I have considered everything, it’s time to go to work. Swiss Francs will strengthen against the dollar. I’ll put my money where my mouth is. I will sell bucks and buy francs. Come little fishes, come into my net…
Fig. 1 USD/CHF (the beginning of Josef K’s day)
A phone rings in a bank. You can read the transcript below. You did know, I take it, that we (by ‘we’ I mean banks) have every phone conversation recorded.
Josef: Hello. My name is Josef K. My password is XXXXX. Quote ten thousand US Dollars against the Swiss Franc.
Dealer: 58/63
Josef: I sell.
Dealer: You have sold ten thousand Dollars against the Swiss Franc at a rate of 1.5058.
Josef: Yes, I confirm. Josef K., password XXXXX, I’ve sold ten thousand Dollars against the Swiss Franc at a rate of 1.5058.
Well, they had a nice chat, didn’t they? It’d be nice to understand something of what they said though. As if by magic we appear and reveal all: First, each client has an individual password (for obvious reasons) which must be stated in any transaction with a dealer. Then the dealer’s words: 58/63. This is the Swiss Franc’s price. The bank buys at 1.5058 and sells at 1.5063. Accordingly the client sells at 1.5058 and buys at 1.5063. Clarity and speed are the most important factors of a trader’s (and a dealer’s) work therefore the dealer only uses the final two figures in the price of a currency. Of course, if for any reason you are unsure of the first few numbers or you do not know them (what of it? You’ve spent the last month relaxing in the Caribbean and you’ve forgotten the state of the currency market), then you can always ask for the full quote.
A few minutes after 2pm
Josef: Now the wheels are in motion, all is in the hands of the market. Now I should cover myself. I should not leave my position exposed. Think, man, think! Where should I place my orders?
What is an order? An order is a guardian angel, tiny but vigilant, who watches over wealth that has been earned through arduous labour. In other words, it is a clearly formulated command made in advance to your dealer to make a purchase or sale of a stated quantity of a specified currency as soon as its price rises or falls to values designated by you.
An order is like a thermostat on a heating system which turns itself on when the temperature drops to a certain point and turns itself off it the temperature gets too high. Orders give you the opportunity to set your profit or loss in advance and this helps you control the tendency to minimize profits and maximize losses. Just make the order and your dealer will do the necessary, protecting your interests, looking out for you. Let’s get back to Josef:
Josef: I’m counting on the Franc appreciating. I reckon the Dollar will fall. After all I’ve sold the Dollar against the Franc. What I’ll do is take profit when the rate falls to 1.4960… that is to 148 points lower than the current market (1.5058- 0.0148=1.4910). Voila! 148 points in Francs is $99.26. In case of the dollar rises, I will place a stop loss order as I was taught. Let’s place this order at 1.5100. That makes $31.12. I don’t want to lose more, that’s 47 points. I am, of course, brilliant to distraction but it pays to watch your back. The Lord helps those who help themselves, as the saying goes.
While Josef was thinking we noticed that he used a word that may be new to you, ‘point’. A point is the minimum change in the price of the exchange value of one currency against another. For example, the Swiss Franc, the Euro and the British Pound are measured in numbers with four places after the decimal point, whilst the yen has two places. Consequently for the Euro the minimum change (one point) is equal to 0.0001 of the price and for the yen it is 0.01
Fig 2 Chart USD/CHF with Josef’s orders
Now let us discover how Josef calculates where he should put his orders. This is the central question. Only through understanding this process is it possible to gain control. By setting at what price we take our profit ensures its stability, or at least its predictability. How do we determine the value of one point? Well, the quickest way is to check the price of a point with our trading platform IDSystem. But it’s a good idea to learn how this price is worked out. Remember that currencies are always quoted in pairs i.e. GBP/USD, USD/CHF etc. The base currency is the first currency in the pair. When the base currency is not the dollar (i.e. in the pairs GBP/USD; EUR/USD and AUD/USD) with a lot of 10000 USD a point is worth one dollar and with a lot of 100000 USD a point is worth ten dollars. When the dollar is the base currency (and this is the case for the majority of currencies) the formula to calculate the value of a point is as follows:
Cost of one point = (lot X point)/ rate of exchange of quotation against the dollar
The lot is the size of the transaction (in our example $10000) The point in terms of CHF is 0.0001 The rate of exchange of quotation against the dollar = 1.5058 So:
Cost of point = (10000 x 0.0001) / 1.5058 = $0.66
If you want to train yourself (and you should) apply this formula to your own and different currencies. So let’s calculate Josef’s potential profit. If at a rate of 1.5058 USD/CHF, he sells 10000 USD for 15058 CHF. When the USD/CHF rate falls 148 points to 1.4910, he sells the available 15058 francs and gets 10099.26 USD. He pockets the difference. The stop loss order is worked out the same way. Well that’s the math and Josef wasn’t idle: he had it all at his finger tips and he rang the bank to place his orders. Let’s listen in:
Josef: Hello, this is Josef K, my password is XXXXX. Please accept this order. Please buy ten thousand US dollars against Swiss Francs at the rate of 1.5105. This will close my position. And here is a second order. I’d like to buy ten thousand US dollars against Swiss Francs at the rate of 1.4910. This will also close my position..
Dealer: You have placed two orders. The first one: to buy ten thousand US dollars against the Swiss Franc at the rate of 1.5105. This will close your position. The second: to buy ten thousand US dollars against the Swiss Franc at the rate of 1.4910. This will close your position.
Josef: Yes I confirm. My name is Josef K, password XXXXX. I have placed two orders. The first one: buy ten thousand US dollars against the Swiss Franc at the rate of 1.5105. This will close my position. The second: buy ten thousand US dollars against the Swiss Franc at the rate of 1.4910. This will close my position.
Fig 3 USD/CHF with Josef’s orders
After making the deal, all there is to do is rest and wait for the outcome. This is exactly what Josef did as the Swiss Franc continued to gain against the Dollar. Three hours later Josef learned that his Take Profit order had been filled. Yes! Josef’s forecast was spot on and almost $100 dollars was added to his pot of 800. His account rested at 899.26 USD. Congratulations! In the twinkling of an eye … how happy a hundred dollars can make you! $100 in three hours … that’s four hundred a day… $2000 a week and in a month… We are getting carried away and we’ve forgotten the main thing, the nitty-gritty. How did Josef arrive at his forecast? Intuition? Guesswork? Some system or other? That’s a matter between Josef and his Maker. Maybe the stars whispered to him or he had a dream. I can only answer for myself. Such a forecast is based on tangibles in the shape of two great beasts which go by the names of ‘technical analysis’ and ‘fundamental analysis’. The next couple of chapters are dedicated to them.
