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Introduction to indexes and currencies


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Introduction to indexes and currencies

  1. 1. Introduction To Indexes and CurrenciesWhat is an Index?A stock index is a method of measuring the value of a section of thestock market. It’s basically computed from selected stocks.Example of Indexes:U.S :Nasdaq, Dow Jones, S&P 500, Russel,Britain:FTSE100FTSE500France:CAC40China:SSE Composite IndexHong Kong:Hang Seng IndexIndiaBombay Stock ExchangeJapan:
  2. 2. Nikkei 225Germany:DAXWhat does it exactly means?Dow Jones Industrial Average: comprises 30 stocks : Alcoa,American Express, American International Group (AIG), AT&T,Bank of America, Boeing, Caterpillar, Chevron, Citigroup, Coca-Cola,DuPont, Exxon, General Electric, General Motors, Hewlett-Packard,Home Depot, Intel, IBM, Johnson & Johnson, Morgan Chase,McDonalds, Merck, Microsoft, Pfizer, Procter & Gamble, UnitedTechnologies, Verizon, Wal-Mart and Walt Disney.How to calculate it?We add all the stock values: But after calculation you find that itequals for example: 1545.32.But it differs from its real value on the stock market right???To get to the value on the market you divide this number by theofficial industrial averages divisorWhich is in this case 0.122834016.After dividing 1545.32/0.122834016 = 12580.55 which is the valueappearing on the market.
  3. 3. What drives indexes?Well as it depends on the values of the firms so if there is a decreaseof the stock value of Mcdonalds the index will face a decrease too. Soit depends on the value of the stock because some stocks have abigger impact on the index.What traders use to analyse it?They have a look at the aggregate demand in these sector, they do afundamental analysis on each stocks have a look on the economy,political impact, and other factors (Sandy Hurricane).
  4. 4. FX Market:What makes it different from other markets?-Huge trading volume representing the largest asset class in theworld leading to high liquidity-Geographical dispersion-Its continuous operation: 24 hours a day except weekends, i.e.,trading from 20:15 GMT on Sunday until 22:00 GMT Friday;-The low margins of relative profit compared with other markets offixed income; and-The use of leverage to enhance profit and loss margins and withrespect to account sizeHow to buy it or sell it?There are different types of transactions in the FX marketSpot transaction: two-day delivery transaction except for the case oftrades between the Us dollar, canadian dollar, turkish liram euro andrussian ruble which settle the next business day. It represents a directexchange between two currencies and has the shortest time frame,which involves cash rather than a contract.Forward transaction. In this transaction money does not actuallychanges hands until some agreed upon future date. The buyer andseller agree for an exchange rate in the future and the transactionoccurs on that date. The date is decided by both parties
  5. 5. Swap transaction: it is the most common transaction, two partiesagree exchange currencies for a certain length then in a fixed datethey exchange it again,Futures:Futures are standardized forward contracts and are usually traded on aexchange created for this purpose the average contract length it 3months.Option: an FX option is a derivative where the owner has the rightbut not the obligation to exchange money denominated in onecurrency into another currency at a pre-agreed exchange rate on aspecified date.What drives the currency market?-Traders have a look first at a fundamental analysis. For example,during my internship they were based on the unemployment data inthe U.S.-They also have a look on the economy and what people say about it.Because some might speculate about it.-Have a look on the supply of the money by the FED and their policy.-Political impact-Bad harvest ( example Tsunami for Japan).How to begin?Forex platform can be found for free online. Usually, I would suggestto begin with a free demo account ( 30 days) and can begin with a 50quids minimum cash.
  6. 6. Forex Tips:Know yourself!If you want to trade in a company you need to know if you and thecompany match. For example if you as a customer want to trade in abus company you need to figure out yourself how often do you takethe bus. You need to know as many information possible about thebusiness and if it suits to your lifestyle and your friend’s lifestyle.The help of an experienced (for example)The help of an experienced trader could be really useful tobegin with in trading.Two ways of trading:-Watching during few minutes or few hours the market througha computer during the day.- Other prefers to check their trade during regular intervals.This is why it is important to know yourself!Because some people can’t stand watching the market movingup and down but others enjoy watching it and can’t think abouta different way for trading.THE PERFECT STRATEGY DOESN’T EXIST!In fact, for each trade there are many different strategies, whichcould be at the same time good for one trade and bad for theother one.Example of few strategies:
  7. 7. - With clearly defined criteria and check with your list if it’sfit.- Identifying through graphs.- A good strategy is the one, which avoid the guesswork.- A good strategy should clearly define stop loss and profittargets.- You need to know every risk for each trade.Stay Disciplined!When you fix an objective for example checking the marketevery 2 hours then you need to follow it.Successful trader make as well loss but they are disciplinedand this is why they make profit overall.The emotions can play tricks on you and do not let you what todo.The key is to follow your strategy and not what you mind say toyou.A profitable trade is buying a currency or share and hoping tosell it later at a higher currency and then buy it back cheaper ata later stageForex units are the pips, its 0.0001 change that is the smallestquoted unit.IF you are prepared to risk 50 pips maximum, then you can setan automatic order to close the position should the price fall by50 pips! It is called a Stop Loss order!When you set a profit target it is called a Profit Limit Order.Some vocabulary:
  8. 8. When traders think that a currency will increase they are said tobe ”bullish”If traders think negatively then they are said to be “bearish”How to trade in Forex:In forex you are always comparing one currency to another,forex is in fact quoted in pairs. The first currency in a currencypair is the “base currency”, the second currency is the “countercurrency”. For example if you are bearish of euros (think it willdecrease) you could sell EUR/USD but you are not only sellingeuros but buying US dollars as well.So if you buy a pair, up is good, if you sell it down is good.What is leverage?A leverage allow you to trade with 10 000 pound in the marketby setting aside only 2000 pound as a security deposit. Itmeans that you can take advantage of even the smallestmovements in currencies by controlling more money in themarket than you have in your account.It can increase considerably your profits but as well increaseyour loss.Start trading with small amount is the best to do not take toomuch riskHow do you know which currencies will riseand will fall?
  9. 9. Fundamental Analysis:You need to look at supply anddemand. This is called fundamental analysis. Interest rates,economic growth, employment, inflation, and political risk areall factors that can affect supply and demand for currencies.Technical Analysis: Price charts tell many stories and mostforex traders depend on them in making their trading decisions.Chart can point out trends and important price points wheretraders can enter or exit the market, if you know how to readthem.Money management: an essential part of trading. All tradersneed to know how to measure their potential risks and rewardsand use this to judge entries, exits and trade size.The risk management:Before entering a trade you need to know how many pips arerisked and exactly the amount, which is risked in monetaryterms.Mostly, any professional trader risk more than 1-2% of theirtrading account on any one trade.To become a successful forex trader you must learn how tomanage risk in priority.The winning attitude:
  10. 10. Unrealistic people just quit because people fail to makeconsistent profits in forex.The truth about trading is you will have many losing trades andto be profitable you need strong risk management!A winning attitude recognizes small gains over time are better.It is easy after a string of successful trades to be tempted toincrease your trade size but it could be really dangerous andcould be out of money.Three different strategies:The first one is called the “News Fade”. You need to go onlineand check the events. Each events has a particular impact onthe currency and from that you can take notes and write downthe impact of each events on theDevelop a safety!You need to look in the monitor how you are doing and criticizeyourself.You can use an excel spreadsheet and put for each column atrading strategy.You can note the trade time, currency, set up time, the risk ratiohow the trade progressed and how it was concluded.Enjoy!Trading is basically changing all the time, no one knows allabout trading and the advantage is that you can alwaysimprove your trading.