Basic Concepts In Forex
Yesterday’s article was
relatively in-depth as it related to my thoughts and trading ideas in
the FX arena. While that type of commentary is useful in order to better
understand the dynamics behind the trade, I realized after several emails that
perhaps an explanation of a few basic concepts was in order.
The single most asked question is the one that
relates to the spread in the FX market. It typically goes something like this:
“Sure, there are no
commissions, but you pay a spread.”
Hmmm. True, but every time I buy some
Newmont Mining (NEM) while doing
HVT, I pay a spread and a commission on
top of that. Let’s use a simple example:
NEM 41.10 x 41.15
This is the bid ask for
NEM at a given point during the trading day. If I need to buy NEM, I
will buy it at 41.15, and if for some reason I need to immediately get rid of
it, I would sell at 41.10. So, the spread alone cost me $5 on 100 shares.
Let’s use the same logic in FX, in this case an
FX-mini in the EUR:
EUR 124.00 x 124.05
Again, if I buy the EUR,
I pay 1.2405, and if I immediately turn around and sell it, I receive 124.00, a
loss of 5 pips. In this case that equates to $5.
It is the exact same as above, yet there is no
commission. Do not get hung up on the spreads, the spreads are a cost of doing
business, and given that I do not short-term trade (HVT) FX, the spread is even
less important. In fact, most of the spreads are exactly what you would find in
the Inter-bank Market. Too many traders get bogged down in the minutia and
never simply sit down and start trading.
Turning back to yesterday’s article, the recent
strength in the dollar has put most of the major currencies under pressure in
the last few sessions, especially yesterday. This has not only given me a nice
start to the short EUR/JPY and
EUR/AUD positions, but also provided some nice
intra-day swing trades as well. Will the rise in the dollar continue? Who
knows, the only thing we can do is monitor it closely. The daily and weekly
charts still in a down-trend, this may be simply a counter-trend bounce, do not
get too excited.
Note: I made
an error in Monday’s column. I had indicated that the G7 meeting was this
weekend, this was incorrect, the G7 meeting is February 6-7
Key FX Levels
EUR
123.35 (38% retracement off recent high) & 121.56
Dollar Index
86.67 and 86.50, these levels (support) will be key for FX and trades in
the gold mining stocks
GBP
1.8135 & 1.8209 (both are potential intra-day resistance
levels)
CHF
1.2466 (support)
As always, I welcome your
comments and questions. If you would like to have your email address added to
my FX Mailing List for actual trade recommendations ahead of my FX
Service through TM in mid-February; simply send me your name and
email address to: aspendave@yahoo.com.
Dave