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2. Background2.1 Financial Markets and Asset ClassesAsset classes may be defined as a group of securities which behave similarly and are subject to the samelaws. There are three main asset classes, namely: equities (or stocks), fixed income (or bonds), and cashequivalents (or money market instruments). Other than these main three, some professionals considerother things as asset classes such as currencies, commodities, real estate, and others. [1]2.1.1 StocksStocks, equities, or shares are essentially different ways of representing the same thing, that is, partialownership of a company.[2] When one owns stock in a company they are known as a shareholder (usuallyquite small), and the more stock one has in a given company, the more of the company one owns. This issimply a relatively efficient way of raising capital for the company. Being a shareholder provides severalbenefits including (but certainly not limited to) a share of the company’s earnings, and this is what enablestraders to make money.Most stocks are traded on exchanges which have historically been physical locations, but today, exchangesare mostly implemented electronically in computer networks. The stock market is a mechanism to simplifythe linking of buyers and sellers. Some examples of exchanges are the NYSE, and the NASDAQ which arethe two largest exchanges in the US. In particular, the NYSE is regarded as the most prestigious exchange,wherein a large number of trades are made in person on a trading floor. In contrast, the NASDAQ tradesthrough electronic networks, as previously mentioned.Stock prices change continually as a result of market driving forces which often, cannot be predicted. Butin general, they change because of supply and demand, that is, when a stock is in high demand, the priceof the stock moves up. Conversely, when the stock is in low demand, i.e. more people want to sell thanbuy the stock, then the price falls. The price movement of a particular stock can be thought of as anindicator as to what the investors believe the company is worth, which is indirectly a reflection of its valueand expected growth.3

2.1.2 BondsBonds exist as a result of large organizations’ need to borrow money. But typically banks cannot providesuch large sums of lending money, so they sell bonds to a public market. This way the buyer of the bondis essentially lending money to the seller of the bond, with the understanding that the money will be paidback by a certain date (maturity) with interest payments at a certain rate (called coupons). Bonds do nothave the possibility of making large percent returns of money as stocks do, but they are very low-risksecurities known as fixed income securities since the buyer knows how much money he will make if heholds it until the maturity date - that is - the date by which the issuer has to repay the amount borrowed.By the definition of a bond, it is debt, thus buying it makes one a creditor, rather than a shareholder as instocks. This contributes to the reduced risk because, in the event of bankruptcy, the bondholder has ahigher claim to the assets of the company and so they will be paid before a shareholder.[3]While bonds often appear less attractive than stocks (due to their low returns), they have some veryimportant uses. Clearly, for a retiree, the risk associated with stocks may be undesirable and so theirwealth should shift into bonds. Going to university is another example of a period of time where financialrisk must be reduced and investing in bonds would be appropriate.2.1.3 Cash EquivalentsCash equivalents are investments securities which have high credit quality and highly liquid. These areanother of the three main asset classes and can serve as an indicator of the health of a company’s financialsystem. A particular company's’ ability to generate cash and cash equivalents can help analysts estimatewhether it is a good investment choice. This is because it reflects the company’s ability to settle itspayments in a short amount of time. The five types of cash equivalents are Treasury bills, commercialpaper, marketable securities, money market funds and short-term government bonds.Treasury Bills are securities issued by the U.S. Department of Treasury. When these are issued, it isequivalent to saying that the company is lending money to the government. These bills can be providedin values of 1,000 to 5 million. The difference between the purchase price and the redemption valuebecomes the yield. [4]4

Commercial papers are used by large companies to settle short term debts such as the company's’ payroll.It is a promise to pay the face amount by the specified maturity date on the note.Marketable securities are assets and instruments that are easily converted into cash, making themextremely liquid. These are liquid because maturities often occur within one or fewer years. Additionally,these are not affected significantly by the rate at which they are traded.Money market funds are similar to checking accounts with higher interest rates from the depositedmoney. They provide organizations with efficacious tools to manage their money given that they aretypically more stable in relation to mutual funds as an example. Also, its share price stays at a fixed 1 pershare.Short-term government bonds are provided as funds for government projects by the government. Theymake use of the country’s domestic currency when issued and investors must consider political, inflation,and interest rate risks when investing in these types of bonds.2.1.4 CommoditiesCommodities consist of all of the basic goods that are used in commerce. This can include fundamentalfood items such as cocoa and coffee, or metals used in industry and precious metals. The same principlesof buying low and selling high with any investment, apply to commodities as well. However, commoditiesare leveraged significantly and trade by contract sizes instead of shares and this makes investing in gold,grains, oil, etc. much easier. [5]2.1.5 CurrenciesCurrencies are accepted forms of money used for making exchanges within the respective country of thecurrency - and the asset class of focus for this report. For example, the official currency of the UnitedStates of America is the US Dollar (USD), that of Great Britain is the British Pound (GBP), and for theEuropean Union - the Euro (EUR). There are some digital currencies such as bitcoin, dogecoin, and others,however, the exchange rates of these currencies can vary significantly in short amounts of time.Currencies are traded on the Foreign Exchange Market (FOREX market) where they are always traded inpairs by the ratio of the two currencies’ value. For example, the EUR/USD currency pair might be traded5

at 1.10 which means that the Euro is currently valued as being worth 1.10 US Dollars. The value ofcurrencies can vary by large amounts in relatively short periods of time based on any number of factors.This, combined with very high volume, liquidity, and leverage, makes the FOREX market an attractiveoption for traders.Exchange rates of currencies may be floating or fixed; floating if the value of the currency changesaccording to FOREX market changes, and fixed if the value is based on a different currency like gold or acurrency basket. The value of EUR/USD for example is floating since both the Euro and US Dollar arefloating currencies.There are as many tradeable currency pairs as there are currencies in the world and they are separatedinto major currency pairs and minor ones. The major currency pairs are those that trade the most volumeagainst the US Dollar which are EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, and USD/CAD. Theminor currency pairs are those which are not traded with the US Dollar - the higher volume ones consistof individual currencies from the major pairs, such as EUR/GBP, GBP/JPY, EUR/CHF. Additionally, there areexotic pairs which are not as liquid and possess much larger spreads such as the USD/HKD.[6]2.1.6 Real EstateReal estate is property consisting of land and the structures, resources, vegetation, etc. that are on it. Itmay be grouped into three categories. The first category, residential real estate can include undevelopedland, houses, condos, and townhouses. The second category, commercial real estate, can include officebuildings, warehouses, or retail stores. The third category, industrial real estate are factories, mines, orfarms.Real estate must be differentiated between ‘personal property’ and ‘real property’. Personal Propertyconsists of movable assets, unlike real property which is fixed to a location permanently. Personalproperty includes intangible items such as financial investments but also physical items such as clothes,vehicles, electronics, and washing machines. Real property, on the other hand, is real estate that is anyproperty which is physically attached to a piece of land. It is also important to note that it is specificallyland which has been modified through lawful human actions. To clarify, renters and leaseholders, forexample, do not own real estate since they only own the rights to occupy land or buildings.6

The most common type of real estate investments is becoming a homeowner. However, since the pricesof purchasing a home are often beyond what someone can afford, they borrow money in the form of amortgage. Mortgages can be either fixed rate or variable rate - in the former case, they generally havehigher interest rates than their variable rate counterpart, making them more expensive in the short term.This is because they are protected from substantial future scheduled payment increases. Variable ratemortgages simply do not have this protection.[7]2.2 The Forex MarketThe foreign exchange market, or more commonly known as the Forex market, is a global decentralizedmarket for the trading of currencies. This is the largest, most liquid financial market in the world with anaverage daily trading volume exceeding over 5.3 trillion. Forex trading allows the trader to buy and sellcurrencies at current or determined prices. The trading process is conducted electronically over-thecounter (OTC), which means that all transactions occur via the internet. [8] The market is open 24 hoursa day, five and a half days a week and currencies are traded worldwide in the major financial centers ofLondon, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney - across almostevery time zone. This means even though the US forex market opens from 8 AM to 5 PM only, we can stilltrade forex on another market which is open. For example, when the trading session in the U.S. ends, theforex market begins in Tokyo and Hong Kong.[9]Figure 1 FOREX trading hours [10]The foreign exchange market does not determine the relative values different currencies but set thecurrent market price of the value of one currency as demanded against another. That price is mainlydetermined by supply and demand. A currency's value fluctuates as its supply and demand fluctuates, justlike anything else. An increase in supply or a decrease in demand for a currency can cause the value ofthat currency to fall. A decrease in the supply or an increase in demand for a currency can cause the valueof that currency to rise. Many factors influence the price of the currencies, including current interest7

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of this project will take place, followed by important terminology particular to forex. Next, the types of trading orders will be discussed and then market behavior guidelines and the methods used to analyze the market, i.e. fundamental analysis and technical