Forex Education: June 2007

Monday, June 25, 2007

Forex rules

We would like to present you some advice for successful forex trading.

* You buy a trading system and learn the rules
* You study and learn the skills of trading, in theory
* Trade with a Disciplined Plan
* You try the new skills you've learned on a demo account
* You experience the "beginners luck". You make some winning trades. You're psyched
* Good Execution Good Anticipation (while we are trading, whether the last trade we did was profitable or not is definitely not important. There is no point drawing conclusions on the outcome of just one –or even a few-trades. We can only access our anticipation skills when we have made a reasonable number of trades and see the longer-term result of our action. It is so important that when we are trading, our goal should be focus on executing our trades with ruthless efficiency and to judge only that. If you consider the ways that you lose money trading, you will find that it is down to poor execution, rather than poor anticipation)
* You continue trading but start experiencing losses. The confidence you experienced in the beginning has made you a little over confident. You think that this period of losses is temporary. You continue to trade, mounting up more losses
* Cut Your Losses Early and Let Your Profits Run
* Do Not Over Trade (do not bet on the farm. One of the most common mistakes that traders make is leveraging their account too high by trading much larger sizes than their account should prudently trade)
* After losing all of your money or a serious chunk of your trading capital you start look for answers
* You do some research and decide to get someone to help you. You hire an expert to teach you the skills of trading from someone who has been there
* This mentor shows you the skills you need to become a successful trader. They teach you to handle the bad times with the good. They strive to develop you mentally, physically, emotionally, and spiritually
* After mentoring for a certain amount of time you start out on your own. At this time it is important to seek people who are your peers. You add like minded individuals to your group of friends or co-workers. You learn from each other. You talk to each other, compare notes, and create a buddy system that helps you through the lonely times that trading will inevitably bring
* You continue to learn by trial and error. You may decide to seek out more mentoring because there are "levels" of trading success that require new skill sets. For instance, trading one contract and winning or losing a dollar is different than trading a hundred contracts and managing thousands of dollars at a time
* Do Not Marry Your Trades

Money on the Forex

At first, money is quite a fantastic invention, comparable to the invention of the wheel. Just as with the help of the wheel the transport of goods was made easy in a previous unthinkable manner so made money the exchange of goods and even the production of goods for sale possible. Without money it was only possible to exchange service for service. The basket-maker, who needed new shoes, had first to find a shoe-maker, who needed a basket. This shows that without money a market for specialization and division of labor was impossible to achieve.

The definition of money becomes more difficult if the conception of money will be extended to more and more phenomena. This difficulty is reflected in scientific statements, for which three samples should suffice:

* "Money is a general good of nominal validity" (F.Ltje)
* "Money is a creation of the money order" (F.G.Knapp)
* "Money is what is valid« (G.Schmoelders)"

In the view of such »precise« remarks the statement of a national banker (O.Issing) is almost reassuring: »Huge heaps of scientific literature show evidence that the definition of money is anything but indisputable.« But, if national bankers do not know »where money ends« it is more than doubtful that they have a concise notion of what money is.

Looking at the exchange of services and goods, which made civilization and culture possible, money is the intermediary which frees the render of a service from being bound to one partner. Money makes it possible to sell a service to anyone interested in it and, with the received payment, unlimited by time and place, asking for a return service from anybody else. Before money came into existence these services were rendered by goods, which nearly everybody could use, such as salt, grains, tea-bricks or coca-beans.

These goods could be used because of their relatively long »shelf-life« as medium of exchange but they were un-handy and lost value in time. Money, being countable and durable as well as facilitating to be carried, stored and to compare prices, brought about the development of a market economy without which the civilization of today would be unthinkable.

Money is the means of exchange by which people buy and sell things. Today, when we use money, we are as likely to use plastic cards as paper bills and coins, but this was not always true. Consider how society moved from bartering goods to exchanging money.

We carry money to buy things, but money has more meaning than just its cash value. Its artistic design tells a story about its home country. What is most important and prominent about a country often finds its way on to the faces of its paper money. Money can depict a country’s landscape, its unique plants and animals, prominent people from its history, or national symbols such as a coat of arms. In Nigeria, where agriculture is a major part of the economy, images of people collecting coconuts and farmers selling their harvest can be found on the paper money. China’s money shows images of dragons, rice fields, and beautiful mountain ranges. Some of Brazil’s paper money depicts monkeys and sea turtles.

These days, people regularly exchange paper bills and use plastic cards for money—but it didn’t start out that way. Before “money” existed, people traded items of value, such as cattle or grain. Similarly, the earliest forms of currency were inherently valuable things, such as gold, silver, or other precious resources. In Ancient Rome, soldiers were paid with salt, which was harvested from the sea. Salt could be used to season and preserve food, but more importantly, the human body requires it for survival.

In West Africa, people exchanged manillas as currency from the late 15th to the early 20th century. Manillas were ornamental bracelets made from precious metals such as copper, brass, or iron. In North America, the earliest form of currency was a shell bead called wampum. The Narragansett people are believed to be the first producers of these beads, which were created by shaping and drilling the inner spiral of Whelk shells. Wampum was valued because it took lots of time and hard work to find suitable shells and make them into beautiful beads.

Did you know that you can own a little piece of a big company? In a stock market, people buy and sell shares of a company, which are also known as stocks. A share is a unit of ownership of a company; people who own shares of a company are called “shareholders.” Companies sell stock because they want to raise money to expand their business—it costs lots of money to create new products, build more factories or stores, and hire more employees. People buy stock because they want to make money by choosing good investments.

Some companies give part of their profits to shareholders by paying them cash. These payments are called “dividends.” Nowadays, most people make money in the stock market by investing in companies that are successful. If shareholders buy stock when the value is low and sell it when the value is high, they make a profit. But, investing in the stock market can be risky. If the stock goes down in value, the shareholders lose money. Investors can buy stocks in many different kinds of companies. Examples of stock markets around the world are the New York Stock Exchange in the United States, the London Stock Exchange in England, and the Nagoya Stock Exchange in Japan.

On January 1, 1999, the European Union made money history, implementing the largest monetary changeover the world has ever seen. On that day, eleven of the countries in the European Economic and Monetary Union (EMU) adopted a new, single currency called the Euro. The Euro was a “cashless” currency when it was first introduced, meaning that it was only used for cashless transactions, such as electronic banking and stock market transactions. Actual Euro banknotes (bills) and coins officially went into circulation on January 1, 2002.

The original eleven countries that adopted the Euro were Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. By unifying, these countries became a stronger economic and political power in the world. A single currency also allowed people, services, and goods to move freely from country to country without the inconvenience of currency exchange.

Where Does Money Get Its Value from?

At the times when gold or silver were used as money, the value of money was mainly determined by the value of the metal. This value in turn consisted of the desirability, the rarity and the difficulty to find the metal. Money made of gold or silver was like a good which was exchanged for another good. Today only cents might have some such value. The nominal worth of bigger coins and especially bills exceeds the cost of material and production by a wide margin.

Money which is itself actually worthless, is backed today by the products of the economy one can buy with it. It is a document of a claim to a service just as a received banknote is normally the proof of a previous service. If the national bank would double the amount of money tomorrow in the case of unchanged economic output, nobody would become any richer.

The result of such a doubling of money would be a doubling of all prices and nobody could buy more than before. But on the other hand all the money accounts and the debts would be cut to half of the value. This means that the creditors would lose half of the purchasing power of their assets and the debtors could now pay their debts with half of the former real value.

Money Supply - the amount of money in the economy, consisting primarily of currency in circulation plus deposits in banks: M-1 U.S. money supply consisting of currency held by the public, traveler's checks, checking account funds, NOW and super- NOW accounts, automatic transfer service accounts, and balances in credit unions.

M-2 U.S. money supply consisting M-1 plus savings and small time deposits (less than $100,000) at depository institutions, overnight repurchase agreements at commercial banks, and money market mutual fund accounts. M-3 U.S. money supply consisting of M-2 plus large time deposits ($100,000 or more) at depository institutions, repurchase agreements with maturities longer than one day at commercial banks, and institutional money market accounts.

Forex positions - open, close, short, long

There are such important terms in forex as "long position", "short position", "close position", "open position".

Position - The amount of currency or security owned or owed by a forex trader or investor.

Long (Position) - A position that was obtained by buying in anticipation of an increase in price.
Open:

Each open position has four major characteristics: You're trading a particular currency pair, you're either long or short the market (you've bought or sold, respectively), the size of the position in increments of 100,000 of the base currency, and an exchange rate at which the position was opened. For example a "EUR/USD, 500, S, 0.9220", means the trader Sold 500,000 Euros for U.S. Dollars at an exchange rate of 0.9220.
Close:

The close rate is the current exchange rate at which the trader can exit the position using a market order. If you're long the market, the current bid will be shown as the close rate. If you're short, the close will reflect the current FX market ask price.
Going short – going long

When you buy a currency, you are said to be “long” in that currency. Long positions are entered into at the offer price. Thus if you are buying one GBP/USD lot quoted at 1.5847/52, then you will buy 100,000 GBP at 1.5852 USD.

When you sell a currency, you are said to be “short” in that currency. Short positions are entered into at the bid price, which is 1.5847 USD in our example.

Because of the symmetry of currency transactions, you are always simultaneously long in one currency and short in another. For example if you exchange 100,000 GBP for USD you are short in sterling and long in US dollars.
Closing out

An open position is one that is live and ongoing. As long as the position is open, its value will fluctuate in accordance with the exchange rate in the market. Any profits and losses will exist on paper only and will be reflected in your margin account.

To close out your position, you conduct an equal and opposite trade in the same currency pair. For example, if you have gone long in one lot of GBP/USD (at the prevailing offer price) you can close out that position by subsequently going short in one GBP/USD lot (at the prevailing bid price).

Your opening and closing trades must the conducted through the same intermediary. You cannot open a GBP/USD position with Broker A and close it out through Broker B.

Forex quotes

We know that the FX market is the largest in the world and that your broker or institution that you are trading with is collecting quotes from a centralized feed or individual quotes comprising of interbank rates.

So how are these forex quotes made up? Well, as we previously mentioned currencies are traded in pairs and are each assigned a symbol. For the Japanese Yen it is JPY, for the Pounds Sterling it is GBP, for Euro it is EUR and for the Swiss Frank it is CHF. So, EUR/USD would be Euro-Dollar pair. GBP/USD would be pounds Sterling-Dollar pair and USD/CHF would be Dollar-Swiss Franc pair and so on.

You will always see the USD quoted first with few exceptions such as Pounds Sterling, Euro Dollar, Australia Dollar and New Zealand Dollar. The first currency quoted is called the base currency.

When you see forex quotes you will actually see two numbers. The first number is called the bid and the second number is called the offer (sometimes called the ASK).

If we use the EUR/USD as an example you might see 0.9950/0.9955 the first number 0.9950 is the bid price and is the price traders are prepared to buy Euros against the USD Dollar. The second number 0.9955 is the offer price and is the price traders are prepared to sell the Euro against the US Dollar.

These quotes are sometimes abbreviated to the last two digits of the currency such as 50/55. Each broker has its own convention and some will quote the full number and others will show only the last two.

You will also notice that there is a difference between the bid and the offer price and that is called the spread. For the four major currencies the spread is normally 5 give or take a pip.

To carry on from the symbol conventions and using our previous EUR quote of 0.9950 bid, that means that 1 Euro = 0.9950 US Dollars. In another example if we used the USD/CAD 1.4500 that would mean that 1 US Dollar = 1.4500 Canadian Dollars.

The most common increment of currencies is the PIP.

Currencies in the FOREX market are traded on a price interest point (pip) system. Each currency pair has its own pip value.

Since we have a currency PAIR such as EUR/USD, we need a way to talk about its price value. Whenever you see a FOREX price quote, you will see something listed along the lines of the following:

USD/JPY: 112.46 - Seconds later - 112.51

The first part before the first dash refers to the bid price. In other words it's what you obtain in JPY when you sell USD. In example above, the bid price is 112.46. The second component, which comes after both dashes and usually occurs minutes or seconds later, is used to obtain the ask price, this is what you have to pay in JPY if you buy USD.

In this example, the ask price is 112.51. The difference between the bid and the ask price is called the spread. In the example above, the spread is .05 or 5 pips.

USD/JPY: 123.50

When you see a Forex currency pair price quote, like the one above, just remember that that last digit of the price (after the decimal point) is referred to as the pip. So if you see a quote (118.50) and then a qu.ote in one minute of (118.51), then you should automatically know that the price rose by 1 pip.

Similarly, if you see a price quote of 118.58 and then after 5 minutes it's 118.50, the price dropped by 8 pips. The pip is always the last decimal place of the currency price quote.

In the FOREX market your main objective is to capture as many profitable pips as possible!

In the "Majors", this would include USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the other currency quoted in the pair such as JPY.

In the example above, a quote of USD/JPY 123.50 means that one U.S. dollar is equal to 123.50 Japanese yen.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated (become stronger) in value and the other currency has deppreciated (become weaker). If the USD/JPY quote increases to 124.01, the dollar is now much stronger than the JPY because with that same $1 USD you will be able to buy more yen than you could earlier.

Of course there are exceptions to this rule and these 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 1.4366, indicating that one British pound equals 1.4366 U.S. dollars. These currency pairs are like this because they are stronger than the USD in value.

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

To sum up this point, if a currency quote goes up then it increases the value of the base currency. A lower quote means that the base currency is weakening.

There are some currency pairs that do not involve the U.S. dollar. These currencies are called cross currencies, but the idea is exactly the same. For example, a quote of GBP/JPY 210.95 signifies that one GBP is equal to 210.95 Japanese yen.

Nearly all the brokers you will deal with will work all this out for you. They may have slightly different conventions, but it is all done automatically. It is good however for you to know how they work it out. In the next section we will be discussing how these seemingly insignificant amounts can add up.

In summary, currency traders must become familiar also with the way currencies are quoted. The first currency in the pair is considered the base currency; and the second is the counter or quote currency. Most of the time, U.S. dollar is considered the base currency, and quotes are expressed in units of US$1 per counter currency (for example, USD/JPY or USD/CAD). The only exceptions to this convention are quotes in relation to the euro, the pound sterling and the Australian dollar - these three are quoted as dollars per foreign currency.

Forex quotes always include a bid and an ask price. The bid is the price at which the market maker is willing to buy the base currency in exchange for the counter currency. The ask price is the price at which the market maker is willing to sell the base currency in exchange for the counter currency. The difference between the bid and the ask prices is referred to as the spread.

The cost of establishing a position is determined by the spread, and prices are always quoted using five numbers (for example, 134.85), the final digit of which is referred to as a point or a pip.

Forex exchange rate

A forex rate of exchange is the price of one currency in terms of another currency. It is the means by which banks are able to trade foreign currencies in exchange for Australian dollars.

Banks quote prices at which they will buy and sell foreign currency. These prices are based on prices that are quoted in the major wholesale foreign exchange markets and can change constantly throughout the day, depending on market forces.

Every currency has a unique three-character International Standardization Organization (ISO) code. The ISO codes are based on the 2-letter country code, plus a third character derived from the name of the currency (e.g. GBP represents the Great Britain Pound and USD the United States Dollar)

Every currency pair is expressed as two ISO codes separated by a division symbol (e.g. GBP/USD), the first representing the "base” currency and the second the "quote” currency (also known as "counter" or "secondary" currency).

GBP/USD

Base Currency/Quote Currency

The exchange rate is usually displayed to the right of the currency pair

GBP/USD = 1.6545

This denotes that one unit of the British Pound (the base currency) can be exchanged for 1.6545 US dollars (the quote currency). If you are buying the base currency, it specifies how much you have to pay in the quote currency to obtain one unit of the base currency. If you are selling the base currency, the exchange rate is telling you how much you get in the quote currency for one unit of the base currency.

The smallest increment by which a currency can move is called a “pip” (similar to “point” in equity trading). The last two decimal places measure the pip movement of a currency. For instance, in the example above, 45 represents the pips. If, in the same example, the GBP/USD appreciated to 1.6560, you would say it moved up (or rose) 15 pips. Or, if it depreciated to 1.6541 you would say is fell (or moved down) 4 pips.

There are 3 major groups of factors that influence on exchange rate development:
1) Fundamental Factors

Fundamental trading strategies consist of macro-economic strategic assessments; these criteria often include the economic condition of the currency’s country of origin, the country’s monetary policy, and other "fundamental" elements.

Typically, on the world markets, the US economy has the greatest influence. Fully 80% of financial operations conducted in world markets are transacted in dollars. This causes the dollar rise or fall against all other currencies. The fundamental factors affecting world markets are:

* Gross national product
* The level of real percentage
* The level of unemployment
* Inflation
* An index of industrial production

Therefore, the common rule for a trader is to orient to the expectations and moods of the majority of investors in the market. Exchange rate movement tendency can be analyzed by reading publications, studying reviews of market situation in information systems such as Reuters, Bridge (Dow Jones), and CQG. Following the publication of the leading economic indicators, the market will inevitably begin to move. A trader’s primary task is to participate in such movement, which invariably will be lead by the majority in the market. The axiom is - “don’t miss the boat”.
2) Technical Factors

Technical analysis is a field of market analysis, which supposes that market has a memory and consists primarily of a variety of technical aspects, each of which can be interpreted to generate buy and sell signals or to predict market direction.

During the past few years, in response to rapid growth of electronic analytical devices such as those offered by Reuters, Bridge (Dow Jones), CQG and others, greater numbers of traders make their decisions according to the technical analysis, which regularly increases its influence on any real rate movement.

Technical analysis is a method for price forecasting based on historical market movement studies. For the last 30 years, studies in the field of technical analysis have proven themselves a science with its own philosophical system and set of operative axioms.
3) Aside from the fundamental and technical factors

* Insuperable circumstances – acts of nature (earthquakes, a tsunami, a typhoon, flooding, etc.)
* Political events – war, political scandals, terrorist acts, etc
* Political speeches
* Currency interventions by central banks.

Forex trading mistakes and what to do with them

1)Belief change.

Every mistake is a learning experience. They all have something valuable to offer. Try to counteract the natural tendency of feeling frustrated and approach mistakes in a positive manner. Instead of yelling to everyone around and feeling disappointed, say to yourself "ok, I did something wrong, what happened? What is it?

2) Identify the mistake made.

Define the mistake, find out what caused the mistake, and try as hard as you can to effectively see the nature of that mistake. Finding the mistake nature will prevent you from making the same mistake again. More than often you will find the answer where you less expected. Take for instance a trader that doesn't follow the system. The reason behind this could be that the trader is afraid of loosing. But then, why is he or she afraid? It could be that the trader is using a system that does not fit him or her, and finds difficult to follow every signal. In this case, as you can see, the nature of the mistake is not in the surface. You need to try as hard as you can to find the real reason of the given mistake.

3) Measure the consequences of the mistake.

List the consequences of making that particular mistake, both good and bad. Good consequences are those that make us better traders after dealing with the mistake. Think on all possible reasons you can learn from what happened. For the same example above, what are the consequences of making that mistake? Well, if you don't follow the system, you will gradually loose confidence in it, and this at the end will put you into trades you don't really want to be, and out of trades you should be in.

4) Take action.

Taking proper action is the last and most important step. In order to learn, you need to change your behavior. Make sure that whatever you do, you become "this-mistake-proof". By taking action we turn every single mistake into a small part of success in our trading career. Continuing with the same example, redefining the system would be the trader's final step. The trader would put a system that perfectly fits him or her, so the trader doesn't find any trouble following it in future signals.

Every trading activity is in fact participating in a battle. Winning the battle is a matter of knowledge, skill and experience. If you miss any of those you are going to join the long line of losers. Some says that 95 to 99 percent of the traders are lining up on the loser's side.

How to win the battle in the currency market? It is easy to answer that question, based on the above approach prepare yourself for the battle. If you treat currency market activity as a hobby you'll ultimately lose all investments there. If you treat it as a business you still may loose everything.

The correct approach is: consider each pressing of the Buy/Sell button as entering a battlefield. If you enter it without having a knowledge, skill and experience on how to win, you are destined to fail. You may have some lucky trades in the beginning, though. That, by the way, is the worst case scenario for the rookie in trading.

The earlier you get your bad lessons, the better for your overall experience. No mater how good you consider yourself prepared, after demo trading lessons, you have no idea of the forces ruling on the real market.

In fact the worst enemy you are going to face in the very beginning is not hiding behind the walls of the global currency trading centers. Your most dangerous foe is hiding deep inside of you. That enemy is so powerful that you will be amazed how quickly it will wash away all your carefully considered decision.

Forex psychology

Forex (or trading) psychology is very difficult but at the same time very important and interesting for study.

As every successful Forex trader knows, it is not enough just to have the technical knowhow of the actual mechanics of trading the Forex (foreign currency exchange) market, but to recognise that to be a winner relies also on the psychology of trading – Forex requires mental discipline.

While the aim is to capture as many Pips (Price Interest Points) as possible, in order to make your profit, your head needs to rule your heart in Forex trading. Don’t get carried away by the thrill and excitement of the moment! Have a plan or strategy in place before you start trading, and predetermine your exit point.

Within the Forex trading experience, you will have losing trades (every Forex trader does). But the art is in knowing when to let go of these, and not hang on in the hope that they will turn around and start making money. Don’t keep lowering your stop-loss order in anticipation of an upturn in the market that may not come for some while, and don’t persist just to try and prove yourself right! Smart traders know there will always be another trade along soon. Equally, know also when to exit from profitable trades.

A golden rule is always to place a stop-loss order, along with every entry order, to prevent any loss from sinking too far. Anyone who doesn’t place a stop-loss order is going to lose probably a lot of money. An acknowledged maxim is to cut your losers, but let your winners ride.

Apply discipline and emotional control when trading, and follow the rules. Try not to be too greedy. While it is great to be passionate about what you do, patience can be a virtue when Forex is concerned. Don’t let your emotions hold sway, and resist the urge to gamble! Have the courage to stick with your plan and stay with the rules. Believe in yourself for that winning system.

Most of all, gain an understanding of the charts, for they represent so much and are relatively easy to interpret and use. Forex trading develops strong trends, and although a more volatile market, predictability is one of the advantages of this market over others such as futures and stocks. Technical analysis is the most precise way of trading Forex, with charts showing the historical data, which over time has patterns repeating themselves, and can be used reliably for predicting future trends.

The key, of course, is recognising these price patterns to know when to place orders in present-day trading. Research has shown that those who trade ‘with the trend’ improve their chances of success. Don’t cloud your mind with non-essentials such as wondering about the reasons for price movements. In other words, if the market trends show your judgement to be correct, stay with the market for the maximum gain, according to your own risk-to-profit boundaries. If the market starts to go against you, take your profits and get out.

It is wise to open a demo account and to practise trading ‘on paper’ first before risking your money. If you’re unsuccessful in this, it is unlikely that you will suddenly become an expert trader in a ‘live’ account, when using your own finances adds to the pressure to succeed. Never risk more money than you can afford to lose.

Forex Trading

The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex markets currently exceeds US$1.9 trillion. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks.

Market size and liquidity
The foreign exchange market is unique because of:
its trading volume,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours - 24 hours a day (except on weekends).
the variety of factors that affect exchange rates,

According to the BIS [1], average daily turnover in traditional foreign exchange markets was estimated at $1,880 billion. Daily averages in April for different years, in billions of US dollars, are presented on the chart below:
Global foreign exchange market turnover:
$621 billion spot
$1.26 trillion in derivatives, ie
$208 billion in outright forwards
$944 billion in forex swaps
$107 billion in FX options.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, but only accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Average daily global turnover in traditional foreign exchange market transactions totaled $2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a day. This was more than ten times the size of the combined daily turnover on all the world’s equity markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms has also made it easier for retail traders to trade in the foreign exchange market. [2]
Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006. Other large centres include the US (with a 18.2% global share), Japan (7.6%) and Singapore (5.7%) (Chart 2). Most of the remainder was accounted for by trading in Germany, Switzerland, Australia, Canada, France and Hong Kong.

The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 0-3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $100,000.

These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 5 pips wide (i.e. 0.0005). Competition has greatly increased with pip spreads shrinking on the major pairs to as little as 1 to 1.5 pips.

Forex Currency Trading Online

As like many before you, when you first start trading on the Forex market you will soon realize that a lot of the traders lose money rather than gain. So if you do not want to end up in the same situation as many before you, here are some tips in relation to Forex currency trading online that can help you gain more and lose less.
1. Forget the Hype
Too often you will see sites that are promoting ways in which you can get rich through Forex trading as long as you purchase their book for $100. However, instead of spending your money on something that is probably completely worthless, all you need to do is spend some time searching the internet and you will soon discover everything you need to know and all for free.
If however you really want to learn what the top traders are doing and obtain advice from them, there are plenty of good quality books that you can purchase through such online stores as Amazon.
2. Day Trading - Forget It
Unfortunately a lot of people starting out in Forex trading have often heard that you can make good money through day trading. This is simply not true and those that have listened to this have soon learnt the hard way.
Ask any reputable vendor online and they will soon tell you that the only way you will be able to make any money and real profits in forex currency trading online is over the long term.
3. Be Smart
When it comes to Forex trading you need to be smart so it is important that you learn as much as you can about the subject as possible. Look at the various tools and systems that are available and soon you will discover that you are able to trade on the markets much more easily after just a couple of weeks.
4. You need to be a risk taker
Unfortunately with any form of trading there are some risk involved and so if you are not prepared to take any risks then forget about getting involved in Forex trading. Only those who are willing to accept the risks and be prepared to make some loses are going to be successful when it comes to Forex trading.

5. Find a simple system
Simple Forex trading systems work much better than the more complicated types. Certainly when first starting out,it is best to use a system that uses both support and resistance practices as well as breakout methodology. Plus a system that uses confirming indicators also. By keeping your system as simple as possible you will find it much easier to understand and learn everything you need to know to ensure that you maximize your gains but minimize your losses.

Forex Benefits Over Futures

The origins of the modern futures market lies in the agriculture markets of the 19th century. Farmers started selling contracts to deliver agricultural products at a later date. This was done to anticipate market needs and stabilize supply and demand during off seasons.
The current futures market has moved far beyond agricultural products. It is a worldwide market for all sorts of commodities, including manufactured goods, agricultural products, and financial instruments such as currencies and treasury bonds.
When the futures market is played by speculators, the actual goods are not important because there is no expectation of delivery. Rather, it is the contract itself that is traded, the value of which changes constantly throughout the day as expectations change regarding the value of the commodity itself.

Win or Lose

In every futures contract there is a buyer and a seller. The seller takes the short position and the buyer takes the long position. The futures contract specifies a buying price, a quantity and a delivery date.
Speculators hope to profit by the daily fluctuations in the futures market by buying long (from the buyer) if they expect prices to rise, or by buying short (from the seller) if they expect prices to fall. Futures accounts are settled every day.
At the end of the contract period, the contract itself is settled. The final contract buyer can now take delivery of his truckload of whatevers. Of course, he may opt to just start the process all over again by writing up a contract to deliver his whatevers on a certain date at a certain price.

Forex Benefits

The foreign exchange market (Forex) has several advantages over the futures market.
More Liquid
Forex is an extremely liquid market. As the largest financial market in the world it dwarfs the futures market in daily exchanges. This means that Forex stop orders can be executed more easily and with less slippage. The Forex is open 24 hours a day, 5 days a week. Most futures exchanges are open 7 hours a day. This makes Forex more liquid and allows Forex traders to take advantage of trading opportunities as they arise rather than waiting for the market to open.

Commission-Free

Forex transactions have no commissions. Brokers earn money by setting a spread -- the difference between what a currency can be bought at and what it can be sold at. In contrast, traders must pay a commission or brokerage fee for each futures transaction they enter into.
Instant Transactions
Because of the high volume of trading, Forex transactions are executed almost instantly. This minimizes slippage and increases price certainty. Brokers in the futures market often quote prices reflecting the last trade -- not necessarily the price of your transaction.

Safeguards

Final prices in futures are always a little uncertain because of market gap and slippage. The Forex is less risky because of built-in safeguards in the trading system

Posted by Lokesh And Gaurav at 10:55 AM 0 comments

Benefits of Trading the Forex Market

Trading the Forex market has become very popular in the last years. Why is it that traders around the world see the Forex market as an investment opportunity? We will try to answer this question in this article. Also we will discuss come differences between the Forex market, the stocks market and the futures market.

Some of the benefits of trading the Forex market are:

Superior liquidity.

Liquidity is what really makes the Forex market different from other markets. The Forex market is by far the most liquid financial market in the world with nearly 2 trillion dollars traded everyday. This ensures price stability and better trade execution. Allowing traders to open and close transactions with ease. Also such a tremendous volume makes it hard to manipulate the market in an extended manner.

24hr Market.

This one is also one of the greatest advantages of trading Forex. It is an around the click market, the market opens on Sunday at 3:00 pm EST when New Zealand begins operations, and closes on Friday at 5:00 pm EST when San Francisco terminates operations. There are transactions in practically every time zone, allowing active traders to choose at what time to trade.

Leverage trading.

Trading the Forex Market offers a greater buying power than many other markets. Some Forex brokers offer leverage up to 400:1, allowing traders to have only 0.25% in margin of the total investment. For instance, a trader using 100:1 means that to have a US$100,000 position, only US$1,000 are needed on margin to be able to open that position.

Low Transaction costs

Almost all brokers offer commission free trading. The only cost traders incur in any transaction is the spread (difference between the buy and sell price of each currency pair). This spread could be as low as 1 pip (the minimum increment in any currency pair) in some pairs.

Low minimum investment

The Forex market requires less capital to start trading than any other markets. The initial investment could go as low as $300 USD, depending on leverage offered by the broker. This is a great advantage since Forex traders are able to keep their risk investment to the lowest level.

Specialized trading

The liquidity of the market allows us to focus on just a few instruments (or currency pairs) as our main investments (85% of all trading transactions are made on the seven major currencies). Allowing us to monitor, and at the end get to know each instrument better.
Trading from anywhere.
If you do a lot of traveling, you can trade from anywhere in the world just having an internet connection.
Some of the most important differences between the Forex market and other markets are explained below.
Forex market vs. Equity markets
Liquidity
FX market: Near two trillion dollars of daily volume.
Equity market: Around 200 billion on a daily basis.
Trading hours
FX market: 24hr market, 5.5 days a week.
Equity market: Monday through Friday from 8:30 EST to 5:00 EST.
Profit potential
FX market: In both, rising and falling markets.
Equity market: Most traders/investor profit only from rising markets.
Transaction costs
FX market: Commission free and tight spreads.
Equity market: High Commissions and transaction fees.
Buying power
FX market: Leverage up to 400:1.
Equity market: Leverage from 2:1 to 4:1.
Specialization
FX market: most volume (85%) is made on major currencies (USD, EUR, JPY, GBP, CHF, CAD and AUD.)
Equity market: More than 40,000 stocks to choose from.
Forex market vs. Futures market
Liquidity
FX Market: Near two trillion dollars of daily volume.
Futures market: Around 400 billion dollars on a daily basis.
Transaction costs
FX market: Commission free and tight spreads.
Futures market: High commissions fees.
Margin
FX market: Fixed rate of margin on every position.
Futures market: Different levels of margin on overnight positions than day time positions.
Trade execution
FX market: Instantaneous execution.
Futures market: Inconsistent execution.
All this makes the Forex market very attractive to investors and traders. But I need to make something clear, although the benefits of trading the Forex market are notorious; it is still difficult to make a successful career trading the Forex market. It requires a lot of education, discipline, commitment and patience, as any other market.

Sunday, June 10, 2007

Trading Forex

A currency trade is the simultaneous buying of one currency and selling of another one. The currency combination used in the trade is called a cross (for example, the Euro/US Dollar, or the GB Pound/Japanese Yen.). The most commonly traded currencies are the so-called “majors” – EURUSD , USDJPY , USDCHF and GBPUSD .

The most important forex market is the spot market as it has the largest volume. The market is called the spot market because trades are settled immediately, or “on the spot”. In practice this means two banking days.

Forward Outrights
For forward outrights, settlement on the value date selected in the trade means that even though the trade itself is carried out immediately, there is a small interest rate calculation left. The interest rate differential doesn't usually affect trade considerations unless you plan on holding a position with a large differential for a long period of time. The interest rate differential varies according to the cross you are trading. On the USDCHF , for example, the interest rate differential is quite small, whereas the differential on NOKJPY is large. This is because if you trade e.g. NOKJPY, you get almost 7% (annual) interest in Norway and close to 0% in Japan. So, if you borrow money in Japan, to finance the trade and buying NOK, you have a positive interest rate differential. This differential has to be calculated and added to your account. You can have both a positive and a negative interest rate differential, so it may work for or against you when you make a trade.

Trading on Margin
Trading on margin means that you can buy and sell assets that represent more value than the capital in your account. Forex trading is usually conducted with relatively small margin deposits. This is useful since it permits investors to exploit currency exchange rate fluctuations which tend to be very small. A margin of 1.0% means you can trade up to USD 1,000,000 even though you only have $10,000 in your account. A margin of 1% corresponds to a 100:1 leverage (or 'gearing'). (Because USD 10,000 is 1% of USD 1,000,000.) Using this much leverage enables you to make profits very quickly, but there is also a greater risk of incurring large losses and even being completely wiped out. Therefore, it is inadvisable to maximise your leveraging as the risks can be very high. For more information on the trading conditions of Saxo Bank, go to the Account Summary on your SaxoTrader and open the section entitled "Trading Conditions" found in the top right-hand corner of the Account Summary.

Why trade Forex?

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24 hour trading
One of the major advantages of trading forex is the opportunity to trade 24 hours a day from Sunday evening (20:00 GMT) to Friday evening (22:00 GMT). This gives you a unique opportunity to react instantly to breaking news that is affecting the markets.
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Superior liquidity
The forex market is so liquid that there are always buyers and sellers to trade with. The liquidity of this market, especially that of the major currencies, helps ensure price stability and narrow spreads. The liquidity comes mainly from banks that provide liquidity to investors, companies, institutions and other currency market players.
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No commissions
The fact that forex is often traded without commissions makes it very attractive as an investment opportunity for investors who want to deal on a frequent basis.
Trading the “majors” is also cheaper than trading other cross because of the high level of liquidity. For more information on the trading conditions of Saxo Bank, go to the Account Summary on your SaxoTrader and open the section entitled "Trading Conditions" found in the top right-hand corner of the Account Summary.
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100:1 Leverage
Leverage (gearing) enables you to hold a position worth up to 100 times more than your margin deposit. For example, a USD 10,000 deposit can command positions of up to USD 1,000,000 through leverage. You can leverage the first USD 25,000 of your investment up to 100 times and additional collateral up to 50 times.
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Profit potential in falling markets
Since the market is constantly moving, there are always trading opportunities, whether a currency is strengthening or weakening in relation to another currency. When you trade currencies, they literally work against each other. If the EURUSD declines, for example, it is because the U.S. dollar gets stronger against the Euro and vice versa. So, if you think the EURUSD will decline (that is, that the Euro will weaken versus the dollar), you would sell EUR now and then later you buy Euro back at a lower price and take your profits. The opposite trading scenario would occur if the EURUSD appreciates.

Important Forex Trading Terms

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Spread
The spread is the difference between the price that you can sell currency at ( Bid) and the price you can buy currency at ( Ask). The spread on majors is usually 3 pips under normal market conditions. For more information on the trading conditions at Saxo Bank, go to the Account Summary on your Client Station and open the section entitled "Trading Conditions" found in the top right-hand corner of the Account Summary.
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Pips
A pip is the smallest unit by which a cross price quote changes. When trading forex you will often hear that there is a 3-pip spread when you trade the majors. This spread is revealed when you compare the bid and the ask price, for example EURUSD is quoted at a bid price of 0.9875 and an ask price of 0.9878. The difference is USD 0.0003, which is equal to 3 “pips”.

On a contract or position, the value of a pip can easily be calculated. You know that the EURUSD is quoted with four decimals, so all you have to do is cancel out the four zeros on the amount you trade and you will have the va value of one pip. Thus, on a EURUSD 100,000 contract, one pip is USD 10. On a USDJPY 100,000 contract, one pip is equal to 1000 yen, because USDJPY is quoted with only two decimals.

Trading Scenario – Trading Rising Prices
If you believe that the Euro will strengthen against the dollar you'll want to buy Euro now and sell it back later at a higher price.

• You buy Euro We quote EURUSD at Bid 0.9875 and Ask 0.9878, which means that you can sell 1 Euro for 0.9875 USD or buy 1 Euro for 0.9878 USD .

In this example you buy Euro 100,000, at the quote price of 0.9878 (ask price) per Euro.
• The market moves in your favor Later the market turns in favour of the Euro and the EURUSD is now quoted at Bid 0.9894 and Ask 0.9896.
• Now you sell your Euro and get the profit You sell Euro at a Bid price of 0.9894.
• The profit is calculated as follows Sell price-buy price x size of trade
(0.9894 minus 0.9878) multiplied by 100.000 = USD 140 Profit
(Note that the profit or loss is always expressed in the secondary currency)

Trading Scenario – Trading Falling Prices
If, on the other hand, you believe that the Euro will weaken against the dollar, you'll want to sell EURUSD .

• You sell Euro We quote EURUSD at a Bid price of 0.9875 and Ask price of 0.9880 and you decide to sell Euro 100,000 at a Bid price of 0.9875.
• The market moves in your favour The Euro weakens against the dollar and the EURUSD is now quoted at bid 0.9744 and ask 0.9749.
• Now you buy back your Euro You buy EUR at an ask price of 0.9749.
• Your Profit/loss is then Sell price-buy price x size of trade
(0.9875 minus 0.9749) multiplied by 100.000 = USD 1260 Profit
Remember that trading EUR 100,000 as we have done in our examples, does not mean that you have to put up Euro 100,000 yourself. On a 2% margin means that you have to deposit 2.0% of Euro 100,000, which is Euro 2,000 on margin as a guarantee for the future performance of your position.

Further Reading
To see how you can trade the forex market and benefit from our toolbox of information and live quotes, please proceed to the Forex Quick Start found under the Trading menu of SaxoTrader.

Glossary
• Appreciation An increase in the value of a currency.
• Ask The price requested by the trader. This usually indicates the lowest price a seller will accept.
• Base currency The currency that the investor buys or sells (i.e. EUR in EURUSD ).
• Bear Someone who believes prices are heading down. A bear market is one in which there is a sustained fall in prices and which does not look like it will recover quickly.
• Bid The price offered by the trader. This usually indicates the highest price a purchaser will pay.
• Bid/Ask The Bid rate is the rate at which you can sell. The Ask (or offer) rate is the rate at which you can buy.
• Bull Someone who is optimistic about the market. A bull market is characterised by enthusiastic and sustained buying.
• cross When trading with currencies, the investor buys one currency with another. These two currencies form the cross: for example, EURUSD .
• Cross rate An exchange rate that is calculated from two other exchange rates.
• Depreciation/decline A fall in the value of a currency.
• Exchange rate What one currency is worth in terms of another, for example the Austrialian dollar might be worth 58 US cents or 70 yen.

Currencies traded freely on foreign-exchange markets have a spot rate (applying to trades settled 'spot', ie, two working days hence) and a forward rate. Countries can determine their exchange rates in a variety of ways.
1. A floating exchange rate system where the currency finds its own level in the market.
2. A crawling or flexible peg system which is a combination of an officially fixed rate and frequent small adjustments which in theory work against a build-up of speculation about a revaluation or devaluation.
3. A fixed exchange-rate system where the value of the currency is set by the government and/or the central bank.
• EURUSD Means that you trade EUR against dollars. If you buy Euro you pay in dollars and if you sell Euro you receive dollars.
• FX, Forex, Foreign Exchange All names for the transaction of one currency for another, e.g. you buy £100.00 with USD 150.25 or sell USD 150.25 for £100.00.
• Interbank Short-term (often overnight) borrowing and lending between banks, as distinct from banks' business with their corporate clients or other financial institutions.
• Interest rate differential The yield spread between two otherwise comparable debt instruments denominated in different currencies.
• Leverage (gearing) In this case leverage means that the investor only funds part of the amount traded.
• Long To buy.
• Long position A position that increases its value if market prices increase.
• Liquid (-ity) The capacity to be converted easily and with minimum loss into cash. A liquid market is one in which there is enough activity to satisfy both buyers and sellers. Ultra-short-dated treasury notes are an example of a liquid investment.
• Margin The deposit required when entering into a position as well as to hold an open position. Your margin status can be monitored in the Account Summary.
• NYSE The New York Stock Exchange.
• Open position A position in a currency that has not yet been offset. For example, if you have bought 100,000 USDJPY , you have an open position in USDJPY until you offset it by selling 100,000 USDJPY , thus "closing" the position.
• “Over the counter” When trading takes place directly between two parties, rather than on an exchange. Over the counter trades can be customised whereas exchange-traded products are often standardised.
• Pips A pip is the smallest unit by which a Forex cross price quote changes. So if EURUSD bid is now quoted at 0.9767 and it moves up 2 pips, it will be quoted at 0.9769.
• Position Traders talk of 'taking a position' which simply means buying or selling currency cross. 'Position' can also refer to a trader's cash/securities/currencies balance, whether he or she is short of cash, has money to lend, is overbought or oversold in a currency, etc.
• Risk Trying to control outcomes to a known or predictable range of gains or losses. Risk management involves several steps which begin with a sound understanding of one's business and the exposures or risks that have to be covered to protect the value of that business. Then an assessment should be made of the types of variables that can affect the business and how best to protect against unwelcome outcomes. Consideration must also be given to the preferred risk profile - whether one is risk- averse or fairly aggressive in approach. This also involves deciding which instruments to use to manage risk, and whether a natural hedge exists that can be used. Once undertaken, a risk-management strategy should be continually assessed for effectiveness and cost.
• Secondary currency (variable currency or counter currency) The currency that the investor trades the base currency against (i.e. USD in EURUSD ).
• Short position A position that benefits from a decline in market prices.
• Short To sell.
• Speculative Buying and selling in the hope of making a profit, rather than doing so for some fundamental business-related need.
• Spot A Spot rate is the current market price of an asset.
• Spot market The part of the market calling for spot settlement of transactions. The precise meaning of 'spot' will depend on local custom for a commodity, security or currency. In the UK, US and Australian foreign-exchange markets, 'spot' means delivery two working days hence.
• Spread The difference between the bid and the ask rate.