For the last three decades Foreign Exchange market, - briefly Forex or FX, had integrated into the world's biggest financial market. The volume of daily transactions is about 1-3 trillion of US dollars. The trading instruments on this market are the currencies of different countries, so the fluctuation of currency's rates allows to gain a real profit.
Monday, June 1, 2009
he dollar fell to an 8-week low against the euro
The dollar fell to an 8-week low against the euro and numerous other currencies today, as investors stayed clear of the greenback because of uncertainly of the struggling US car manufacturers and its economic impact.
Late last week, the White House said it was considering a $700 billion bailout to prevent the collapse of the US car manufacturers; this was after the US Senate had rejected the plans on Thursday.
In the early session, the dollar was 0.7% down against the euro at $1.3470, as investors are wary that the collapse of any one of the US car manufacturers could drag other companies under with it.
The dollar was also under pressure because of the Federal Reserve’s policy meeting later this afternoon, where it is widely anticipated that the Federal Reserve will cut interest rates by another 0.5%.
Margin Trading
The forex market is a 100% margin-based market. This is a familiar thing for those used to trading futures.
In fact, spot forex trading is essentially trading a 2-day forward (futures) contract. You do not take actual possession of any currency, but rather have a theoretical agreement to do so in the future. That puts you in a position of benefiting from prices changes. For that your broker requires a deposit on your trades to provide surety against any losses you may incur. How much of a deposit can vary. Some brokers will asked for as little as 1/2%. That is fairly aggressive, though. Expect 1%-2% on the value of the position in most cases.
Now, unlike the stock market, margin trading does not mean margin loans. Your broker will not be lending you money to buy securities (at least not the way a stock broker does). As such, there is no margin interest charged. In fact, since you are the one putting money on deposit with your broker, you may earn interest in your margin funds.
Transaction Processing
Also, the lack of an exchange means a difference in how trading is actually done. In the stock market an order is submitted to a broker who facilitates the trade with another broker/dealer (over-the-counter) or through an exchange. In spot forex much of the trading done by individuals is actually executed directly with their broker/dealer. That means the broker takes the other side of the trade. This is not always the case, but is the most common approach.
Transaction Costs
The lack of an exchange and the direct trade with the broker creates another difference between stock and forex trading. In the stock market brokers will generally charge a commission for each buy and sell transaction you do. In forex, though, most brokers do not charge any commissions. Since they are taking the other side of all the customer trades, they profit by making the spread between the bid and offer prices.
Some traders do not like the structure of the spot forex market. They are not comfortable with their broker being on the other side of their trades as they feel it presents a type of conflict of interest. They also question the safety of their funds and the lack of overall regulation. There are some worthwhile concerns, certainly, but the fact of the matter is that the majority of forex brokers are very reliable and ethical. Those that are not don't stay in business very long.
No Exchanges
The lack of an exchange is probably the next big thing that sticks out as being different in forex. While it is true that there is exchange-based forex trading in the form of futures, the primary trading takes place over-the-counter via the spot market. There is no NYSE of forex.
On the largest scale, forex transactions are done in what is referred to as the inter-bank market. That literally means banks trading with each other on behalf of their customers. Larger speculators also operate in the inter-bank market where they can execute multi-million dollar trades with ease. Individual traders, who generally trade in much smaller sizes, primarily do so through brokers and dealers.
This is something which can trouble stock traders. There is no central location for price data, and no real volume information is attainable. Since volume is an often reported figure in the stock market, the lack of it in spot forex trading is something which takes a bit of getting used to for those making the switch.
The Time in the Major Financial Centers Impacts Market Players
Foreign exchange is a continuous global market, providing participants with 24-hour market access. The only breaks in trading occur during a brief period over the weekend. Although foreign exchange is the most liquid of all markets, the fact that it is an international market and trading 24-hours a day, the time of day can have a direct impact on the liquidity available for trading a particular currency.
The major dealer centers and time zones are that of Sydney, Tokyo, London, and New York. Therefore, traders must consider which players are in the market, since in the modern interconnected financial world, events that occur at any hour, in any part of the globe, can affect some or all parts of the investment community.
The market's 24-hour nature is a substantial attraction to traders that prefer to trade at all times of the day, or night.
*Under volatile market conditions, a broker may not be able to execute a limit or stop order at the exact price specified by the trader. CMS’s own policy, however, is to attempt to honor all stop and limit orders up to 10 lots in size.
Forex is an over-the-counter (OTC) or off-exchange market.
trader’s option
It is the trader’s option to take either a conservative or a more risk-taking approach. Employing a conservative approach, the trader establishes and liquidates positions quickly and efficiently to capitalize on even the slightest of price fluctuations, using limit and stop orders to manage risk. A limit order is placed to ensure a position is established once a price level in the market has been reached.* A stop order is placed to automatically liquidate a position at a chosen price level in order to limit potential loss on a particular trade. By placing orders in relation to technical support and resistance levels, the trader may profit incrementally from the minor price fluctuations that occur each day.
Buying and Selling Currencies
Traders can generate profits (or losses) whether a currency is rising or falling by buying one currency, which is anticipated to gain value against another currency or selling one currency, which is anticipated to lose value against another currency. Taking a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. Alternatively, a short position is one in which the trader sells a currency that he anticipates to depreciate and aims to buy the currency back later at a lower price.
Buying or selling currencies in response to economic or political events which occur are reactive, whereas buying or selling currencies on anticipated events is speculative. The bulk of currency activity is generated by market participants anticipating the direction of currency prices. In general, the value of a currency versus other currencies is a reflection of the condition of that country’s economy with respect to the other major economies.
Trading Forex
Trading FX
Forex Overviewarrow-online
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1. What is Forex?arrow-online
2. Trading Forexarrow-online
3. Forex vs. Stocksarrow-online 4. Fundamental Analysisarrow-online
5. Technical Analysisarrow-online 6. VT Trader - CMS's Trading Softwarearrow-online
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Trading Forex Using fundamental and technical analysis, the individual trader attempts to determine trends in the price movements of currencies, and by buying or selling currency pairs, attempts to gain profits. The most often traded currencies, the major currencies, are those of countries with stable governments and respected central banks that target low inflation. Currencies that often trade along with the U.S. Dollar include the European Euro, the Japanese Yen, and the British Pound as they are the most liquid. A trader can trade these currencies in any combination. CMS Forex also offers the Swiss Franc, and the Canadian, Australia and New Zealand Dollars making for 19 total trading instruments when accounting for all the cross pairs. More "Exotic" currencies are not offered as they are often tightly regulated and simply too illiquid.
How Does Forex Trading Work?
Forex trading is typically done through a broker or market maker. As a forex trader you can choose a currency pair that you feel is going to change in value and place a trade accordingly. For example, if you had purchased 1,000 Euros in January of 2005, it would have cost you around $1,200 USD. Throughout 2005 the Euro’s value vs. the U.S. Dollar’s value increased. At the end of the year 1,000 Euros was worth $1,300 U.S. Dollars. If you had chosen to close your trade at that point, you would have made $100.
Forex trades can be placed through a broker or market maker. Orders can be placed with just a few clicks and the broker then passes the order along to a partner in the Interbank Market to fill your position. When you close your trade, the broker closes the position on the Interbank Market and credits your account with the loss or gain. This can all happen literally within a few seconds.
Foreign Exchange (FOREX)
Foreign Exchange (FOREX)
is the arena where a nation's currency is exchanged for that of another. The foreign exchange market is the largest financial market in the world, with the equivalent of over $1.9 trillion changing hands daily; more than three times the aggregate amount of the US Equity and Treasury markets combined. Unlike other financial markets, the Forex market has no physical location and no central exchange (off-exchange). It operates through a global network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another in all the major financial centers.
Traditionally, retail investors' only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971. Today, importers and exporters, international portfolio managers, multinational corporations, speculators, day traders, long-term holders and hedge funds all use the FOREX market to pay for goods and services, transact in financial assets or to reduce the risk of currency movements by hedging their exposure in other markets.
Swing Trading - The Best Way to Trade Forex
Ideal Trading
Swing trading can mean a lot of things. So, a definition is a good place to start. I call anything swing trading that doesn't require you to look at your trades more that several times a day at most.
That's the whole point. Check the market. Put on trades if the market warrants it. Shut off the computer and get on with your life. Sounds good to me.
Timeframes
Usually you wouldn't try to swing trade on anything less than a 1 hour chart. I prefer the 4 hour chart myself. If I had more patience, I would trade the daily chart. However, anything smaller than the hourly charts, and you are starting to get into the market "noise." Trends and breakouts are much clearly the slower the timeframe. Why not take advantage of that?
Does It Fit You?
The thing about swing trading is that it can definitely get boring. You see, you might come upon a stretch where for a week or more, no trades present themselves. Do you have the patience to watch and wait? Or will you jump into the market? Don't answer the question. You really don't know until you've been there and done that.
However, don't go running to day trading if you're having trouble swing trading. First, day trading is harder. Second, just like swing trading, you will have dry spells in day trading too.
Your System
Of course, you need to have a system or methodology. I'm not going to discuss it here as I've already got a page devoted to it. For a very important bird's eye view of the process, have a look at my forex trading system page.
More articles on non-day trading.
Want a forcast of where the rates will be in a 1 1/2 years?
18 Month Forecast of Exchange Rates
Want to where where the best places are to get the inside story on the forex market?
Best Forex Commentary
Can you be totally hedged and still make money?
Forex Trading. Full Hedging, Is It Possible?
Your choices if you choose to enter this market
Forex (fx) Trading Options - What Choices Do You Have?
What makes the best wealth hedge against uncertain times?
The Best Hedge Against Uncertainty - Gold or Foreign Currency?
Day Trading Forex
Profit Potential
Why would anyone want to day trade? Simple. To paraphrase Bill Clinton, "It's the money, stupid. " If you can make money at a modest rate swing trading, why not increase the rate money is made by trading intra-day. That's the attraction. Just remember that just like any kind of trading, however, the money doesn't just flow in. There are things that you will need to watch out for.
Pitfalls
There are three things that people considering day trading don't seem to consider. (I know I sure didn't.)
1. Uneven equity curve. You will not steadily make money. I admit I get really sick of this "Make $500 a day!" nonsense. There is no such thing as steady money in trading. You will make some and then lose some. The idea is to make more than you lose. When you day trade, this is all taken to a new level. You lose and you make it so much faster.
As a side note, it's normal to have a larger trading account 5% of the time. In other words, only once a month will your bankroll set a new high. Most people don't know that.
2. Losing days. Having an uneven equity curve means that you will have losing days. You could have a day where you lose $1000. Yes, it happens. The sooner you accept that as a day trader, the more likely you are to succeed. (And you'll have a lot less stress.)
3. Days with no trades. The market does what it wants. There are days where no good trades materialize. So, that means that the winning day trader doesn't trade. Almost nothing is harder (at least for me) that sitting in front of the screen watching the price all day and taking no trade.
Myths
Day trading has taken on almost mystical proportions in some people's minds. I've heard some talking about how day traders make hundreds of trades daily. No day trader I've ever met does that. Try making one hundred trades a day and the spread with financially murder you. Day traders make from zero to maybe three trades in a day.
All of the hype advertising, purports that day trading is easy. Wrong! Anyone who has tried it can tell you that. However, then many of the people who tried it, and then failed, believe that it is impossible. It's not.
Steps To Success
That begs the question, how do you do it then? Here are the steps to success as a day trader as I see it.
1. Success at trading. Don't try to day trade until you've proven to yourself that you can trade successfully at a much slower pace.
2. Sufficient capital. If your trading account isn't in the high five figures, you shouldn't day trade (if that's going to be your only source of income).
3. A winning system. Day trading is harder than any other kind of trading that I know of. You really need to make sure your system will hold up. A system that works in a slower time frame will not necessarily work for day trading. Make sure you're system has a positive expectation.
4. Practice. Practice makes perfect. Yes, it's a tired old phrase, but it's true.
5. Patience. The market will try to destroy you as a new day trader. Have patience. Hang tough. You will make it, provided the previous four items are in order.
Winning Forex Trading
The Whole Point Of Trading
Why do we trade? Money. Let's keep that is the front of our minds. Traders get carried away with all the fun fancy stuff they can do. They get carried away with the thrill. They get carried away with the analysis, but trading is all about making more money.
Your Focus
That's the whole point of this website. It's to show you how to win more. Why did you start trading in the first place (or if you're not trading yet, why did you originally think about it)? It was the financial reward. Okay, so together let's take a journey down the path of becoming better traders.
Overview Of Winning
Really quickly, I just want to give you an overview of the three most important things that are forgotten by many traders (dooming them to become losing traders).
* Keep it simple. The simpler your trading regimen and trading rules are, the more likely you are to follow them. Make it easy. Make it simple.
* Don't care. This is the hardest thing for traders to master. You need to figure out a way to not care about your individual trades. You start caring, and you start stressing. You start stressing, and you'll make a mistake. Make a mistake, and you've lost. I guarantee you this is the reason professional fund managers never consistently make large returns. The managers are thinking way too much about what the investors will think of their every move.
* Be sure you have an edge. For much more detail on this see my trading systems page.
P.S. Why Trading Isn’t Gambling
There appears to be a lot of correlation between gambling and trading. Both can seem random. Both have more losing participants than winners. Both use similar terminology.
So, is trading gambling? No.
You see, trading does one thing that gambling doesn't. It creates value. When two businesses in different countries want to do business, they need to exchange currencies. When a traveler visits another country, he/she needs currency exchanged. When a high net-worth individual wants to invest overseas, currency needs to be exchanged yet again.
Yet, if there were no small forex traders, there wouldn't be anyone to take the other side of the trade for these necessary transactions. So trading creates value, because it allows money to flow freely from country to country as business is done.
Gambling on the other hand creates no value. It was created strictly for the entertainment value, and that's the difference between the two.
Related Articles
The statistics on the US dollar are ghastly. Through the month of May, the world’s most actively traded currency plunged 547 pips or 6.5 percent on a traded weighted basis to its lowest level this year. With the momentum building, there was no shortage of reason to sell this currency.
The statistics on the US dollar are ghastly. Through the month of May, the world’s most actively traded currency plunged 547 pips or 6.5 percent on a traded weighted basis to its lowest level this year. With the momentum building, there was no shortage of reason to sell this currency. The 1Q GDP revisions confirmed the country’s worst six month period of economic activity in 51 years. Policy officials warned that a recovery could be pushed back into 2010. Rising national debt levels intensified speculation that the US sovereign debt rating was in jeopardy. And, once again, international calls to abandon the US dollar as a reserve currency were amplified. All of these are legitimate concerns; but none of them are new or immediate problems. This is what is important to remember heading into the coming week. Risk appetite will no doubt has its influence on the greenback; but a dense list of high-level event risk (from the US docket and abroad) will cast the battered currency in a more objective light as we see where the US really stands in the global scale between economic depression and recovery.
Referring to the dollar’s own calendar, fundamental traders will respond to a wide range of proven market movers. The scope of the list will cover nearly every facet of the US economy and will therefore better qualify speculation as to whether the there are signs of ‘green shoots.’ This is a misleading and perhaps overused term that allude to the beginning signs of growth. Like the rest of the world, the United States if far from growth; and what speculators benchmark now is the deceleration in the pace of contraction. Topping the list for potential impact (as it usually does) is the monthly non-farm payrolls report. The consensus from Bloomberg’s survey economists projects another 521,000 jobs lost through May. It is first interesting to note that the spread on expectations has grown to be relatively tight (forecasts range between a 450,000 and 600,000 drop). More important though is the pace of job losses. If this figure prints as expected, it would mark the second month that the rate of payroll reductions slowed and it would be an overall, significant improvement on January’s record breaking 741,000. As the leading indicator for economic health, a steady improvement of this caliber could single-handedly convert a bulk of the market to believers that the world’s largest economy is on track to recovery ahead of its major trade partners.
Nothing to scoff at itself, the rest of the data crossing the wires over the coming week will cover the health of the individual sectors in a little more detail. Consumers – whose spending accounts for 70 percent of the economy – will evaluated through personal income, spending and credit figures. If we are to expect a genuine economic recovery before the end of the year, we should see a turn in these figures relatively soon. From the business side of things, the ISM manufacturing and services sector surveys are due on Monday and Wednesday respectively. The outlook for factory activity has been negative for 15 months now and services seven – though the reversal since the end of 2008 has been relatively aggressive. Finally, the pending home sales figure will be a lagging indicator for the housing market, but consistent improvements from data in this group will eventually pan out to a true revival.
Alone, the round of US data will gauge how the American economy is performing compared to last month, last quarter and last year. However, for currency traders, the Forex market is a relative game in which the pace of US growth and returns must be set against its global counterparts to gauge the strength of the dollar. In this capacity, we must set the dollar against the backdrop of the major releases from other economies next week. The list of notables includes: the RBA, BoC, ECB and BoE rate decisions; Canadian 1Q GDP; Australia 1Q GDP; Swiss 1Q GDP; Canadian employment; and 1Q Japanese capital spending among others. – JK
Best Forex Trading Book
Book Description The first plain-English introduction to foreign currency exchange trading--one of today's hottest profit opportunities The foreign currency market is the largest financial market in the world, and foreign exchange trading is quickly becoming one of today's most high-profile, potentially ...
"For many investors, an intense, 24-hour-a-day, $1.5 trillion roller-coaster of a market spells "danger"; for readers of Forex Revolution, the word is "opportunity." —Michael J. Panzner, vice president, Rabo Securities USA, Inc., and author of The New Laws of the Stock
Bill Williams' pioneering application of chaos theory to the financial markets is leading technical analysis into the twenty-first century and beyond. New Trading Dimensions presents a complete, highly original, and intriguing trading method with clear, detailed illustrations, and challenging practice pages. Bill's wisdom, technical expertise, and skillful teaching style make this a revolutionary must-have new book for stock and commodity traders." —Tom Bierovic, Product Manager for User Education, Omega Research, Inc.o
Forex Forecasting
Basic Forex forecast methods: Technical analysis and fundamental analysis.
This article provides insight into the two major methods of analysis used to forecast the behavior of the Forex market. Technical analysis and fundamental analysis differ greatly, but both can be useful forecast tools for the Forex trader. They have the same goal - to predict a price or movement. The technician studies the effect while the fundamentalist studies the cause of market movement. Many successful traders combine a mixture of both approaches for superior results.
Technical analysis
Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action. Technical analysis is concerned with what has actually happened in the market, rather than what should happen and takes into account the price of instruments and the volume of trading, and creates charts from that data to use as the primary tool. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments simultaneously.
Technical analysis is built on three essential principles:
1. Market action discounts everything! This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. However, the pure technical analyst is only concerned with price movements, not with the reasons for any changes.
2. Prices move in trends Technical analysis is used to identify patterns of market behavior that have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. Also, there are recognized patterns that repeat themselves on a consistent basis.
3. History repeats itself Forex chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little over time.
Forex charts are based on market action involving price. There are five categories in Forex technical analysis theory:
* Indicators (oscillators, e.g.: Relative Strength Index (RSI)
* Number theory (Fibonacci numbers, Gann numbers)
* Waves (Elliott wave theory)
* Gaps (high-low, open-closing)
* Trends (following moving average).
Some major technical analysis tools are described below:
Relative Strength Index (RSI):
The RSI measures the ratio of up-moves to down-moves and normalizes the calculation so that the index is expressed in a range of 0-100. If the RSI is 70 or greater, then the instrument is assumed to be overbought (a situation in which prices have risen more than market expectations). An RSI of 30 or less is taken as a signal that the instrument may be oversold (a situation in which prices have fallen more than the market expectations).
Stochastic oscillator:
This is used to indicate overbought/oversold conditions on a scale of 0-100%. The indicator is based on the observation that in a strong up trend, period closing prices tend to concentrate in the higher part of the period's range. Conversely, as prices fall in a strong down trend, closing prices tend to be near to the extreme low of the period range. Stochastic calculations produce two lines, %K and %D that are used to indicate overbought/oversold areas of a chart. Divergence between the stochastic lines and the price action of the underlying instrument gives a powerful trading signal.
Moving Average Convergence Divergence (MACD):
This indicator involves plotting two momentum lines. The MACD line is the difference between two exponential moving averages and the signal or trigger line, which is an exponential moving average of the difference. If the MACD and trigger lines cross, then this is taken as a signal that a change in the trend is likely.
Number theory:
Fibonacci numbers: The Fibonacci number sequence (1,1,2,3,5,8,13,21,34...) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next larger number is 62%, which is a popular Fibonacci retracement number. The inverse of 62%, which is 38%, is also used as a Fibonacci retracement number.
Gann numbers:
W.D. Gann was a stock and a commodity trader working in the '50s who reputedly made over $50 million in the markets. He made his fortune using methods that he developed for trading instruments based on relationships between price movement and time, known as time/price equivalents. There is no easy explanation for Gann's methods, but in essence he used angles in charts to determine support and resistance areas and predict the times of future trend changes. He also used lines in charts to predict support and resistance areas.
Waves
Elliott wave theory: The Elliott wave theory is an approach to market analysis that is based on repetitive wave patterns and the Fibonacci number sequence. An ideal Elliott wave patterns shows a five-wave advance followed by a three-wave decline.
Gaps
Gaps are spaces left on the bar chart where no trading has taken place. An up gap is formed when the lowest price on a trading day is higher than the highest high of the previous day. A down gap is formed when the highest price of the day is lower than the lowest price of the prior day. An up gap is usually a sign of market strength, while a down gap is a sign of market weakness. A breakaway gap is a price gap that forms on the completion of an important price pattern. It usually signals the beginning of an important price move. A runaway gap is a price gap that usually occurs around the mid-point of an important market trend. For that reason, it is also called a measuring gap. An exhaustion gap is a price gap that occurs at the end of an important trend and signals that the trend is ending.
Trends
A trend refers to the direction of prices. Rising peaks and troughs constitute an up trend; falling peaks and troughs constitute a downtrend that determines the steepness of the current trend. The breaking of a trend line usually signals a trend reversal. Horizontal peaks and troughs characterize a trading range.
Moving averages are used to smooth price information in order to confirm trends and support and resistance levels. They are also useful in deciding on a trading strategy, particularly in futures trading or a market with a strong up or down trend.
The most common technical tools:
Coppock Curve is an investment tool used in technical analysis for predicting bear market lows.
DMI (Directional Movement Indicator) is a popular technical indicator used to determine whether or not a currency pair is trending.
Unlike the fundamental analyst, the technical analyst is not much concerned with any of the "bigger picture" factors affecting the market, but concentrates on the activity of that instrument's market.
Fundamental analysis
Fundamental analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument. In practice, many market players use technical analysis in conjunction with fundamental analysis to determine their trading strategy. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments, whereas the fundamental analyst needs to know a particular market intimately. Fundamental analysis focuses on what ought to happen in a market. Factors involved in price analysis: Supply and demand, seasonal cycles, weather and government policy.
The fundamentalist studies the cause of market movement, while the technician studies the effect. Fundamental analysis is a macro or strategic assessment of where a currency should be trading based on any criteria but the movement of the currency's price itself. These criteria often include the economic condition of the country that the currency represents, monetary policy, and other "fundamental" elements.
Many profitable trades are made moments prior to or shortly after major economic announcements.
Forex Software
Forex trading software helps investors working in the sometimes complicated area of foreign exchange transactions and should be looked at by all serious investors.
Using the older methods of reading hard copy newsletters, magazines and books worked well during its day and age, but today decisions need to be made quickly, and having access to up to date information and the ability to make a trade quickly is something that forex trading software offers the investor and it greatly increases the ability of an investor trader to work the market resulting in profit.
For the investor who is interested in acquiring forex trading software there are many good options. Checking with a financial advisor you trust to see what forex trading software he or she recommends can be a good place to start. Also going online and doing a web search of forex trading software can show many programs available.
Many people when going online will log onto message forums or join online groups that discuss forex trading and see what other traders like to use. Simply posting a message on the group asking what forex trading software is poplar and what the advantages and disadvantages of each program are can add to a person’s knowledge base and allow him or her to make a good decision when purchasing forex trading software.
Remember also that some specific forex trading software programs are available for short free trial periods. Experimenting with several programs will help an investor make a decision as to which forex trading software will offer the options and ease of use desired. This try it before you buy it approach will help a person avoid decisions that might be regretted later
.If, as an investor, you are using one of the many reliable online trading systems, the company that you are working through may have forex trading software they can furnish you. Often this is available for quick and easy download to your home computer and is already set up for optimum operation with the system with which you are working.
If your company does not provide forex trading software they probably have programs that they can recommend, that they and their members have had good luck with in the past. Always ask what forex trading software they recommend before making a purchase.Since the companies that manufacture and market forex trading software are competing for your business their advertisements and websites will list many of the positive features of their product.
They often offer free e-books or free e-zines that provide information on forex trading. If a company is able to provide you with this information take a close and serious look at what they are offering. Consider this a part of your forex trading education, and learn from it. Use it as a way to add to your personal knowledge base and you’ll benefit.
Remember that the many choices of forex trading software are there because individuals involved in forex trading have different needs and different preferences, so learning all you can about a program, and about the forex trading market itself before buying will always pay off.
Forex(FX) Trading Strategy
A forex trading strategy can provide profit for a skilled speculator. A FX trading strategy is, simply put, a method for using foreign exchange rates of currency from various countries to buy one country’s currency when it is undervalued, and exchange it for another country’s currency with it is of normal or higher value, with the difference being profit.
A common forex trading strategy could involve US dollars and the Euro, the official currency of most European countries. To use a simple example of a forex trading strategy, a speculator would buy Euros when they were undervalued; let’s say two Euros equaled one US dollar. This would be unusual because normally the two currencies are almost equal.
By spending one hundred US dollars to buy two hundred Euros a speculator would be able to buy more goods in Germany, France or other European countries. When the market changed and became more even, the speculator would have twice as many goods as he normally would have, and would be able to exchange those goods for US dollars once again.
The difference would be profit. This is a very simple explanation of a forex trading strategy, but gives the basics to the new speculator.Of course, when coming up with a forex trading strategy the trader should only use money that he or she can afford to loose. This is speculation, as opposed to investment. The chances for profit are real, and could come quick but if the market turns the opposite way than expected the trader could actually loose money.
A forex trading strategy can reap large profits, but if anyone tells you that all trades will result in profit, they haven’t studied the market as well as they should have and they are not correct. Still having a sound forex trading strategy for a competent businessman can be a profitable venture. It requires study of the markets, which takes time and is usually best accomplished by reading financial newsletters and using tools available on the Internet.
Getting the advice of a professional forex trading strategy specialist can also be a sound choice. Professionals have the time, education and skills and can generally help a trader come up with a forex trading strategy that will result in profit more often than one could do without their help.The most sound forex trading strategy options are generally used by large multinational corporations who are often able to make steady profits.
Watching what large corporations do who are involved in forex trading, looking for patterns they may have set, can help a trader to get the benefit of the very expensive expertise used by these large companies. Making watching of the large traders a part of a person’s education is definitely a good place to start a forex trading education. Identifying the state of the market, determining the time frame you are working in, and the currencies that have fluctuation and getting the advice of professionals through self study can be the wisest forex trading strategy option available.
Learn Forex Trading and Multiply Your Wealth
To many people that sounds amazing, and perhaps it is. It can be very profitable for investors and fortunes have been made by many. The incentive to learn forex trading is the oldest incentive by far, the incentive to make profit. If you learn forex trading you are learning how to make your money make more money for you, the goal of all investors.
If you choose to learn forex trading online you are not alone since thousands of people choose this method every year. If you learn forex trading online you have the benefit of choosing an instructor from almost anywhere in the world, or to choose multiple instructors.
When you learn forex trading in this fashion your virtual classmates could be from England, Hong Kong, Singapore, Paris, or any other exotic locale that you may have only read about in the past.
Obviously this diversity of culture and knowledge will be beneficial. During online chats and student discussions questions will be raised that you may not have thought of yourself, and you’ll be able to benefit by hearing the answers.
The ultimate goal of forex trading is to trade currency in a consistent manner that will result in profit. For instance, buying Euros with US dollars and then selling the Euros for more than you gave for them when the market changes.
This is the oldest rule of business, buy low and sell high. If you learn forex trading you’ll be able to do this on a scale you never would have thought possible, limited only by the amount of investment funds you have and by market conditions.
Trading characteristics
There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called Fxmarketspace opened in 2007 and aspired but failed to the role of a central market clearing mechanism.
The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.
The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.
On the spot market, according to the BIS study, the most heavily traded products were:
and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (17.0%), and sterling (15.0%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the buyers.
Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EUR/USD and USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also
| Rank | Currency | ISO 4217 code (Symbol) | % daily share (April 2007) |
|---|---|---|---|
| 1 |  United States dollar | USD ($) | 86.3% |
| 2 |  Euro | EUR (€) | 37.0% |
| 3 |  Japanese yen | JPY (¥) | 17.0% |
| 4 |  Pound sterling | GBP (£) | 15.0% |
| 5 |  Swiss franc | CHF (Fr) | 6.8% |
| 6 |  Australian dollar | AUD ($) | 6.7% |
| 7 |  Canadian dollar | CAD ($) | 4.2% |
| 8-9 |  Swedish krona | SEK (kr) | 2.8% |
| 8-9 |  Hong Kong dollar | HKD ($) | 2.8% |
| 10 |  Norwegian krone | NOK (kr) | 2.2% |
| 11 |  New Zealand dollar | NZD ($) | 1.9% |
| 12 |  Mexican peso | MXN ($) | 1.3% |
| 13 |  Singapore dollar | SGD ($) | 1.2% |
| 14 |  South Korean won | KRW (₩) | 1.1% |
| Other | 14.5% | ||
| Total | 200% | ||
increased.
Determinants of FX Rates
he following theories explain the fluctuations in FX rates in a floating exchange rate regime (In a fixed exchange rate regime, FX rates are decided by its government):
(a) International parity conditions viz; purchasing power parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world.
(b) Balance of payments model (see exchange rate). This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit.
(c) Asset market model (see exchange rate) views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by people’s willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.”
None of the models developed so far succeed to explain FX rates levels and volatility in the longer time frames. For shorter time frames (less than a few days) algorithm can be devised to predict prices. Large and small institutions and professional individual traders have made consistent profits from it. It is understood from above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.
Economic factors
These include: (a)economic policy, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators.
- Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
- Economic conditions include:
- Government budget deficits or surpluses
- The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
- Balance of trade levels and trends
- The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
- Inflation levels and trends
- Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising [. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.
- Economic growth and health
- Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.
- Productivity of an economy
- Increasing productivity in an economy should positively influence the value of its currency. It affects are more prominent if the increase is in the traded sector [3].
Option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.
Speculation
Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do.[16] Other economists such as Joseph Stiglitz consider this argument to be based more on politics and a free market philosophy than on economics.[17]
Large hedge funds and other well capitalized "position traders" are the main professional speculators.
Currency speculation is considered a highly suspect activity in many countries.[where?] While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the krona.[18] Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.
Gregory J. Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.[19]
In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and foreign exchange speculators allegedly made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions. Given that Malaysia recovered quickly after imposing currency controls directly against IMF advice, this view is open to doubt.
Exchange-Traded Fund
Exchange-traded funds (or ETFs) are open ended investment companies that can be traded at any time throughout the course of the day. Typically, ETFs try to replicate a stock market index such as the S&P 500 (e.g., SPY), but recently they are now replicating investments in the currency markets with the ETF increasing in value when the US Dollar weakens versus a specific currency, such as the Euro. Certain of these funds track the price movements of world currencies versus the US Dollar, and increase in value directly counter to the US Dollar, allowing for speculation in the US Dollar for US and US Dollar denominated investors and speculators.
Market size and liquidity
The foreign exchange market is unique because of
-
- its trading volumes,
- the extreme liquidity of the market,
- its geographical dispersion,
- its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday),
- the variety of factors that affect exchange rates.
- the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
- the use of leverage
As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the Bank for International Settlements,[2] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:
-
- $1.005 trillion in spot transactions
- $362 billion in outright forwards
- $1.714 trillion in foreign exchange swaps
- $129 billion estimated gaps in reporting
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.[4] In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.
Exchange-traded FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.
Several other developed countries also permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Most emerging countries do not permit FX derivative products on their exchanges in view of prevalent controls on the capital accounts. However, a few select emerging countries (e.g., Korea, South Africa, India—[1]; [2]) have already successfully experimented with the currency futures exchanges, despite having some controls on the capital account.
FX futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
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 have made it easier for retail traders to trade in the foreign exchange market. In 2006, retail traders constituted over 2% of the whole FX market volumes with an average daily trade volume of over US$50-60 billion (see retail trading platforms).[6] 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 34.1% in April 2007. The ten most active traders account for almost 80% of trading volume, according to the 2008 Euromoney FX survey.[3] 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 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of base currency, which is a standard "lot".
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 3 pips wide (i.e., 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips.
Foreign exchange market
The foreign exchange market (currency, forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. [1]FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when worldover countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.
Presently, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements.[2] Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.[3]
The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, etc., and the need for trading in such currencies.
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