Most people give very little attention to money & risk management aspects when it comes to stock trading. And to those who do, it is only treated as an after-thought.
In most cases, huge emphasis is given to analysis and techniques of assessing trading opportunities.
The following is a summary of 6 steps money & risk management strategies that have served me well over the years. They had saved me from being poor while at the same time gave me space to fine-tune and modify my trading approaches and got back what I’ve lost in the market. Now I’m not saying they are the only ones available in the market. It’s just that they are the ones that have been useful and profitable to me. And just what are the 6 STEPS? Well, read on!
STEP 1 – TRADING BULLETS
No money, no trade! No argument there! You need to set aside some money just for trading purposes. Just like what you would do when you set aside your money for children’s education, emergency fund, etc. You should not, must not, borrow money from anybody (banks included!) just because you have that burning ambition to bring in huge rewards from trading.
Don’t have enough money? Start saving. If you cannot even do this, then you’re not ready for trading. Period.
Never do a Hail Mary and dump everything that you have in one single trade, no matter how much you love THAT stock! Don’t be a Rambo in the stock market! Those who do not bother about money management are the ones who would dump all their money in one single trade. Don’t put all your eggs in one basket.
STEP 2 – RISKY BUSINESS
Trading success depends on how you manage risk. It’s NOT based on how you choose your stock.
Every Tom, Dick & Harry talks about risk control. But most of them still lose money! Good trading means you lose only a small amount of money.
First and foremost, you need to know your risk tolerance. In other words, you must identify where your stress point is. How much money can you afford to lose without losing your sleep? How much money are you willing to lose in a single trade? These are some of the questions that you need to ask yourself in order to determine your risk threshold.
Risk can be controlled and minimized to a level that is comfortable to you.
STEP 3 – WHEN TO BUY
When do you jump into a trade? The simple answer is that it depends on the trading plan that you follow. There is no right or wrong answer. Whether or not you make money out of it will only be known after you have sold your shares. It is not uncommon that a sell signal to me may be a buy signal for you and we both still earn profits from our own trading systems. Anytime is a good time to buy as long as the conditions are in accordance with your trading system.
There are as many trading systems or plans as there are the traders themselves. Within the technical analysis fraternity alone, there are the trend followers, breakout traders, momentum chasing players, day traders etc. Some traders would buy on price weaknesses, uptrend breakouts and rebounds. The trend followers would join in when they feel it is safe to hop on-board the moving trend train.
Many traders spend considerable amount of time in deciding when to enter a trade. My view is that setting exit conditions is MORE IMPORTANT than entry conditions! Why? It’s the exit price that determines your overall risk and profit! It is for this reason that I spend more time defining the exit conditions for each of the trade that I intend to take rather than the entry conditions.
STEP 4 – STOP LOSS (EXIT CONDITION)
In property, the most important thing to remember is location, location, and location. In the stock market, its stop loss, stop loss & stop loss! Identify stop loss conditions before you enter trade. This is your insurance if you’re wrong about the trade.
The ultimate role of stop loss is to protect capital and later, to protect profit as the trade progresses.
Not cutting losses is actually one of the biggest mistakes that traders make. Coming a close second is the mistake of not letting your profits run.
Stocks do their own thing, not what we think they should do.
Suppress the urge to be “right” – focus on the need to be disciplined when executing your trading plan. Lose your opinion – not your money!
Most importantly, choose a stop that you would definitely act on!
STEP 5 – POSITION SIZE
It’s inevitable that you’re going to lose money from time to time in this business. Everybody does! But what separates the pros from the boys is that the pros minimize their losses and maximize their profits. The retail crowd would do exactly the opposite – let the losses run and cut their profits short!
If you’re still new in the stock market and lack trading experience, it is absolutely important for you to know how to control and minimize risk effectively whilst you go over the learning curve.
And just how do you minimize the risk? One way is by simply reducing your position size, which is the number of shares that you intend to buy. Don’t bite more than you can chew. Fact is, the traders who win are those who minimize risk. And those who don’t? They pay the price and get wiped out.
In fact, it’s a good idea to trade in small position sizes when you’re new in trading. I also keep my position size small whenever I want to test out a new trading approach. If it bombs out, that’s OK as I’ve already planned for it. I consider that as “service charge” by Mr. Market for giving me such “advisory” service!
Ultimately, your intended or actual position size would depend on the level of risk that you’re prepared to take.
STEP 6 – RISK REWARD RATIO
The purpose of using risk reward ratio is to assess whether the intended trade is worth taking the risk. This analysis tool is useful when you have already identified a sell price target for a particular stock that you want to trade.
Let’s use an example to calculate the risk reward ratio. Suppose you have set your entry price at $7.00. Your stop loss is set at $6.34. And you have made up your mind that you want to sell this stock once it hits $10.00 (your sell price target). The calculation of the risk reward ratio would be as follows:
Risk Reward Ratio = (Sell Price – Entry Price)/(Entry Price – Stop Loss)
= (10 – 7)/(7 –6.34) = 4.55
Stocks that have ratios greater than 2 are potential trading candidates. Better trading candidates are those that have ratios greater than 3.
Risk reward ratio can also be used as screening criteria for trading candidates.
Thursday, December 17, 2009
The Most Popular Forex Entry Strategies
The Forex markets move. In a market with significant and consistent movement, using a breakout strategy is very appropriate. As with any strategy, there is a right way to understand and use a strategy and a wrong way. In this piece, I will discuss the two most popular breakout entry methods – the Support and Resistance Breakout and Trend Line Breakout.
Support and Resistance Breakout
Once in a while, I hear someone say that breakout trading worked best in the late 1990s in the stock market. Well, someone who learned to trade in the late ‘90s and who does not understand breakout trading might say that. In those days, you could buy anything at almost any time or price and make money. Today, breakout trading is where you see most of the money being made in Forex trading by those who truly understand the structure behind a true breakout.
Recently, my articles have been focused on various strategies I have seen traders using and finding success with. In this article, we will look at far and away the most popular entry strategy, the “breakout.”
The above chart shows the EUR/USD. Notice the horizontal resistance line on the chart and let's work left to right in our understanding of what is really happening behind the candles in this chart. The first circled pivot high on the left becomes a pivot high because supply in this market exceeded demand at that price level. When price reached the line, some of the sellers making up supply at that price get to sell, but there is still much more supply than demand so price has to fall to a lower level.
The drop from the first circled area was significant, as we would expect. The second time price revisited the resistance level, it declined again but this time, the decline was shallow compared to the first time. This was because each time the resistance level is revisited, more sellers that make up supply get to sell, so the supply and demand equation is becoming more balanced.
The analogy here is ‘chopping down a tree’ (not a great example, I know). With each chop, ‘mass’ is removed from the ‘tree’ and the tree becomes more likely to fall. In trading, the ‘mass’ is ‘supply and demand.’ Moving left to right, price comes back to that level a third time and falls once again, but the decline is shallow suggesting that there are not as many sellers remaining at that price level.
Next, price revisits the price level a fourth time but, instead of declining from that level, it bases sideways suggesting there are no longer more sellers than buyers. This is when you get ready to buy because in Forex trading (and any other market for that matter), price is likely to move higher. One would feel comfortable taking a low risk entry on a breakout here as the objective price action tells us that there are simply few sellers if any left at the resistance price level.
Does every trade work? Of course not – we are talking about trading here! This is why it is so important to understand what is driving the movement of the candles. This helps you understand the structure of a breakout. For a short position, we would just do the opposite of what I am suggesting here. If you want to see an example of a shorting opportunity, print this page out and turn it upside down.
The Trend Line Breakout
Trend line breakouts and breakdowns are a very popular entry strategy in Forex and other markets. Much of the time, this is the only type of entry a student will practice in class all week long because they become comfortable with it as it is simple to understand and can produce some strong moves.
This is another chart of the EUR/USD currency pair. The down trend line is drawn using two points on the chart, which is what is always required when drawing trend lines. Once the two points are evident and the trend line is drawn, simply wait for price to breakout above the line for a long entry. The logic here is that price is trending down because it is at price levels where supply exceeds demand.
We want to buy this market when it reaches a price level where demand exceeds supply (more buyers than sellers). Instead of trying to guess at where this might be, the price action on the chart will tell us where this price level is if we just wait and watch. When price eventually breaks out above that down trend line, it happens because it has reached a price level where there are more willing buyers (demand) than sellers (supply). This is where we would want to take a low risk entry and buy.
While there are many profit taking targets, one logical target for profit is the origin of the decline in price that started the whole downtrend in the first place. This is shown as the dashed red line on the previous chart.
The above chart shows a steep uptrend in the price action and our uptrend line. Instead of guessing as to where this dramatic advance in price might end or at what price level all the supply is resting, draw an uptrend line by connecting the pivot lows and look to sell short on a breakout (breakdown in this case) of that line. As in the last example, a natural target can be the origin of that rally in price as shown by the dashed red horizontal line on the bottom of this chart.
Keep in mind that the most important part of trading is the proper management of risk. The focus of this piece has been to help with market entry as that is the beginning of a good risk-averse strategy. The breakout entries discussed in this article are equally appropriate in any and all markets so do not think this is just for Forex.
Never forget, whether the market candles on a screen represent a chart of stocks, futures, Forex currencies, options, football trading cards, rare coins or anything tradable… they are all just people and price. A breakout in price would be quantified the same way in any and all of these markets. If you are watching the buying and selling of a David Beckham rookie card and see that the last one available at the current price level just sold, what is about to happen to price?
excerpt from forexjournal.com
Support and Resistance Breakout
Once in a while, I hear someone say that breakout trading worked best in the late 1990s in the stock market. Well, someone who learned to trade in the late ‘90s and who does not understand breakout trading might say that. In those days, you could buy anything at almost any time or price and make money. Today, breakout trading is where you see most of the money being made in Forex trading by those who truly understand the structure behind a true breakout.
Recently, my articles have been focused on various strategies I have seen traders using and finding success with. In this article, we will look at far and away the most popular entry strategy, the “breakout.”
The above chart shows the EUR/USD. Notice the horizontal resistance line on the chart and let's work left to right in our understanding of what is really happening behind the candles in this chart. The first circled pivot high on the left becomes a pivot high because supply in this market exceeded demand at that price level. When price reached the line, some of the sellers making up supply at that price get to sell, but there is still much more supply than demand so price has to fall to a lower level.
The drop from the first circled area was significant, as we would expect. The second time price revisited the resistance level, it declined again but this time, the decline was shallow compared to the first time. This was because each time the resistance level is revisited, more sellers that make up supply get to sell, so the supply and demand equation is becoming more balanced.
The analogy here is ‘chopping down a tree’ (not a great example, I know). With each chop, ‘mass’ is removed from the ‘tree’ and the tree becomes more likely to fall. In trading, the ‘mass’ is ‘supply and demand.’ Moving left to right, price comes back to that level a third time and falls once again, but the decline is shallow suggesting that there are not as many sellers remaining at that price level.
Next, price revisits the price level a fourth time but, instead of declining from that level, it bases sideways suggesting there are no longer more sellers than buyers. This is when you get ready to buy because in Forex trading (and any other market for that matter), price is likely to move higher. One would feel comfortable taking a low risk entry on a breakout here as the objective price action tells us that there are simply few sellers if any left at the resistance price level.
Does every trade work? Of course not – we are talking about trading here! This is why it is so important to understand what is driving the movement of the candles. This helps you understand the structure of a breakout. For a short position, we would just do the opposite of what I am suggesting here. If you want to see an example of a shorting opportunity, print this page out and turn it upside down.
The Trend Line Breakout
Trend line breakouts and breakdowns are a very popular entry strategy in Forex and other markets. Much of the time, this is the only type of entry a student will practice in class all week long because they become comfortable with it as it is simple to understand and can produce some strong moves.
This is another chart of the EUR/USD currency pair. The down trend line is drawn using two points on the chart, which is what is always required when drawing trend lines. Once the two points are evident and the trend line is drawn, simply wait for price to breakout above the line for a long entry. The logic here is that price is trending down because it is at price levels where supply exceeds demand.
We want to buy this market when it reaches a price level where demand exceeds supply (more buyers than sellers). Instead of trying to guess at where this might be, the price action on the chart will tell us where this price level is if we just wait and watch. When price eventually breaks out above that down trend line, it happens because it has reached a price level where there are more willing buyers (demand) than sellers (supply). This is where we would want to take a low risk entry and buy.
While there are many profit taking targets, one logical target for profit is the origin of the decline in price that started the whole downtrend in the first place. This is shown as the dashed red line on the previous chart.
The above chart shows a steep uptrend in the price action and our uptrend line. Instead of guessing as to where this dramatic advance in price might end or at what price level all the supply is resting, draw an uptrend line by connecting the pivot lows and look to sell short on a breakout (breakdown in this case) of that line. As in the last example, a natural target can be the origin of that rally in price as shown by the dashed red horizontal line on the bottom of this chart.
Keep in mind that the most important part of trading is the proper management of risk. The focus of this piece has been to help with market entry as that is the beginning of a good risk-averse strategy. The breakout entries discussed in this article are equally appropriate in any and all markets so do not think this is just for Forex.
Never forget, whether the market candles on a screen represent a chart of stocks, futures, Forex currencies, options, football trading cards, rare coins or anything tradable… they are all just people and price. A breakout in price would be quantified the same way in any and all of these markets. If you are watching the buying and selling of a David Beckham rookie card and see that the last one available at the current price level just sold, what is about to happen to price?
excerpt from forexjournal.com
Thursday, December 10, 2009
What Is Day Trading?
We often hear the term ‘day trading’ today but just what is day trading?
In very simple terms a day trader buys and sells with a very short investment horizon which is typically measured in minutes with trading positions being opened and closed within the same trading day. Day trading is particularly suited to high volume, volatile markets such as the Forex but is certainly not limited to currency trading. It is for example very commonly seen in the equity markets, although it tends to be seen on the more volatile exchanges such as the NASDAQ, rather than the NYSE or AMEX.
The principle is simply to spot an opportunity and then profit from it quickly getting in and out of the market with just enough time to make your profit and too little time to risk the market turning against you. For example, you might open a position at 11:00 am and close it out just a few minutes later at 11:07 am to take a small but quick profit and repeat this process as many as a hundred times in a single trading session.
Today this traditional definition has been widened somewhat and we now also refer to the practice of trading from home through an online broker as day trading. And, just to complicate matters, the term ’swing trading’ has also started to appear recently to refer to traders with a slightly longer investment horizon of anywhere from one to five days.
Day trading in its truest form (buying and selling with a very short investment horizon) is a risky business and is not something which you should try unless you know exactly what you are doing as, while it can be very profitable, it can also produce very large losses very quickly.
Although we talk about ‘investment horizons’ it also needs to be understood that day trading is not the same as investing and you will be working to very short time frames during which you will need to be glued to your computer screen jumping onto the wave of a trade as it gains momentum and the jumping off as it crests in order to ride the next wave. Spotting the waves as they roll in and knowing just when to jump on and jump off requires both skill and practice.
For those who enjoy the excitement of the roller coaster ride then day trading can be both exciting and profitable but it is not something for the novice forex trader and should only be contemplated once you have cut your teeth in the world of currency trading and gained a fair amount of experience.
by http://learningforextradingonline.com/forex-questions
In very simple terms a day trader buys and sells with a very short investment horizon which is typically measured in minutes with trading positions being opened and closed within the same trading day. Day trading is particularly suited to high volume, volatile markets such as the Forex but is certainly not limited to currency trading. It is for example very commonly seen in the equity markets, although it tends to be seen on the more volatile exchanges such as the NASDAQ, rather than the NYSE or AMEX.
The principle is simply to spot an opportunity and then profit from it quickly getting in and out of the market with just enough time to make your profit and too little time to risk the market turning against you. For example, you might open a position at 11:00 am and close it out just a few minutes later at 11:07 am to take a small but quick profit and repeat this process as many as a hundred times in a single trading session.
Today this traditional definition has been widened somewhat and we now also refer to the practice of trading from home through an online broker as day trading. And, just to complicate matters, the term ’swing trading’ has also started to appear recently to refer to traders with a slightly longer investment horizon of anywhere from one to five days.
Day trading in its truest form (buying and selling with a very short investment horizon) is a risky business and is not something which you should try unless you know exactly what you are doing as, while it can be very profitable, it can also produce very large losses very quickly.
Although we talk about ‘investment horizons’ it also needs to be understood that day trading is not the same as investing and you will be working to very short time frames during which you will need to be glued to your computer screen jumping onto the wave of a trade as it gains momentum and the jumping off as it crests in order to ride the next wave. Spotting the waves as they roll in and knowing just when to jump on and jump off requires both skill and practice.
For those who enjoy the excitement of the roller coaster ride then day trading can be both exciting and profitable but it is not something for the novice forex trader and should only be contemplated once you have cut your teeth in the world of currency trading and gained a fair amount of experience.
by http://learningforextradingonline.com/forex-questions
Money Management Principles
Trade With Sufficient Captial
One of the worst blunders that forex traders can make is attempting to trade without sufficient capital.
The trader with limited capital not only will be a worried trader, always looking to minimize losses beyond the point of realistic trading, but he will also frequently be taken out of the trading game before he can realize any sense of success trading the method(s) or patterns.
Exercise Discipline
Discipline is probably one of the most overused words in forex trading education. However, despite the clich¨¦, discipline continues to be the most important behaviour one can master to become a profitable trader. Discipline is the ability to plan your work and work your plan.
It¡¯s the ability to give your trade the time to develop without hastily taking yourself out of the market simply because you are uncomfortable with risk. Discipline is also the ability to continue to trade the methods and patterns even after you¡¯ve suffered losses. Do your best to cultivate the degree of discipline required to be a world-class trader.
Employ Risk-to-Reward Ratios
The following shows you possible risk-to reward ratios, and the win ratios required to break even in a trading system.
Risk-to-Reward Ratio (in pips)and Win Ratio Required to Break Even(%)
40/20 (2 to 1) = 67%, 40/40 (1 to1) = 50%, 40/60 (1 to 1.5) = 40%,
40/80 (1 to 2) = 33.5%,
60/20 (3 to 1) = 75%,
60/60 (1 to 1) = 50%,
60 /90 (1 to 1.5) = 40%,
60/120 (1 to 2) = 33.5%
Important Note
Never risk more pips on a trade then you plan to make. It doesn¡¯t make sense to risk 100 pips in order to make only 10. Why? See below example.
Profit taking level (pips): 10
Stop used or pips at risk: 100
You win 10 times which makes 100 winning pips. You ONLY lose once and have to give back all profits!!!
This type of trading makes no sense and you will lose on the long term guaranteed!
About the Author
Toby Smitz - Daily Operations Forex Trading with free education
One of the worst blunders that forex traders can make is attempting to trade without sufficient capital.
The trader with limited capital not only will be a worried trader, always looking to minimize losses beyond the point of realistic trading, but he will also frequently be taken out of the trading game before he can realize any sense of success trading the method(s) or patterns.
Exercise Discipline
Discipline is probably one of the most overused words in forex trading education. However, despite the clich¨¦, discipline continues to be the most important behaviour one can master to become a profitable trader. Discipline is the ability to plan your work and work your plan.
It¡¯s the ability to give your trade the time to develop without hastily taking yourself out of the market simply because you are uncomfortable with risk. Discipline is also the ability to continue to trade the methods and patterns even after you¡¯ve suffered losses. Do your best to cultivate the degree of discipline required to be a world-class trader.
Employ Risk-to-Reward Ratios
The following shows you possible risk-to reward ratios, and the win ratios required to break even in a trading system.
Risk-to-Reward Ratio (in pips)and Win Ratio Required to Break Even(%)
40/20 (2 to 1) = 67%, 40/40 (1 to1) = 50%, 40/60 (1 to 1.5) = 40%,
40/80 (1 to 2) = 33.5%,
60/20 (3 to 1) = 75%,
60/60 (1 to 1) = 50%,
60 /90 (1 to 1.5) = 40%,
60/120 (1 to 2) = 33.5%
Important Note
Never risk more pips on a trade then you plan to make. It doesn¡¯t make sense to risk 100 pips in order to make only 10. Why? See below example.
Profit taking level (pips): 10
Stop used or pips at risk: 100
You win 10 times which makes 100 winning pips. You ONLY lose once and have to give back all profits!!!
This type of trading makes no sense and you will lose on the long term guaranteed!
About the Author
Toby Smitz - Daily Operations Forex Trading with free education
Successful Forex Day Trading Strategies
The majority of Forex Trading Systems that are used by beginner traders are focused towards short term trading strategies, which aim to take small risk and promise to pile up massive profits and regular income. So we will look at how to succeed.
The major challenges that Forex day trader face are the following:
There are millions and millions of individuals will all different views, skills, knowledge, who think very differently so what Forex Trading System can predict reliably what will happen in the next minute, next hour or next day?
Lets be honest not one of them can reliably predict this.
From experience this is simply the silliest way to be trading forex, with all of the differences and variables it is impossible to know what is going to happen in the coming minutes, hours, days, and here is why.
Fact: All volatility in short term time frames is random and you cannot get the odds on your side, you can't win long term it is as simple as that!
Most of the forex day trading strategies, systems that have ever been purchased have ever made any really gains, sometimes random luck will see people profit. Most of them show back tests of the past, this is easy to show positive as you already know the outcome and can adjust the test accordingly.
Most of the systems are just incredibly brilliant sales pitches that work on peoples greed, and create a good story like Mary Poppins.
All is not lost you can win Best Forex Broker, but it is not as simple as turning on computer and putting in a program, it does take some skill and knowledge. You need to get the odds stacked in your favor and one strategy to be able to do this is through swing trading or long term trend following. Remember trend is your friend, so if you follow your system it can mean big profits if you have a great forex system and have the knowledge to be able to do it.
Do not make the mistake of day trading or forex scalping, get the right Forex education and trade long term and you can soon be enjoying currency trading success to get more Free Education feel free to visit the CFD FX REPORT they can provide you with valuable education lessons and help you find the Best Forex Broker in the Market.
Happy Trading
About the Author
The major challenges that Forex day trader face are the following:
There are millions and millions of individuals will all different views, skills, knowledge, who think very differently so what Forex Trading System can predict reliably what will happen in the next minute, next hour or next day?
Lets be honest not one of them can reliably predict this.
From experience this is simply the silliest way to be trading forex, with all of the differences and variables it is impossible to know what is going to happen in the coming minutes, hours, days, and here is why.
Fact: All volatility in short term time frames is random and you cannot get the odds on your side, you can't win long term it is as simple as that!
Most of the forex day trading strategies, systems that have ever been purchased have ever made any really gains, sometimes random luck will see people profit. Most of them show back tests of the past, this is easy to show positive as you already know the outcome and can adjust the test accordingly.
Most of the systems are just incredibly brilliant sales pitches that work on peoples greed, and create a good story like Mary Poppins.
All is not lost you can win Best Forex Broker, but it is not as simple as turning on computer and putting in a program, it does take some skill and knowledge. You need to get the odds stacked in your favor and one strategy to be able to do this is through swing trading or long term trend following. Remember trend is your friend, so if you follow your system it can mean big profits if you have a great forex system and have the knowledge to be able to do it.
Do not make the mistake of day trading or forex scalping, get the right Forex education and trade long term and you can soon be enjoying currency trading success to get more Free Education feel free to visit the CFD FX REPORT they can provide you with valuable education lessons and help you find the Best Forex Broker in the Market.
Happy Trading
About the Author
Forex Trading Strategy - A Simple Timeless Method For Huge Gains
The Forex trading strategy enclosed can be learned in a few weeks and can make you huge profits in around 30 minutes a day. It's easy to understand and have confidence in so let's take a look at it.
The methodology we are going to look at here is long term trend following with breakouts.
The one constant in Forex markets is they will trend for long periods of time in a sustained direction and as these trends reflect the underlying health of the economy, they will last for weeks months or years. If you can lock into these trends and hold them, with leverage on your side, you can make a lot of money but how do you get in on these trends and ride them?
The best way to get in on any trend is to buy a break of support or resistance, to a new chart high or low. You generally, want a level that has been tested at least twice and the more times the better. What you are looking for is a level which the traders consider important.
If the break is a good one the following will occur:
As soon as the level is penetrated, stops behind the level are hit and push the price further in favour of the breakout, technical buying kicks in and pushes the price further from the breakout point and then as the new trend develops retail buyers want to get on board pushing the trend even further.
It sounds simple and logical and it is but most traders have a problem with taking breakouts and it's rooted in their psychology. When the break occurs they think, I have missed the start of the move, so better wait for a pullback to get in but the really big breakouts don't come back, the trend develops and the trader who waited misses the move.
The trader who simply bought the beak, missed the first bit of the move but he has the odds on his side of a continuation of the trend and stands to make money.
Most traders want to predict and buy tops and bottoms and be perfect but that's impossible, if they focused purely on making money, they would see the logic of breakouts which is simply trade the reality of price change and forget prediction.
When trading breakouts, you need to be patient and wait for the best trading signals. You need to pick levels which have been tested several times and are considered important by traders.
Breakout trading can be done easily, by anyone and doesn't take long to learn. You can put together a simple, breakout strategy together in a week or so and then start enjoying currency trading success.
I know traders who trade just a few times a month, spend 30 minutes a day, on their Forex trading strategy and make triple digit annual gains. Discover breakout trading and you will have a simple, easy to understand and timeless way to make big profits.
About the Author
NEW! 2 X FREE ESSENTIAL TRADER PDFS ESSENTIAL FOREX TRADING COURSE For free 2 x trading Pdf's, with 50 of pages of essential Forex info and more advice on Profitable Forex Trading visit our website at: http://www.learncurrencytradingonline.com
The methodology we are going to look at here is long term trend following with breakouts.
The one constant in Forex markets is they will trend for long periods of time in a sustained direction and as these trends reflect the underlying health of the economy, they will last for weeks months or years. If you can lock into these trends and hold them, with leverage on your side, you can make a lot of money but how do you get in on these trends and ride them?
The best way to get in on any trend is to buy a break of support or resistance, to a new chart high or low. You generally, want a level that has been tested at least twice and the more times the better. What you are looking for is a level which the traders consider important.
If the break is a good one the following will occur:
As soon as the level is penetrated, stops behind the level are hit and push the price further in favour of the breakout, technical buying kicks in and pushes the price further from the breakout point and then as the new trend develops retail buyers want to get on board pushing the trend even further.
It sounds simple and logical and it is but most traders have a problem with taking breakouts and it's rooted in their psychology. When the break occurs they think, I have missed the start of the move, so better wait for a pullback to get in but the really big breakouts don't come back, the trend develops and the trader who waited misses the move.
The trader who simply bought the beak, missed the first bit of the move but he has the odds on his side of a continuation of the trend and stands to make money.
Most traders want to predict and buy tops and bottoms and be perfect but that's impossible, if they focused purely on making money, they would see the logic of breakouts which is simply trade the reality of price change and forget prediction.
When trading breakouts, you need to be patient and wait for the best trading signals. You need to pick levels which have been tested several times and are considered important by traders.
Breakout trading can be done easily, by anyone and doesn't take long to learn. You can put together a simple, breakout strategy together in a week or so and then start enjoying currency trading success.
I know traders who trade just a few times a month, spend 30 minutes a day, on their Forex trading strategy and make triple digit annual gains. Discover breakout trading and you will have a simple, easy to understand and timeless way to make big profits.
About the Author
NEW! 2 X FREE ESSENTIAL TRADER PDFS ESSENTIAL FOREX TRADING COURSE For free 2 x trading Pdf's, with 50 of pages of essential Forex info and more advice on Profitable Forex Trading visit our website at: http://www.learncurrencytradingonline.com
Thursday, December 3, 2009
Trading news- Good or Bad
Hi forex traders,
Trading news is one of the dangerous adventure i dont advise forex novice to embark on.Before entry a trade, forex trader should look up for the news that are coming out for the day at one of these forex news site, preferable forex factory. if you in trade and there are very important news that want to come out, you should kindly exit your trade and continue whenever the news as come and gone.
Do not trade the news if you are not expert because the news can wipe away all your hard earn income you have earned. the chart above shows the unemployment claims that came out this afternoon 2:30GMT and the candlestick first came dowm momentarily from 1.51207 to 1.50823 about 38pips for the first three minute and later reverse back to 1.51403. that is whipsaw which can cause havoc on beginners trading capital. I trade the news and make just $300 and within two minute, i exit the trade and added my profit to my capital.
to your success.
David Olushina
Trading news is one of the dangerous adventure i dont advise forex novice to embark on.Before entry a trade, forex trader should look up for the news that are coming out for the day at one of these forex news site, preferable forex factory. if you in trade and there are very important news that want to come out, you should kindly exit your trade and continue whenever the news as come and gone.
Do not trade the news if you are not expert because the news can wipe away all your hard earn income you have earned. the chart above shows the unemployment claims that came out this afternoon 2:30GMT and the candlestick first came dowm momentarily from 1.51207 to 1.50823 about 38pips for the first three minute and later reverse back to 1.51403. that is whipsaw which can cause havoc on beginners trading capital. I trade the news and make just $300 and within two minute, i exit the trade and added my profit to my capital.
to your success.
David Olushina
Thursday, November 26, 2009
Trading lesson from expert
Those of you who have taken one of our DailyFX Courses know that the instructors always recommend trading in the direction of the trend on the daily chart. If the trend is up, then only look for buys and if the trend is down, then only look for sells.
This includes those situations where you have identified a trading opportunity using a chart pattern. On the daily chart of the GBP/CHF below, I have identified two Double Tops and a Range Bound situation.
Many traders look for these patterns on a chart as solid trading opportunities. They will try to sell Double Tops (and buy Double Bottoms) and wait for a breakout of the range with the intention of entering into a trade in the direction of that breakout. But we still recommend using the direction of the trend as a directional bias on your trades even in these situations. When a market pulls back off of an all-time high and then starts to move back up to new all-time highs, there will be a period of time when the market looks like a potential double top. However, selling all-time highs or buying all-time lows is really not an approach that will lead to consistent profits. We should be looking to buy a market that is at or near all-time highs, not try to predict the end of the trending move. Our preferred play is to sell Double Tops in a downtrend and buy Double Bottoms in an uptrend. On the chart below are two examples of what that looks like. Many traders will sell as the market moves down through the support low between the two highs as that serves as some confirmation that it is indeed a Double Top. Selling as the market moves down through that low and placing your protective stop above the Double Top represents a solid trading opportunity.
Since we are looking at a market in a downtrend, we can also see how that trend may determine the direction of a break out of a trading range. When a market moves into a range bound situation, many times it is because traders are waiting for a news event before putting on new positions. More often than not, that news event just confirms the direction of the trend and breaks out of the range in that same direction. So markets that are moving down and then move into a range will more often than not, break down through support. Markets that are moving up and then move into a range will more often than not, break out up through resistance. Otherwise, markets have a tendency to break out of a range in the same direction it was trading in before going into the range. “More often than not” does not mean every time, but does offer a professional enough of an edge to use as the basis of a solid approach to trading.
DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.
This includes those situations where you have identified a trading opportunity using a chart pattern. On the daily chart of the GBP/CHF below, I have identified two Double Tops and a Range Bound situation.
Many traders look for these patterns on a chart as solid trading opportunities. They will try to sell Double Tops (and buy Double Bottoms) and wait for a breakout of the range with the intention of entering into a trade in the direction of that breakout. But we still recommend using the direction of the trend as a directional bias on your trades even in these situations. When a market pulls back off of an all-time high and then starts to move back up to new all-time highs, there will be a period of time when the market looks like a potential double top. However, selling all-time highs or buying all-time lows is really not an approach that will lead to consistent profits. We should be looking to buy a market that is at or near all-time highs, not try to predict the end of the trending move. Our preferred play is to sell Double Tops in a downtrend and buy Double Bottoms in an uptrend. On the chart below are two examples of what that looks like. Many traders will sell as the market moves down through the support low between the two highs as that serves as some confirmation that it is indeed a Double Top. Selling as the market moves down through that low and placing your protective stop above the Double Top represents a solid trading opportunity.
Since we are looking at a market in a downtrend, we can also see how that trend may determine the direction of a break out of a trading range. When a market moves into a range bound situation, many times it is because traders are waiting for a news event before putting on new positions. More often than not, that news event just confirms the direction of the trend and breaks out of the range in that same direction. So markets that are moving down and then move into a range will more often than not, break down through support. Markets that are moving up and then move into a range will more often than not, break out up through resistance. Otherwise, markets have a tendency to break out of a range in the same direction it was trading in before going into the range. “More often than not” does not mean every time, but does offer a professional enough of an edge to use as the basis of a solid approach to trading.
DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.
How To Manage Your Money When Trading The Forex Markets
Money Management
Forex trading can be a very rewarding profession because you can start off with a relatively modest amount of capital and turn it into a considerable amount of money. However it should be pointed out that it's definitely not a get rich scheme.
Of course it is possible to make a lot of money in a short space of time if you use a large amount of leverage and take out a large position or two. However you can do exactly the same at the races or at the roulette wheel. The fact is that forex trading should not be a form of gambling. It's all about taking calculated risks using sensible stakes, and employing a profitable trading system to help you generate winning trades.
Your goal should always be to grow your trading capital slowly and steadily so that in a few years time your account will be showing some considerable growth. This is a lot easier to do and will help you to achieve sustainable long-term wealth without taking unnecessary risks.
Indeed you should forget about using large amounts of leverage because by doing so you are putting a lot of your trading capital at risk. In the worst case scenario you may even be wiped out completely from a single trade that goes against you.
It's a much better idea to use a sensible staking plan. I personally like to risk no more than 3% of my trading capital on any given trade. That way I can easily withstand a few losing trades whilst racking up some decent profits from any winning trades.
This is particularly true if you let your winning trades run for as long as possible. For example you may think that a few losing trades of 3% each time may make a serious dent in your account, but if you let your winning trades run you may achieve gains of up to 5-10% per trade. Therefore your winning trades will more than compensate for your losing ones in the long run.
So the point is that if you are serious about becoming a profitable forex trader, you should manage your money as best as possible. This involves keeping your losses small, using modest stakes of no more than around 3% of your capital per trade, and letting your winning trades run. That way it's a lot easier to generate consistent profits in the long run. All you need is a profitable trading method and some trading capital to get you up and running.
Saturday, November 21, 2009
How to make money in forex
How to make money in forex trader is a post that will broading your understanding on how to trade forex successfully.i will be written in a question form, just to enlightyou more about success behind forex trading.
Questions: Not more than seven
1. How often after losing 10, 20 or 30 percent of your account you look back at your trades and regret you were right from the very begining but still lost, and lost heavily?
2. How may times you take a heavy position and that position turns in your favor soon after you have taken that position?
3. How many times you close out an excellent heavy position just to bank few pips or fearing that pa may move against you wiping out your account?
4. How many times you regret and wish you should have waited for the right time to enter?
6. How many times you keep on changing your direction, losing trade after trade feeling market is after your a$$?
7. Ask other thousand similar questions to yourself
After asking these questions, you would come to just one conclusion:
"Holigrail is not a method but a trader him/herself"
Golden words:
Decide what you want to do, calculate risk and reward, wait, wait, wait and wait for the opportunity. It may appear and disappear without giving you an entry chance. Again wait, wait, wait and wait. When you find the right opportunity, enter and sit tight until the trade concludes. Repeat this several times and you will be a millionaire in about 5 to 50 years, but you WILL BE one.
If you are not willing to take reasonable amount of risk, cannot wait, do not believe in your analysis, cannot stop keep changing your mind with every few pip move against you, and are a pussy cat - wear a tie and a coat, take early morning bus to go and work in someone else's office for next 50 years. Don't waste your time and energy on something which you are not serious in achieving, and that is, make millions.
Questions: Not more than seven
1. How often after losing 10, 20 or 30 percent of your account you look back at your trades and regret you were right from the very begining but still lost, and lost heavily?
2. How may times you take a heavy position and that position turns in your favor soon after you have taken that position?
3. How many times you close out an excellent heavy position just to bank few pips or fearing that pa may move against you wiping out your account?
4. How many times you regret and wish you should have waited for the right time to enter?
6. How many times you keep on changing your direction, losing trade after trade feeling market is after your a$$?
7. Ask other thousand similar questions to yourself
After asking these questions, you would come to just one conclusion:
"Holigrail is not a method but a trader him/herself"
Golden words:
Decide what you want to do, calculate risk and reward, wait, wait, wait and wait for the opportunity. It may appear and disappear without giving you an entry chance. Again wait, wait, wait and wait. When you find the right opportunity, enter and sit tight until the trade concludes. Repeat this several times and you will be a millionaire in about 5 to 50 years, but you WILL BE one.
If you are not willing to take reasonable amount of risk, cannot wait, do not believe in your analysis, cannot stop keep changing your mind with every few pip move against you, and are a pussy cat - wear a tie and a coat, take early morning bus to go and work in someone else's office for next 50 years. Don't waste your time and energy on something which you are not serious in achieving, and that is, make millions.
Money management
What is Money Management: describes strategies or methods a player uses to avoid losing their bankroll.
Money management in the foreign exchange currency market requires educating yourself in a variety of financial areas. First, a definition of the foreign exchange currency or forex market is called for. The forex market is simply the exchange of the currency of one country for the currency of another. The relative values of various currencies in the world change on a regular basis.
Factors such as the stability of the economy of a country, the gross national product, the gross domestic product, inflation, interest rates, and such obvious factors as domestic security and foreign relations come into play. For instance, if a country has an unstable government, is expecting a military takeover, or is about to become involved in a war, then the country’s currency may go down in relative value compared to the currency of other countries.
The Forex, or foreign currency exchange, is all about money. Money from all over the world is bought, sold and traded. On the Forex, anyone can buy and sell currency and with possibly come out ahead in the end. When dealing with the foreign currency exchange, it is possible to buy the currency of one country, sell it and make a profit. For example, a broker might buy a Japanese yen when the yen to dollar ratio increases, then sell the yens and buy back American dollars for a profit.
There are five major forex exchange markets in the world, New York, London, Frankfurt, Paris, Tokyo and Zurich. Forex trading occurs around the clock in various markets, Asian, European, and American. With different time zones, when Asian trading stops, European trading opens, and conversely when European trading stops, American trading opens, and when American trading stops, then it is time for Asian trading to begin again.
Most of the trading in the world occurs in the forex markets; smaller markets for trade in individual countries. Simply put forex trading is the simultaneous buying of one currency and selling of another. Over $1.4 trillion dollars, US of forex trading occurs daily and sometimes fortunes are made or lost in this market. The billionaire George Soros has made most of his money in forex trading. Successfully managing your money in forex trading requires an understanding of the bid/ask spread.
Simply put the bid ask spread is the difference between the price at which something is offered for sale and the price that it is actually purchased for. For instance, if the ask price is 100 dollars, and the bid is 102 dollars then the difference is two dollars, the spread. Many forex traders trade on margin. Trading on margin is buying and selling assets that are worth more than the money in your account. Since currency exchange rates on any given day are usually less than two percent, forex trading is done with a small margin. To use an example, with a one percent margin a trader can trade up to $250,000 even if he only has $5,000 in his account. This means the trade has leverage of 50 to one. This amount of leverage allows a trader to make good profits very quickly. Of course, with the chance of high profits also comes high risk.
Like many other speculative investments, a key part of money management for the forex trader is only using money that can be put at risk. It is wise to set aside a portion of your net worth and make that the only money you use in forex trading. While the chances of good profits are there, if you should have a problem and get wiped out, you’ll only have a limited amount of money placed at risk. Also remember that the market is n constant motion. There are always trading opportunities.
If a currency is becoming stronger or weaker in relation to other currencies there is always a chance for profit. For instance, if you believe that the Euro is gong to become weak compared to the US dollar then selling Euros is a good bet. If you believe that the dollar is going to become weaker than the yen, or the pound sterling, then selling dollars is wise. Staying current on the news and current events in the countries whose currency you hold is a smart move. Many people reach points where they can predict currency changes based on political or economic news in a given country. Remember though that forex trading is speculation, so be careful when managing your funds and only invest what you can afford to risk.
Please always make sure you check with the pros when dealing in this market unless you are doing this as a hobby and don't have a lot at stake in it. There are a lot of big boys playing here and they won't lose much sleep if you and thousands others lose their shirts...
For more articles on a wide variety of subjects visit http://www.david-mclauchlan.com
Money management in the foreign exchange currency market requires educating yourself in a variety of financial areas. First, a definition of the foreign exchange currency or forex market is called for. The forex market is simply the exchange of the currency of one country for the currency of another. The relative values of various currencies in the world change on a regular basis.
Factors such as the stability of the economy of a country, the gross national product, the gross domestic product, inflation, interest rates, and such obvious factors as domestic security and foreign relations come into play. For instance, if a country has an unstable government, is expecting a military takeover, or is about to become involved in a war, then the country’s currency may go down in relative value compared to the currency of other countries.
The Forex, or foreign currency exchange, is all about money. Money from all over the world is bought, sold and traded. On the Forex, anyone can buy and sell currency and with possibly come out ahead in the end. When dealing with the foreign currency exchange, it is possible to buy the currency of one country, sell it and make a profit. For example, a broker might buy a Japanese yen when the yen to dollar ratio increases, then sell the yens and buy back American dollars for a profit.
There are five major forex exchange markets in the world, New York, London, Frankfurt, Paris, Tokyo and Zurich. Forex trading occurs around the clock in various markets, Asian, European, and American. With different time zones, when Asian trading stops, European trading opens, and conversely when European trading stops, American trading opens, and when American trading stops, then it is time for Asian trading to begin again.
Most of the trading in the world occurs in the forex markets; smaller markets for trade in individual countries. Simply put forex trading is the simultaneous buying of one currency and selling of another. Over $1.4 trillion dollars, US of forex trading occurs daily and sometimes fortunes are made or lost in this market. The billionaire George Soros has made most of his money in forex trading. Successfully managing your money in forex trading requires an understanding of the bid/ask spread.
Simply put the bid ask spread is the difference between the price at which something is offered for sale and the price that it is actually purchased for. For instance, if the ask price is 100 dollars, and the bid is 102 dollars then the difference is two dollars, the spread. Many forex traders trade on margin. Trading on margin is buying and selling assets that are worth more than the money in your account. Since currency exchange rates on any given day are usually less than two percent, forex trading is done with a small margin. To use an example, with a one percent margin a trader can trade up to $250,000 even if he only has $5,000 in his account. This means the trade has leverage of 50 to one. This amount of leverage allows a trader to make good profits very quickly. Of course, with the chance of high profits also comes high risk.
Like many other speculative investments, a key part of money management for the forex trader is only using money that can be put at risk. It is wise to set aside a portion of your net worth and make that the only money you use in forex trading. While the chances of good profits are there, if you should have a problem and get wiped out, you’ll only have a limited amount of money placed at risk. Also remember that the market is n constant motion. There are always trading opportunities.
If a currency is becoming stronger or weaker in relation to other currencies there is always a chance for profit. For instance, if you believe that the Euro is gong to become weak compared to the US dollar then selling Euros is a good bet. If you believe that the dollar is going to become weaker than the yen, or the pound sterling, then selling dollars is wise. Staying current on the news and current events in the countries whose currency you hold is a smart move. Many people reach points where they can predict currency changes based on political or economic news in a given country. Remember though that forex trading is speculation, so be careful when managing your funds and only invest what you can afford to risk.
Please always make sure you check with the pros when dealing in this market unless you are doing this as a hobby and don't have a lot at stake in it. There are a lot of big boys playing here and they won't lose much sleep if you and thousands others lose their shirts...
For more articles on a wide variety of subjects visit http://www.david-mclauchlan.com
Thursday, February 5, 2009
Choosing a Forex Broker
Before trading Forex you need to set up an account with a Forex broker. So what exactly is a broker? In simplest terms, a broker is an individual or a company that buys and sells orders according to the trader's decisions. Brokers earn money by charging a commission or a fee for their services.
You may feel overwhelmed by the number of brokers who offer their services online. Deciding on a broker requires a little bit of research on your part, but the time spent will give you insight into the services that are available and fees charged by various brokers.
Is the Forex broker regulated?
When selecting a prospective Forex broker, find out with which regulatory agencies it is registered with. The Forex market is labeled as an “unregulated” market, and it basically is. Regulation is typically reactive, meaning only after you’ve been bamboozled out of your entire savings will something be done.
In the United States a broker should be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) and a NFA member. The CFTC and NFA were made to protect the public against fraud, manipulation, and abusive trade practices.
You can verify Commodity Futures Trading Commission (CFTC) registration and NFA membership status of a particular broker and check their disciplinary history by phoning NFA at (800) 621-3570 or by checking the broker/firm information section (BASIC) of NFA's Web site at www.nfa.futures.org/basicnet/.
Among the registered firms, look for those with clean regulatory records and solid financials. Stay away from non-regulated firms!
The NFA is stepping up their efforts in educating investors about retail forex trading. They’ve created a brochure fit for a Pulitzer Prize called, "Trading in the Retail Off-Exchange Foreign Currency Market”. The NFA recommends you read it before taking the forex plunge.
They’ve also developed a Forex Online Learning Program, an interactive self-directed program explaining how retail forex contracts are traded, the risks inherent in forex trading and steps individuals should take before opening a forex account. Both the brochure and the online learning program are available at no charge to the public.
Customer Service
Forex is a 24-hour market, so 24-hour support is a must! Can you contact the firm by phone, email, chat, etc.? Do the reps seem knowledgeable? The quality of support can vary drastically from broker to broker, so be sure to check them out before opening an account.
Here’s a good tip: choose several online brokers and contact their help desks. Seeing how quickly they respond to your questions can be key in gauging how they will respond to your needs. If you don't get a speedy reply and a satisfactory answer to your question, you certainly wouldn't want to trust them with your business. Just be aware that as in other types of businesses, pre-sales service might be better than post-sales service.
Online Trading Platform
Most, if not all, Forex brokers allow you to trade over the Internet relatively easy. The backbone of any trading platform is their ordering system. So trading software is very important. Get a feel for the options that are available by trying out a demo account at a few online brokers.
Closely examine the broker’s screen layout. It should include:
the ability to view real-time currency exchange rate quotes,
an account summary showing your current account balance with realized and unrealized profit and loss, margin available, and any margin locked in open positions.
Most trading platforms are either Web based (in Java), or a client-based program you can install on your computer, and which version you choose is your personal preference:
Web based software is hosted on your broker’s web site. You won’t have to install any software on your own computer, and you’ll be able to log in from any computer that has an Internet connection.
A client-based software program, or one that you download and install, will only allow you to trade on your own computer (unless you install the program on every computer you use).
Usually, the "download and install" program runs faster, but most programs are operating system specific. For example, most brokers only offer their trading platform application to run on Microsoft Windows. If heaven forbid you are a Mac user (!), you won’t be able to install the application and will have to use your broker’s Web based or Java-based trading platform. These two (the Web or Java-based) will run on any computer since they run through your internet browser.
Java-based software programs are preferred by most brokers, who think they are more safe and reliable. Java-based software tends to be less vulnerable to attack from viruses and hackers during transmissions than "download and install" software.
But always be sure to open a demo account and test out the broker's platform before opening a real account!
Don’t forget your high speed Internet connection
The Forex market is a fast moving market and you will need up-to-the second information to make informed trading decisions. Make sure you have a high speed Internet connection. If you don’t, you might as well not even bother trading. Dial-up will absolutely not work for Forex! If you plan to trade online you will need a modern computer and high speed Internet connection, and we can’t stress this enough!
Bells and Whistles
Any Forex broker worth his salt should offer you real-time quotes and allow you to quickly enter and exit the market. These are minimal requirements of any trading software. Upgraded software packages are usually offered as an extra monthly fee by brokers.
Most brokers now offer integrated charting and technical analysis packages with their trading platforms. The level of integration with the trading platforms varies and is worth understanding carefully.
Mini/Micro Accounts
Most brokers offer very small “mini-accounts” and even smaller "micro-account" for as little as a couple hundred bucks. These little cute accounts are a great way to get started and test your trading skills and gain experience.
Broker Policies
Before selecting an online Forex broker, you should closely examine their features and policies. These include:
Available Currency Pairs
You should confirm that the prospective broker offers, at minimum, the seven major currencies (AUD, CAD, CHF, EUR, GBP, JPY, and USD).
Transaction Costs
Transaction costs are calculated in pips. The lower the number of pips required per trade by the broker, the greater the profit that the trader makes. Comparing pip spreads of half dozen brokers will reveal different transaction costs. For example, the bid/ask spread for EUR/USD is usually 3 pips, but if you can find 2 pips, that’s even better.
Margin Requirement
The lower the margin requirement (meaning the higher the leverage), the greater the potential for higher profits and losses. Margin percentages vary from .25% and up. Low margin requirements are great when your trades are good, but not so great when you are wrong. Be realistic about margins and remember that they swing both ways.
Minimum Trading Size Requirement
The size of one lot may differ from broker to broker, spanning 1,000, 10,000, and 100,000 units. A lot consisting of 100,000 units is called a “standard” lot. A lot consisting of 10,000 units is called a “mini” lot. A lot consisting of 1,000 units is called a “micro” lot. Some brokers even offer fractional unit sizes (called odd lots) which allow you create your own unit size.
Rollover Charges
Rollover charges are determined by the difference between the interest rate of the country of the base currency and the interest rates of the other country. The greater the interest rate differential between the two currencies in the currency pair, the greater the rollover charge will be. For example, when trading GBP/USD, if the British pound has the greater interest differential with the U.S. dollar, then the rollover charge for holding British pound positions would be the most expensive. On the other hand, if the Swiss Franc were to have the smallest interest differential to the U.S. dollar, then overnight charges for USD/CHF would be the least expensive of the currency pairs.
Margin Account Interest Rate
Most brokers pay interest on a trader’s margin account. The interest rates normally fluctuate with the prevailing national rates. If you decide to take an extended break from trading, the money in your margin account will be accruing interest. Keep in mind that most brokers DO NOT allow you to accrue interest unless your margin requirement is at least 2% (50:1).
Trading Hours
Nearly all brokers align their hours of operation to coincide with the hours of operation of the global Forex market: 5:00 pm EST Sunday through 4:00 pm EST Friday.
Other Policies
Be sure to scrutinize a prospective broker’s “fine print” section to be fully aware of all the nuances that a specific broker may impose on a new trader.
Finding the right broker is a critical part of the process. It’s not easy and requires some real work on your part. Don’t pick the first one that looks good to you. Keep looking and trying different demo accounts.
Summary
What to look for in an online Forex broker/dealer:
Low Spreads.
In Forex trading the ‘spread’ is the difference between the buy and sell price of any given currency pair. Lower spreads save you money.
Low minimum account openings.
For those that are new to Forex trading and for those that don’t have millions of dollars in risk capital to trade, being able to open a micro trading account with only $250 (we recommend at least $1,000) is a great feature for new traders.
Instant automatic execution of your orders.
This is very important when choosing a Forex broker. Don’t settle with a firm that re-quotes you when you click on a price or a firm that allows for price ‘slippage’. This is very important when trading for small profits. You want what we call a WYSIWYG (pronounced wiz-ee-wig) broker! This means you want instant execution of your orders and the price you see and "click" is the price that you should get...WYSIWYG = What You See Is What You Get!
Free charting and technical analysis
Choose a broker that gives you access to the best charting and technical analysis available to active traders. Look for a broker that provides free professional charting services and allows traders to trade directly on the charts.
Leverage
Leverage can either make you super rich or super broke. Most likely, it will be the latter. As an inexperienced trader, you don't want too much leverage. A good rule of thumb is to not use more than 100:1 leverage for Standard (100k) accounts and 200:1 for Mini (10k) accounts.
You may feel overwhelmed by the number of brokers who offer their services online. Deciding on a broker requires a little bit of research on your part, but the time spent will give you insight into the services that are available and fees charged by various brokers.
Is the Forex broker regulated?
When selecting a prospective Forex broker, find out with which regulatory agencies it is registered with. The Forex market is labeled as an “unregulated” market, and it basically is. Regulation is typically reactive, meaning only after you’ve been bamboozled out of your entire savings will something be done.
In the United States a broker should be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) and a NFA member. The CFTC and NFA were made to protect the public against fraud, manipulation, and abusive trade practices.
You can verify Commodity Futures Trading Commission (CFTC) registration and NFA membership status of a particular broker and check their disciplinary history by phoning NFA at (800) 621-3570 or by checking the broker/firm information section (BASIC) of NFA's Web site at www.nfa.futures.org/basicnet/.
Among the registered firms, look for those with clean regulatory records and solid financials. Stay away from non-regulated firms!
The NFA is stepping up their efforts in educating investors about retail forex trading. They’ve created a brochure fit for a Pulitzer Prize called, "Trading in the Retail Off-Exchange Foreign Currency Market”. The NFA recommends you read it before taking the forex plunge.
They’ve also developed a Forex Online Learning Program, an interactive self-directed program explaining how retail forex contracts are traded, the risks inherent in forex trading and steps individuals should take before opening a forex account. Both the brochure and the online learning program are available at no charge to the public.
Customer Service
Forex is a 24-hour market, so 24-hour support is a must! Can you contact the firm by phone, email, chat, etc.? Do the reps seem knowledgeable? The quality of support can vary drastically from broker to broker, so be sure to check them out before opening an account.
Here’s a good tip: choose several online brokers and contact their help desks. Seeing how quickly they respond to your questions can be key in gauging how they will respond to your needs. If you don't get a speedy reply and a satisfactory answer to your question, you certainly wouldn't want to trust them with your business. Just be aware that as in other types of businesses, pre-sales service might be better than post-sales service.
Online Trading Platform
Most, if not all, Forex brokers allow you to trade over the Internet relatively easy. The backbone of any trading platform is their ordering system. So trading software is very important. Get a feel for the options that are available by trying out a demo account at a few online brokers.
Closely examine the broker’s screen layout. It should include:
the ability to view real-time currency exchange rate quotes,
an account summary showing your current account balance with realized and unrealized profit and loss, margin available, and any margin locked in open positions.
Most trading platforms are either Web based (in Java), or a client-based program you can install on your computer, and which version you choose is your personal preference:
Web based software is hosted on your broker’s web site. You won’t have to install any software on your own computer, and you’ll be able to log in from any computer that has an Internet connection.
A client-based software program, or one that you download and install, will only allow you to trade on your own computer (unless you install the program on every computer you use).
Usually, the "download and install" program runs faster, but most programs are operating system specific. For example, most brokers only offer their trading platform application to run on Microsoft Windows. If heaven forbid you are a Mac user (!), you won’t be able to install the application and will have to use your broker’s Web based or Java-based trading platform. These two (the Web or Java-based) will run on any computer since they run through your internet browser.
Java-based software programs are preferred by most brokers, who think they are more safe and reliable. Java-based software tends to be less vulnerable to attack from viruses and hackers during transmissions than "download and install" software.
But always be sure to open a demo account and test out the broker's platform before opening a real account!
Don’t forget your high speed Internet connection
The Forex market is a fast moving market and you will need up-to-the second information to make informed trading decisions. Make sure you have a high speed Internet connection. If you don’t, you might as well not even bother trading. Dial-up will absolutely not work for Forex! If you plan to trade online you will need a modern computer and high speed Internet connection, and we can’t stress this enough!
Bells and Whistles
Any Forex broker worth his salt should offer you real-time quotes and allow you to quickly enter and exit the market. These are minimal requirements of any trading software. Upgraded software packages are usually offered as an extra monthly fee by brokers.
Most brokers now offer integrated charting and technical analysis packages with their trading platforms. The level of integration with the trading platforms varies and is worth understanding carefully.
Mini/Micro Accounts
Most brokers offer very small “mini-accounts” and even smaller "micro-account" for as little as a couple hundred bucks. These little cute accounts are a great way to get started and test your trading skills and gain experience.
Broker Policies
Before selecting an online Forex broker, you should closely examine their features and policies. These include:
Available Currency Pairs
You should confirm that the prospective broker offers, at minimum, the seven major currencies (AUD, CAD, CHF, EUR, GBP, JPY, and USD).
Transaction Costs
Transaction costs are calculated in pips. The lower the number of pips required per trade by the broker, the greater the profit that the trader makes. Comparing pip spreads of half dozen brokers will reveal different transaction costs. For example, the bid/ask spread for EUR/USD is usually 3 pips, but if you can find 2 pips, that’s even better.
Margin Requirement
The lower the margin requirement (meaning the higher the leverage), the greater the potential for higher profits and losses. Margin percentages vary from .25% and up. Low margin requirements are great when your trades are good, but not so great when you are wrong. Be realistic about margins and remember that they swing both ways.
Minimum Trading Size Requirement
The size of one lot may differ from broker to broker, spanning 1,000, 10,000, and 100,000 units. A lot consisting of 100,000 units is called a “standard” lot. A lot consisting of 10,000 units is called a “mini” lot. A lot consisting of 1,000 units is called a “micro” lot. Some brokers even offer fractional unit sizes (called odd lots) which allow you create your own unit size.
Rollover Charges
Rollover charges are determined by the difference between the interest rate of the country of the base currency and the interest rates of the other country. The greater the interest rate differential between the two currencies in the currency pair, the greater the rollover charge will be. For example, when trading GBP/USD, if the British pound has the greater interest differential with the U.S. dollar, then the rollover charge for holding British pound positions would be the most expensive. On the other hand, if the Swiss Franc were to have the smallest interest differential to the U.S. dollar, then overnight charges for USD/CHF would be the least expensive of the currency pairs.
Margin Account Interest Rate
Most brokers pay interest on a trader’s margin account. The interest rates normally fluctuate with the prevailing national rates. If you decide to take an extended break from trading, the money in your margin account will be accruing interest. Keep in mind that most brokers DO NOT allow you to accrue interest unless your margin requirement is at least 2% (50:1).
Trading Hours
Nearly all brokers align their hours of operation to coincide with the hours of operation of the global Forex market: 5:00 pm EST Sunday through 4:00 pm EST Friday.
Other Policies
Be sure to scrutinize a prospective broker’s “fine print” section to be fully aware of all the nuances that a specific broker may impose on a new trader.
Finding the right broker is a critical part of the process. It’s not easy and requires some real work on your part. Don’t pick the first one that looks good to you. Keep looking and trying different demo accounts.
Summary
What to look for in an online Forex broker/dealer:
Low Spreads.
In Forex trading the ‘spread’ is the difference between the buy and sell price of any given currency pair. Lower spreads save you money.
Low minimum account openings.
For those that are new to Forex trading and for those that don’t have millions of dollars in risk capital to trade, being able to open a micro trading account with only $250 (we recommend at least $1,000) is a great feature for new traders.
Instant automatic execution of your orders.
This is very important when choosing a Forex broker. Don’t settle with a firm that re-quotes you when you click on a price or a firm that allows for price ‘slippage’. This is very important when trading for small profits. You want what we call a WYSIWYG (pronounced wiz-ee-wig) broker! This means you want instant execution of your orders and the price you see and "click" is the price that you should get...WYSIWYG = What You See Is What You Get!
Free charting and technical analysis
Choose a broker that gives you access to the best charting and technical analysis available to active traders. Look for a broker that provides free professional charting services and allows traders to trade directly on the charts.
Leverage
Leverage can either make you super rich or super broke. Most likely, it will be the latter. As an inexperienced trader, you don't want too much leverage. A good rule of thumb is to not use more than 100:1 leverage for Standard (100k) accounts and 200:1 for Mini (10k) accounts.
Candle stick charts:
Candlestick charts have been around for hundreds of years. They are often referred to as "Japanese candles" because the Japanese would use them to analyze the price of rice contracts.
Similar to a bar chart, candlestick charts also display the open, close, daily high and daily low. The difference is the use of color to show if the stock went up or down over the day.
The chart below is an example of a candlestick chart for AT&T (T). Green bars indicate the stock price rose, red indicates a decline:
Investors seem to have a "love/hate" relationship with candlestick charts. People either love them and use them frequently, or they are completely turned off by them. There are several patterns to look for with candlestick charts - here are a few of the popular ones and what they mean:
This is a bullish pattern - the stock opened at (or near) its low and closed near its high.
The opposite of the pattern above, this is a bearish pattern. It indicates that the stock opened at (or near) its high and dropped substantially to close near its low.
Known as "the hammer", this is a bullish pattern only if it occurs after the stock price has dropped for several days. A hammer is identified by a small body along with a large range. The theory is that this pattern can indicate that a reversal in the downtrend is in the works.
Known as a "star", this pattern is used in other patterns such as the "doji star". For the most part, stars typically indicate a reversal and or indecision. There is a possibility that after seeing a star there will be a reversal or change in the current trend.
So this is the basics of candle stick charting. Of course there are many other patterns, but this should get you started.
Know Your P’s and L’s
Here is where we’re going to do a little math. You've probably heard of the terms "pips" and "lots" thrown around, and here we're going to explain what they are and show you how they are calculated.
Take your time with this information, as it is required knowledge for all Forex traders. Don’t even think about trading until you are comfortable with pip values and calculating profit and loss.
What the heck is a Pip?
The most common increment of currencies is the Pip. If the EUR/USD moves from 1.2250 to 1.2251, that is ONE PIP. A pip is the last decimal place of a quotation. The Pip is how you measure your profit or loss.
As each currency has its own value, it is necessary to calculate the value of a pip for that particular currency. In currencies where the US Dollar is quoted first, the calculation would be as follows.
Let’s take USD/JPY rate at 119.80 (notice this currency pair only goes to two decimal places, most of the other currencies have four decimal places)
In the case of USD/JPY, 1 pip would be .01
Therefore,
USD/JPY:
119.80
.01 divided by exchange rate = pip value
.01 / 119.80 = 0.0000834
This looks like a very long number but later we will discuss lot size.
USD/CHF:
1.5250
.0001 divided by exchange rate = pip value
.0001 / 1.5250 = 0.0000655
USD/CAD:
1.4890
.0001 divided by exchange rate = pip value
.0001 / 1.4890 = 0.00006715
In the case where the US Dollar is not quoted first and we want to get the US Dollar value, we have to add one more step.
EUR/USD:
1.2200
.0001 divided by exchange rate = pip value
so
.0001 / 1.2200 = EUR 0.00008196
but we need to get back to US dollars so we add another calculation which is
EUR x Exchange rate
So
0.00008196 x 1.2200 = 0.00009999
When rounded up it would be 0.0001
GBP/USD:
1.7975
.0001 divided by exchange rate = pip value
So
.0001 / 1.7975 = GBP 0.0000556
But we need to get back to US dollars so we add another calculation which is
GBP x Exchange rate
So
0.0000556 x 1.7975 = 0.0000998
When rounded up it would be 0.0001
You’re probably rolling your eyes back and thinking do I really need to work all this out and the answer is NO. Nearly all forex brokers will work all this out for you automatically. It’s always good for you to know how they work it out.
In the next section, we will discuss how these seemingly insignificant amounts can add up.
Take your time with this information, as it is required knowledge for all Forex traders. Don’t even think about trading until you are comfortable with pip values and calculating profit and loss.
What the heck is a Pip?
The most common increment of currencies is the Pip. If the EUR/USD moves from 1.2250 to 1.2251, that is ONE PIP. A pip is the last decimal place of a quotation. The Pip is how you measure your profit or loss.
As each currency has its own value, it is necessary to calculate the value of a pip for that particular currency. In currencies where the US Dollar is quoted first, the calculation would be as follows.
Let’s take USD/JPY rate at 119.80 (notice this currency pair only goes to two decimal places, most of the other currencies have four decimal places)
In the case of USD/JPY, 1 pip would be .01
Therefore,
USD/JPY:
119.80
.01 divided by exchange rate = pip value
.01 / 119.80 = 0.0000834
This looks like a very long number but later we will discuss lot size.
USD/CHF:
1.5250
.0001 divided by exchange rate = pip value
.0001 / 1.5250 = 0.0000655
USD/CAD:
1.4890
.0001 divided by exchange rate = pip value
.0001 / 1.4890 = 0.00006715
In the case where the US Dollar is not quoted first and we want to get the US Dollar value, we have to add one more step.
EUR/USD:
1.2200
.0001 divided by exchange rate = pip value
so
.0001 / 1.2200 = EUR 0.00008196
but we need to get back to US dollars so we add another calculation which is
EUR x Exchange rate
So
0.00008196 x 1.2200 = 0.00009999
When rounded up it would be 0.0001
GBP/USD:
1.7975
.0001 divided by exchange rate = pip value
So
.0001 / 1.7975 = GBP 0.0000556
But we need to get back to US dollars so we add another calculation which is
GBP x Exchange rate
So
0.0000556 x 1.7975 = 0.0000998
When rounded up it would be 0.0001
You’re probably rolling your eyes back and thinking do I really need to work all this out and the answer is NO. Nearly all forex brokers will work all this out for you automatically. It’s always good for you to know how they work it out.
In the next section, we will discuss how these seemingly insignificant amounts can add up.
Why Trade Foreign Currencies?
There are many benefits and advantages to trading Forex. Here are just a few reasons why so many people are choosing this market:
No commissions.
No clearing fees, no exchange fees, no government fees, no brokerage fees. Brokers are compensated for their services through something called the bid-ask spread.
No middlemen. Spot currency trading eliminates the middlemen, and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
No fixed lot size.
In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5000 ounces. In spot Forex, you determine your own lot size. This allows traders to participate with accounts as small as $250 (although we explain later why a $250 account is a bad idea).
Low transaction costs.
The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under normal market conditions. At larger dealers, the spread could be as low as .07 percent. Of course this depends on your leverage and all will be explained later.
A 24-hour market.
There is no waiting for the opening bell - from Sunday evening to Friday afternoon EST, the Forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade--morning, noon or night.
No one can corner the market.
The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank) can control the market price for an extended period of time.
Leverage.
In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500 dollars, one could trade with $100,000 dollars and so on. But leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
High Liquidity.
Because the Forex Market is so enormous, it is also extremely liquid. This means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will. You are never "stuck" in a trade. You can even set your online trading platform to automatically close your position at your desired profit level (a limit order), and/or close a trade if a trade is going against you (a stop loss order).
Free “Demo” Accounts, News, Charts, and Analysis. Most online Forex brokers offer 'demo' accounts to practice trading, along with breaking Forex news and charting services. All free! These are very valuable resources for “poor” and SMART traders who would like to hone their trading skills with 'play' money before opening a live trading account and risking real money.
“Mini” and “Micro” Trading:
You would think that getting started as a currency trader would cost a ton of money. The fact is, compared to trading stocks, options or futures, it doesn't. Online Forex brokers offer "mini" and “micro” trading accounts, some with a minimum account deposit of $300 or less. Now we're not saying you should open an account with the bare minimum but it does makes Forex much more accessible to the average (poorer) individual who doesn't have a lot of start-up trading capital.
No commissions.
No clearing fees, no exchange fees, no government fees, no brokerage fees. Brokers are compensated for their services through something called the bid-ask spread.
No middlemen. Spot currency trading eliminates the middlemen, and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
No fixed lot size.
In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5000 ounces. In spot Forex, you determine your own lot size. This allows traders to participate with accounts as small as $250 (although we explain later why a $250 account is a bad idea).
Low transaction costs.
The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under normal market conditions. At larger dealers, the spread could be as low as .07 percent. Of course this depends on your leverage and all will be explained later.
A 24-hour market.
There is no waiting for the opening bell - from Sunday evening to Friday afternoon EST, the Forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade--morning, noon or night.
No one can corner the market.
The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank) can control the market price for an extended period of time.
Leverage.
In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500 dollars, one could trade with $100,000 dollars and so on. But leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
High Liquidity.
Because the Forex Market is so enormous, it is also extremely liquid. This means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will. You are never "stuck" in a trade. You can even set your online trading platform to automatically close your position at your desired profit level (a limit order), and/or close a trade if a trade is going against you (a stop loss order).
Free “Demo” Accounts, News, Charts, and Analysis. Most online Forex brokers offer 'demo' accounts to practice trading, along with breaking Forex news and charting services. All free! These are very valuable resources for “poor” and SMART traders who would like to hone their trading skills with 'play' money before opening a live trading account and risking real money.
“Mini” and “Micro” Trading:
You would think that getting started as a currency trader would cost a ton of money. The fact is, compared to trading stocks, options or futures, it doesn't. Online Forex brokers offer "mini" and “micro” trading accounts, some with a minimum account deposit of $300 or less. Now we're not saying you should open an account with the bare minimum but it does makes Forex much more accessible to the average (poorer) individual who doesn't have a lot of start-up trading capital.
How Do Forex quotes work?
Reading a FOREX quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.
The US dollar is the centerpiece of the FOREX market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.
When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.
The three exceptions to this rule 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 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.
In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.
Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.
When trading FOREX you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).
The US dollar is the centerpiece of the FOREX market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.
When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.
The three exceptions to this rule 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 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.
In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.
Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.
When trading FOREX you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).
what is forex?
The Foreign Exchange market, also referred to as the "FOREX" is the biggest and largest financial market in the world. It has a daily average turnover of US$1.9 trillion- just imagine that amount of money! Don't you want to join this trillion-dollar industry?
FOREX is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY). So basically, FOREX is trading.
There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency.
The other 95% is trading for profit, or what you call speculation. Investors frequently trade on information they believe to be superior and relevant, when in fact it is not and is fully discounted by the market.
On one side of each speculative stock trade is a participant who believes he has superior information and on the other side is another participant who believes his information is superior.
For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid- meaning its in cash or convertible to cash) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors.
A true 24-hour market, FOREX trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - real time- day or night.
The FOREX market is considered an Over The Counter (OTC) or 'interbank' market. This is because the transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange compared to stocks and futures markets.
FOREX is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY). So basically, FOREX is trading.
There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency.
The other 95% is trading for profit, or what you call speculation. Investors frequently trade on information they believe to be superior and relevant, when in fact it is not and is fully discounted by the market.
On one side of each speculative stock trade is a participant who believes he has superior information and on the other side is another participant who believes his information is superior.
For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid- meaning its in cash or convertible to cash) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors.
A true 24-hour market, FOREX trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - real time- day or night.
The FOREX market is considered an Over The Counter (OTC) or 'interbank' market. This is because the transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange compared to stocks and futures markets.
Wednesday, January 21, 2009
Forex History
The Gold Exchange and the Bretton Woods Agreement
In 1967, a Chicago bank refused a college professor by the name of Milton Friedman a loan in pound sterling because he had intended to use the funds to short the British currency. Friedman, who had perceived sterling to be priced too high against the dollar, wanted to sell the currency, then later buy it back to repay the bank after the currency declined, thus pocketing a quick profit. The bank’s refusal to grant the loan was due to the Bretton Woods Agreement, established twenty years earlier, which fixed national currencies against the dollar, and set the dollar at a rate of $35 per ounce of gold.
The Bretton Woods Agreement, set up in 1944, aimed at installing international monetary stability by preventing money from fleeing across nations, and restricting speculation in the world currencies. Prior to the Agreement, the gold exchange standard--prevailing between 1876 and World War I--dominated the international economic system. Under the gold exchange, currencies gained a new phase of stability as they were backed by the price of gold. It abolished the age-old practice used by kings and rulers of arbitrarily debasing money and triggering inflation.
But the gold exchange standard didn’t lack faults. As an economy strengthened, it would import heavily from abroad until it ran down its gold reserves required to back its money; consequently, the money supply would shrink, interest rates rose and economic activity slowed to the extent of recession. Ultimately, prices of goods had hit bottom, appearing attractive to other nations, who would rush into buying sprees that injected the economy with gold until it increased its money supply, and drive down interest rates and recreate wealth into the economy. Such boom-bust patterns prevailed throughout the gold standard until the outbreak of World War I interrupted trade flows and the free movement of gold.
After the Wars, the Bretton Woods Agreement was founded, where participating countries agreed to try and maintain the value of their currency with a narrow margin against the dollar and a corresponding rate of gold as needed. Countries were prohibited from devaluing their currencies to their trade advantage and were only allowed to do so for devaluations of less than 10%. Into the 1950s, the ever-expanding volume of international trade led to massive movements of capital generated by post-war construction. That destabilized foreign exchange rates as setup in Bretton Woods.
The Agreement was finally abandoned in 1971, and the US dollar would no longer be convertible into gold. By 1973, currencies of major industrialized nations floated more freely, as they were controlled mainly by the forces of supply and demand. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s, giving rise to new financial instruments, market deregulation and trade liberalization.
In the 1980s, cross-border capital movements accelerated with the advent of computers and technology, extending market continuum through Asian, European and American time zones. Transactions in foreign exchange rocketed from about $70 billion a day in the 1980s, to more than $1.5 trillion a day two decades later.
In 1967, a Chicago bank refused a college professor by the name of Milton Friedman a loan in pound sterling because he had intended to use the funds to short the British currency. Friedman, who had perceived sterling to be priced too high against the dollar, wanted to sell the currency, then later buy it back to repay the bank after the currency declined, thus pocketing a quick profit. The bank’s refusal to grant the loan was due to the Bretton Woods Agreement, established twenty years earlier, which fixed national currencies against the dollar, and set the dollar at a rate of $35 per ounce of gold.
The Bretton Woods Agreement, set up in 1944, aimed at installing international monetary stability by preventing money from fleeing across nations, and restricting speculation in the world currencies. Prior to the Agreement, the gold exchange standard--prevailing between 1876 and World War I--dominated the international economic system. Under the gold exchange, currencies gained a new phase of stability as they were backed by the price of gold. It abolished the age-old practice used by kings and rulers of arbitrarily debasing money and triggering inflation.
But the gold exchange standard didn’t lack faults. As an economy strengthened, it would import heavily from abroad until it ran down its gold reserves required to back its money; consequently, the money supply would shrink, interest rates rose and economic activity slowed to the extent of recession. Ultimately, prices of goods had hit bottom, appearing attractive to other nations, who would rush into buying sprees that injected the economy with gold until it increased its money supply, and drive down interest rates and recreate wealth into the economy. Such boom-bust patterns prevailed throughout the gold standard until the outbreak of World War I interrupted trade flows and the free movement of gold.
After the Wars, the Bretton Woods Agreement was founded, where participating countries agreed to try and maintain the value of their currency with a narrow margin against the dollar and a corresponding rate of gold as needed. Countries were prohibited from devaluing their currencies to their trade advantage and were only allowed to do so for devaluations of less than 10%. Into the 1950s, the ever-expanding volume of international trade led to massive movements of capital generated by post-war construction. That destabilized foreign exchange rates as setup in Bretton Woods.
The Agreement was finally abandoned in 1971, and the US dollar would no longer be convertible into gold. By 1973, currencies of major industrialized nations floated more freely, as they were controlled mainly by the forces of supply and demand. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s, giving rise to new financial instruments, market deregulation and trade liberalization.
In the 1980s, cross-border capital movements accelerated with the advent of computers and technology, extending market continuum through Asian, European and American time zones. Transactions in foreign exchange rocketed from about $70 billion a day in the 1980s, to more than $1.5 trillion a day two decades later.
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