Foreign exchange market

Why Should I Learn Forex Trading?

2011-02-04T22:30:00.000-08:00

Why learn forex? Why trade forex?By reaching GoLearnForex, you must already be aware that Forex trading is a very lucrative way to make money from home or from work. Moreover, I'm sure you know someone, or have heard of someone who's already making good money in FX trading. Why not you ?

What you might not know though, is that 7 out of 10 traders keep on losing money in the Forex market! That's right, 70% of individual FX traders keep losing their hard-earned money in the market; while the other 30% work freely at home and make a solid living out of Forex.

Forex Money Management

2010-07-16T02:59:00.000-07:00

FOREX (FOReign EXchange market) is the international currency trading market, where money is sold and bought freely. In its present condition FOREX was launched in the 1970s, when free floating currencies were adopted by most countries, and only the participants of the market determine the price of one currency against the other proceeding from supply and demand.

As far as freedom from any external control and free competition are concerned, FOREX is a perfect market. It is also the financial market with the highest liquidity. According to various assessments, the daily turnover of the market constitutes from 1 to 2 trillion US dollars a day. Transactions are conducted all over the world via internet 24 hours a day from 00:00 GMT on Monday to 10:00 pm GMT on Friday.

While other traders make complicated mathematical analysis or guess what to do, you don't have to be a financial expert to trade forex and achieve success like professionals do!

All you need is a Forex Automoney - the web service which will give you a detailed information about "what" and "how" to trade.

Now, all you have to do to make a trading profit, is to click one button (for example "Buy") and a moment later the other button ("Sell"). If the price of the chosen currency pair rises in the meanwhile, you can have a trading profit, and with the help of leverage, earn as much as 400 times more than the actual increase in the currency pair's price.

This way, with the tiny effort of a few clicks a day, traders can earn thousands or even dozens of thousand dollars per day

Exploiting currency options expiries for forex trading

2010-01-31T01:20:00.000-08:00

Options are contracts that give the buyer the right to buy or sell an asset at a pre-specified time and price. In return, the seller receives a fee for writing the contract which is termed a premium. A put option is one in which the terms of the contract grant the right to sell the underlying, and a call option is one where the right to buy is granted. Since we will only explore the exploitation of options market data for the benefit of the spot trader, there’s no need to examine the details of this trade. Here we invite the trader to regard the currency options market as a closed box, and to concern himself merely with the aspects that we will utilize to predict the movements of spot.

The strategies we will discuss are simple and easy to use, and depend on the exploitation of implied volatility for long term trades and expiration data for short term use. To utilize these methods we only need to understand a few simple concepts.

* Strike price: This is the price at which the option will grant a payout, in other words, it will register a profit for the option buyer, depending on the kind of option contract.
* Expiry date: This is the date at which the contract is settled, and payments are made. This is perhaps the most important data for trading spot forex.
* Option size: The payout that the option contract stipulates.

Data on open currency options contracts that are close to expiry is regularly provided by IFR and the information can be acquired by registering with brokers that offer the service. Most major forex brokers will offer at least one financial news provider on their platform or website, and the news flow provided by open interest on CBOE options is also available from COT reports which the trader can use to form an opinion on trader positioning, and therefore the potential impact of the option on the market. How to use currency option expiration data to trade the spot market?

One of the easiest and most successful ways of trading the spot currency market is through the use of option expiry data. Options contracts are typically for sums of anywhere between 100 million to 500 million USD, and values beyond the range are not uncommon. Since these are relatively large sums to be concentrated in a few minutes before the expiration, the traders of these options will do all that they can, within reasonable limits, to move the quote to the strike price of the option, provided that the quote is within about 20-30 pips of the strike price at the time of expiry.

One important point that the forex trader can keep in mind is the distinction between the European style, and American style options. Since European style options can only be exercised at their expiration date, they are likely to be defended more vigorously if the quotes happen to be close to the strike price. In addition, at the beginning the trader is advised to utilize non-exotic expiries (so called, vanilla put or call options) for the strategy, as he betters his skills by examining contract types and similar details provided by the news providers. As usual, there is no need to trade every option expiry that is reported. One can simply begin with smaller sums to test his knowledge, and then increase the size and scope of his trades as he gains experience.

The ideal conditions for this method are:

1. Option expiry is at 10 am EST.
2. Option size is greater than 500 million USD.
3. The quote is at the strike price before the news release at 8:30 am EST
4. The news release is not a major event, such as a Fed decision.

But even without the realization of these conditions sizable profits can be made with this method in a calm and unexcited market. But these overall conditions, along with the significance of the news release, are the main determinants of the market’s mood which will in turn influence our stop-loss and the profit potential.

What happens during an option expiry?

If the price quote is close to the strike price of the option, option traders and other market participants will attempt to steer the quote in direction they desire.

A strong sign that the option traders will defend their position is the early gravitation of the price quote to the strike price. In an example scenario, if there’s a European EUR/USD vanilla put or call option with a strike at 1.2540, and the quote is at 1.2570 at 7:30 am, the quote will be steered to sit on the option strike value at about the news release at 8:30 am. After that, as the price reacts to the news, the quote may move away from the strike price in an unwanted. To successfully profit from this pattern the trader would need to join the option traders as they try to move the quote back to the strike value, and since a lot of people play this game the odds of success are quiet high.

As long as option expiries are proclaimed by news providers, and as long as large expiries tempt option traders to risk relatively small sums to ensure that they receive their payouts, this method will keep paying dividends. An important point that we should keep in mind is the momentum created by option expiries. As option traders buy or sell, their actions will be joined by all sorts of other traders and snowballing effect creates its own power as a mini-bubble is generated. Needless to day, right after the option expiry occurs, the strike price will be just another number on the charts, and will lose all its significance.

Article Source
www.forextraders.com

Undercapitalization

2010-01-28T15:03:00.000-08:00

Undercapitalization is closely related to leverage, since, contrary to what many people believe, higher leverage actually increases risk-capital requirements. While the broker allows the client to control higher amounts through less initial capital through high leverage, because price swings are amplified in the process, the trader has to increase his capital that he deposits with the broker in order to survive periods of high volatility (in other words, wide price fluctuations).

Leverage increases the amount of loss or gain that a trader must experience. When the account is registering a positive unrealized return, leverage, and price fluctuations will not cause much problem since they're absorbed by the unrealized profit. When the account is in the red, however, undercapitalization becomes a problem, because even if the price eventually moves in the direction that the trader anticipated when opening the position, the amount of risk capital (in other words, margin) may not be enough to absorb the temporary fluctuations in the meantime.

What use is a successful prediction of market direction if you will never be able to survive the inevitable price fluctuations in between? What use is a complete and well-thought analysis if your capital allocation doesn't allow that analysis to bear its fruit?

Leverage amplifies volatility, and thus increases the initial deposit that must be maintained. But we had said that leverage allows the trader to control large sums through lesser initial deposits. What is the whole point of this circular game? So we reach back at what we argued at the opening of this section: Overleverage is wrong, and must not be used except in very unusual circumstances

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Trading psychology

2010-01-16T09:25:00.000-08:00

Human beings are emotional creatures. We love, we hate, we adore, worship and despise, we can be enthusiastic, and we can be cautious. The canvass of our lives is colored by the palette of emotions, and indeed it's impossible to define a human being without depicting his emotional reactions to life's various occasions.

To the better or worse however, the canvass of profit is colorless. Neither the blush of euphoria, nor the blues of depression have any bearing on the landscape of forex. The successful trader should attempt to banish the shades of pride from his heart when he succeeds, because the market is fickle, and quick to punish those who foolishly feel that they have "cracked the code of forex". But neither should the trader have any feelings of shame or sadness about his failures: failures pave the path of experience leading to success, and as long as he recognizes that he's not ready to embark on big risks, he can survive any calamity that the forex market throws on him by simply risking little, and employing low leverage.

And yet an enormous number of speculators have been unable to act by these simple principles. Desperation and excitement, greed and fear delude many people even after experimentation and study, and success in trading can elude even a genius like Sir Isaac Newton, if he's unwilling to fight his emotions, be deaf to the crowd, and follow the dictates of logic.

So we expect the trader to reason rather than feel, and to calculate rather than dream. We want to take emotions out of the deal, and we don't just want to remove those such as fear, apprehension, worry, anxiety from our trading experience, but also excitement, courage, euphoria, and the other so-called positive emotions, in order that we don't overestimate our skills and power and take more risk than we should take. How do we achieve that?

The only way of achieving this aim, and successfully managing our psychological responses during trading is understanding what we do, and doing what we understand.

Once the trader is aware that his success is not a gift from angels, and his failure is not bad luck, or karma, but the logical consequence of wrong choices and indiscipline, there will be little cause for any emotional ruin, or gratification. Success in the market should be as simple as a good meal enjoyed after hard work. And failure should be as harmless as the bite of a mosquito, because risking more in a highly leveraged trade will never grant anyone success: it is always possible to begin with small sums, gain confidence while scaling-in, and even those small sums will translate to great profits in time. And if they do not, what would make us think that adding to the account or changing leverage will change our fortunes?

And I'd like to repeat here once more in response to the many online get-rich-quick schemes that proliferate: success in the forex market, and in fact in all financial markets, is not dependent on knowledge of some secret formula, or some magic indicator, or a prodigious intellect: all that is needed is discipline and study. To study the causes of economical events, and understanding them, thereafter devising, or adopting a clear and uncomplicated technical method, and adhering to that with principle and discipline is all that is necessary for success. But it must be remembered that nothing more and nothing less will do either. And the trader should get rid of all dreams of overnight riches without labor: who knows, maybe overnight riches will be possible for some individuals, but even then not without hard work and reflection.

Let us examine two major problems that cause traders to lose their wits, and turn the forex market into some kind of Russian roulette where it is impossible to maintain calm during trade decisions: the problem of undercapitalization and overleveraging.

Article Source

www.forextraders.com

Overleveraging — the risks of forex leverage

2010-01-04T09:26:00.000-08:00

We have already discussed what leverage is, and what it offers to the trader. Let us here take a look at the impact overleveraging can have on trader psychology.

As we mentioned above, the best trader is he who can detach himself from his emotions during his trading activity: one can have as much excitement and joy as he desires while enjoying the fruits of his achievements, but during trading itself, the heart should beat softly, and the brain should be in charge. Needless to say, a high-risk, all-or-nothing environment where any slight mistake can wipe out the trader's capital is not the environment that is conducive to creating such a mentality. Mistakes will inevitably happen during trading; neither man nor machine is capable of predicting every movement of the market precisely. To ensure that the mistakes that occur do not eliminate your capital, your self-esteem, and your chance of learning from your errors, do not over leverage.

High leverage works against the speculator by increasing the stakes and making the heart beat faster. No one jumps in his seat over the loss of a couple of dollars through which lessons are learned and mistakes recognized. But as potential losses increase, the beginner will have no time to focus on the lessons from his deficiencies, but instead will agonize over his stupidity at having risked so much money in a bet that didn't possess much chance of success anyway. And there begins the vicious spiral of fear, and losses which can eventually ruin a good man's livelihood.

But if the reader is afraid of the large holes that leverage can open in his pockets, he should also keep in mind that there's nothing related to the forex market per se that is dangerous and harmful. Forex is perhaps the safest of all market, since in general the prices move very slowly, and unlike in the stock market, the wipe-out of an unleveraged account is almost impossible: let us remember that nations do not go bankrupt, and currencies don't go to zero in general. But because many people see forex as a get-rich-quick scheme, and expect nonsensical levels of leverage to work for them, more people fail in this market than those who succeed.

To hopefully clarify this matter even further, and to let the incredulous reader reconsider his opinion, I'd like to remind him that the bankrupt Wall Street firms of 2008, like Bear Sterns, Lehman Brothers, Merril Lynch, had leverage ratios of at most 35 to 1, even in the worst cases. And there doesn't exist a person in the world today who doesn't, in hindsight, recognize how foolish and irresponsible it was to take that much risk. But if leverage in the thirties was bad enough for the giant Wall Street firms, with US government and international backing behind them to recapitalize them repeatedly before they went bankrupt, or were forced into gunshot marriages, how wise can it be for the "average Joe" to leverage his account in the fifty or even a hundred to 1? Given that the forex market is erratic, and unpredictable in the short run, how much wisdom can there be in overleveraging?

Remember, if you can't create great returns at low leverage, there's absolutely no reason to expect to do so on high leverage, and every reason to expect massive losses instead.
Article source
www.forextraders.com

Forex analysis — covering all aspects of forex market analysis

2009-12-27T03:03:00.000-08:00

In this section we will handle the subject of forex analysis in much greater detail, with the hope of providing you a framework with which you can create your own approach and style of analysis.

We will attempt to provide general principles to be adhered to while performing the two types of analysis — fundamental and technical — and then we will look at the indicators and news releases in detail. The golden rule is that the trader should always aim to create a holistic picture from the patchwork of data that he has to go through on a daily basis. He should create models, and test them in light of market developments and the fundamental changes occurring in the analyzed nation’s economy. A mere knowledge of the data, without the power to evaluate and reconstruct it to suit our purpose, is unlikely to be very beneficial. The successful trader succeeds because he understands, while the unfortunate one fails because his attention span is too short to evaluate the information.

Article source
www.forextraders.com

Commitment of traders — the COT reports

2009-12-26T02:40:00.000-08:00

The commitment of traders report is a little different from the previous indicators. It doesn’t measure any economic indicator, but merely states the holdings of commercial and speculative participants in various futures markets which are mostly concentrated in New York and Chicago. The report is released every Friday by the CFTC (Commodities and Futures Trading Commission) and reflects the commitments of traders on the prior Tuesday.

The COT report divides traders into three categories: commercial, non-commercial, and non-reporting. The group “commercial” mostly includes commodity producers (in the case of forex, exporter firms) who use futures to hedge against future price movements (in other words, they would like to eliminate the impact of future price fluctuations on their profits or losses: the exact opposite of what speculators aim at). The group “non-commercial” includes speculators. Speculators have no interest in the actual commodity (be it forex, or lean hog) but merely desire to profit from price fluctuations. Finally, the group of “non-reporting” traders includes small speculators who are of significant market impact, and are therefore not required by the CFTC to report their positions.

What kind of use can the trader make of the COT report? When either speculators or commercial participants have positions that are extreme in comparison to the average of a predefined period, some traders assume the emergence of a small scale temporary bubble, and they will buy or sell to counteract the extreme long or short positions registered.

Others suggest that small speculators, devoid of the tools and knowledge of the bigger participants, are usually wrong, and act on this assumption by doing the opposite of what the non-reporting group does.

Another reasoning claims that the commercial group are likelier to be correct on their analysis as they have interest in and direct knowledge of the commodities in question.

In general, each trader is free to make his mind as to which of these theories he will subscribe to, and he may eventually choose not to use any of them. But in any case, basing one’s assumptions on strong fundamental reasons, rather than the positioning of any group in any market is the course of prudence. This is not only because a successful trader performs his own analysis, but also because the pockets of the large commercial and speculative participants are likely to be far deeper than that of the average trader: Performing proper research and analysis is always better than following anyone, or any indicator blindly.

Article Source

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Summary — fundamental analysis forex

2009-12-24T17:09:00.000-08:00

As we noted before, fundamental analysis offers the best guidance for determining price trends. To give a simple example, in a stable economic environment, with good economic growth, and healthy employment statistics, central banks are almost certain to respond to high inflation with interest rate increases, to which the markets will usually react by buying and favoring the currency of the nation in question. And as central banks seek credibility in their actions, and are not very likely to zigzag with their rate decisions, the trader can anticipate the beginning of a long term trend through his analysis of the central bank's policies and goals, and by following his analysis, he can realize profits.

Of course, there's a lot more to be said about this subject, but the basic principles are simple. The attention span of the market is not long enough to fully evaluate the significance of fundamental developments, and economies absorb changes to fundamental values slowly and gradually. There's ample time for the trader to profit from such changes, once he's aware of them, even if he catches the trend after it's fully underway.

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Consumer price index (CPI)

2009-12-23T06:59:00.000-08:00

The second type of inflation indicator, the Consumer Price Index (CPI), has far greater bearing on the choices of policy makers (such as the US Federal Reserve), and the market in general attaches to it a far greater degree of significance than the PPI. The CPI, as a measure of living costs, has a direct bearing on interest rates, and eventually, the timing of growth cycles (in other words, booms and busts).

The consumer price index measures price changes at the retail level. It registers the price fluctuations only to the extent that a retailer is able pass them on to the consumer. Thus, in an environment of high competition and falling or low demand growth, the retailer may have to cut on his profits, and a rise in PPI may not be reflected in the price the consumer pays, as measured by the CPI.

Rising CPI signifies high inflation, and central banks in general have the goal of keeping inflation low but positive, so that the consumers' purchasing power is not eroded. A rising, but slowing CPI defines disinflation: Prices are still growing, but the speed and intensity of price increases is slowing. Finally, a negative CPI implies deflation: A situation which often suggests that demand across the board is contracting, and the consumer can simply choose to wait for as long as he can before he buys a product. The longer he waits, the lower the price becomes.

It may sound complicated, but the beginning trader will do well by just keeping in mind the relationship between central bank interest rates and the CPI: higher CPI leads the central banks to raise rates, and as higher rates mean higher yield, the currency with high interest rates backing it tends to appreciate. Lower or falling CPI means that inflation risks have receded, corresponding to lower growth, and the central bank is free to lower rates to boost growth.

The CPI is also released monthly by the BLS (Bureau of Labor Statistics).

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Producer price index (PPI)

2009-12-21T05:11:00.000-08:00

We mentioned in the previous section that we’d be discussing inflation, and it’s time to look at one of the two major indicators of inflation that the markets tend to watch at all times.

The producer price index, or PPI for short, is the measure of changes in prices charged by wholesalers to their clients such as retailers who then add their own profit margin to the producer’s price and pass the product to the consumer. Since the producer is at the beginning of the supply chain, under normal economic conditions where there’s healthy consumer demand and the economy is growing, the PPI can serve as an early-warning system for predicting price changes at the retailer end of the chain. The producer price index is different from the consumer price index (CPI) in that it also includes commodities and intermediate materials (such as a car engine or its components, for which the consumer has no use) and is therefore more responsive to changes in global commodity prices and manufacturing industry trends than the consumer price index.

In general, the PPI is more volatile with larger fluctuations than the CPI, and is useful only in giving a sense of the underlying price developments that are not always reflected on the consumer’s bills.

The PPI is one of the oldest indicators in existence, and its time series can be stretched back to the 19^th century. It’s updated each month by the BLS (Bureau of Labor Statistics).

Articel Source

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Where do you start if you want to learn currency trading?

2009-12-11T09:04:00.000-08:00

Well a good starting point is to look at just what Forex trading is and who the players in this market are. We should also think about just why you should be learning online Forex trading and thinking about starting you own online Forex trading business.

The Forex market (which is sometimes referred to as the FX market and for which the full title is The Foreign Exchange Market) was established as we know it today in 1971 following the demise of fixed currency exchanges. Forex currency trading is conducted around the clock, 5 days a week, and daily currency trades are worth in the region of $1.9 trillion US dollars. This means that the Forex the largest market in the world and puts the major stock markets very firmly into second place.

A world-wide market established to facilitate the buying and selling of currency, the Forex market involves large organizations, such as central governments, commercial companies and international commercial banks as well as smaller players such as brokerage houses and individual brokers.

There is no set location for the market (although there are major trading centers around the world in a number of cities such as London, Frankfurt, New York and Tokyo) but it is essentially an 'over-the-counter' market with the vast majority of trading being conducted by telephone and on the internet.

The exchange of currencies is a central element in supporting global trade and, as the major currencies such as the US dollar (USD), the British pound (GBP), the Euro (EUR), the Japanes yen (JPY) and others move against each other and the foreign currency exchange rate for any given pair of currencies changes, there is the opportunity to make money from currency exchanges.

The major players in the market take advantage of this by buying and selling in deals which often run into many millions of dollars, but the smaller players are also extremely active and often trade in deals of as low as one hundred thousand dollars. And, by trading on the back on the smaller players, individuals can get into the market with a lot less than that!

The fact that even small players can join this market means that, as long as you are prepared to take the time to understand the currency markets and to learn the skills of Forex trading, then, with a little bit of capital to invest, it is possible to enjoy an excellent income from online currency trading.

Despite the fact that you cannot trade on your own and will have to use the services of a Forex broker, you certainly don't need a fortune and many Forex brokers will now allow you to open an online Forex mini account with as little as $250.

The Forex market is a technical market and it does takes a while to come to grips with the basic principles underlying the currency markets, to develop the necessary skills in the use of some of the 'tools of the trade' (like technical and fundamental analysis tools) and to learn Forex currency trading online.

Despite this, you do not have to be an expert in the currency markets to profit from them. As long as you take the time to learn foreign exchange currency trading and put in a bit of effort it is quite easy to gain enough of an understanding to begin making money through Foreign trading online.

Foreign currency trading provides an excellent opportunity for the small investor to make money but learning to trade Forex is essential before heading out into the market.

Through a large and growing collection of articles covering everything from the history of foreign currency trading to fundamental and technical analysis, psychology and strategies, tools and software we aim to help you learn to day trade Forex quickly and easily.
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Gross domestic product (GDP)

2009-12-11T08:54:00.000-08:00

Gross domestic product (GDP) is a measure of all goods and services produced inside a country's borders. As such, it doesn't include imports, even though imports can add to job creation and prosperity in an economy. It's loudly discussed by all the major media outlets, and the trader needs little effort in finding and evaluating the report. There's no need to go into the details of its calculation here, but we should briefly discuss its implications on the markets, and what a good or bad GDP number means.

GDP is valuable for the markets for a number of reasons. First, it provides the trader or analyst with a general, all-in-one snapshot of the economic situation of a nation. Without having to go through a large list of statistics, and wading through a sea of numbers to gain an overall grasp of the latest developments in an economy, the analyst finds a comprehensive report in the GDP number and its details. Second, it allows a quick and easy comparison between nations in terms of their economic prowess and health. Third, and perhaps most importantly, it tells the trader whether a nation's economy was growing or contracting during a time period. As the overall health of an economy determines the lending policies of major banks and other financial actors, the GDP number is prone to cause periods of panic and euphoria in the market, and the patient, sensible trader can exploit these periods for his profit.

A positive, rising GDP number is a sign that the economy is growing. A positive, but lower GDP value (in comparison to the previous quarter), is a sign that GDP growth is decelerating. Finally, a negative GDP value over two consecutive quarters is usually considered a recession by economists: a period of falling demand, production, and economic activity, and a source of panic and great concern for financial markets in general.

GDP releases, along with inflation statistics (which we will discuss shortly), are some of the most important parameters that central banks use in determining their interest rate policies. GDP growth can, under certain circumstances, cause high inflation through wage growth and price rises, and central banks try to combat this development by raising interest rates (which leads to higher borrowing costs, more expensive investment, less growth and less inflation.) Conversely, a period of low inflation, or low GDP growth can lead central banks to lower interest rates with the goal of rejuvenating economic activity. Forex, and all financial markets are very responsive to changes in central bank interest rates, and the trader can keep his eyes on GDP statistics and inflation numbers as advance warning on changes in central bank policies.

Let us finally mention that fundamental "analysis" that depends merely on the headline number can sometimes be misleading. The GDP number can be flawed as an indicator of economic health for a number of reasons, but one that must be born in mind is that inventory accumulation by firms (rising stocks of unsold goods at firms' warehouses) is added as a positive to the GDP value, and this sometimes can cause an unreasonably healthy picture to be portrayed before periods of economic slack. Since inventory accumulation can be caused by insufficient demand, the trader should always check this component of the release for anomalies before making a judgement.

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Fundamental analysis

2009-12-11T08:51:00.000-08:00

Fundamental analysis concerns itself with the causes of price movements. It doesn't attempt to predict future price movements per se, but because economic events move far slower than market developments, it's usually the case that a phenomenon established by fundamental analysis will be valid for a longer time than the market reacts to it, and discounts it (due to the market's erratic, irrational and emotional behavior), and it's this fact that the trader exploits for profit.

Fundamental analysis is about economy and politics. It is important to keep up-to-date about weekly employment statistics, consumer price inflation, interest rates and similar "hot" indicators that are at the forefront of newspapers pages and TV screens, but just being aware of them and expecting the market to react to them in the desired fashion in a short time is not fundamental analysis, nor is it common sense. In fact, as we mentioned in the earlier paragraph, the main reason that the trader can profit through fundamental analysis is that the markets do not react reasonably to fundamental developments.

Let's illustrate our point with an example:

Until the autumn of 2007 the US had very low unemployment: Toward the latter part of the second presidential term of George W. Bush, unemployment in the US moved below five percent, and it remained at those levels for a considerable time. Most of the data released through this period remained positive overall, with the exception of the housing market, where conditions had been deteriorating since 2005.

Thus, most of the data and news releases were positive, and if we're seeking to show that fundamental analysis provides good guidance to the trader, it's clear that we do not have that guidance in the patchwork of numbers that attracted the most of the media attention. Focusing on the news releases, without placing them into a working context, without understanding the workings of the economy, the trader is as blind as the proverbial blind man who tries to describe an elephant by a few gropes at its feet, the tusks and the trunk.

Like most good things in life, being successful in performing fundamental analysis requires study and patience, but once again, there's no expectation of exceptional skills from the trader. Economics is a popular field, and most of the data necessary for understanding the market is available online with research provided for free, in many cases, by big banks and government institutions. What the investor is expected to do is not to memorize the numbers and compare each week's release to the previous one, but form a coherent mental picture of "what happens why".

Finally, let us repeat here that most of the major fundamental events that the market appears to discount in a few days of trading at most, have in fact effects that last far longer and reach far deeper than the violent but brief reactions of price movements suggest. Interest rates and unemployment statistics are simple but effective examples for demonstrating our point: The effects of the interest rate reductions during 2000-2001 had lasted for at least 4 years in the real estate market, and had a great role in establishing the downward dollar trend that lasted between 2001 and 2008. Similarly, the trend of job creation in the US and abroad, once begun, had a deep and lasting impact on global stock prices and forex trends which went through all sorts of panics and shocks during this same period (the Iraq War, and several defaults by some large firms are good examples). In the end, however, the so-called big picture of stability supplied by high employment and low interest rates always brought the markets on track. What caused them to collapse eventually is outside the subject of our discussion. But, the fact that fundamental economic events are long-term, and that their effects last longer and are deeper than the market discounts is a fact that is not changed by all these deveoplments.

Let us briefly examine a number of the major economic indicators used in fundamental analysis.

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ForexTechnical indicators

2009-12-11T08:39:00.000-08:00

Technical indicators are utilized by traders in the same way that price patterns are. In the case of indicators the purpose is to give the chaotic jumble of prices and quotes some resemblance of order through the employment of simple mathematical tools. While the idea of engaging in mathematics may sound intimidating to many at first, all of these indicators have been standardized through the years, and the trading software that draws them will in general leave little discretion to the user. The mathematical formulas themselves are usually simple and straightforward, and some high school mathematics is the most that is needed to understand why and how are they are constructed.

How many indicators should we use? Which indicator is the best for evaluating a chart? These are the questions that often confuse the inexperienced trader, and leads the experienced trader to claim that trading is an art and not a science.

Let’s try to answer those questions one by one:

How many indicators should a trader use?

The answer to this is not as difficult as it seems at first glance. It can’t be denied that the more indicators there are on the computer screen, the more information is available for the trader. Moving averages of different time periods, for instance, can provide a good signal for determining the next obstacle, the next support and resistance levels for the price.

But the question is, how much information does the trader need? Does he aim at making quick profits on an intraday basis? Or, does he aim at making profits from monthly movements? Obviously, a long term investor has very little use for a 3-hour moving average.

And beyond these questions, how much information is the trader able to evaluate meaningfully before losing focus and being lost in meaningless mental discussions about whether this or that indicator gives the right signals?

Naturally, people will have differing answers to these questions based on personal experience, and there’s nothing wrong about that, as many of the indicators themselves are the same tools disguised in slightly differing formulae. It’s very hard to decide whether the RSI or Stochastics is more accurate in giving signals, but it’s not that hard to claim that what they do is by and large the same thing.

Simplicity and clarity, as in everything else, are the best pieces of advice that a beginning forex trader can pocket from this discussion.

Which indicator is the best for evaluating a chart?

To this, the answer is rather simple: none. While it's true that for different types of charts, different types of indicators can have more significance (such as the RSI being more suitable for ranging markets), the best method probably is taking one of each type of indicator (oscillator, moving averages, and so on) and combining them to get as complete a picture as possible about the current state of the market through the use of technical analysis.

Let’s briefly examine the four major indicator classes most often encountered in forex:

1. Oscillators

The relative strength index (RSI), or Stochastics are called oscillators because they move back and forth (oscillate) between two fixed points. In general, the forex oscillators move back and forth between overbought and oversold levels, and the signals they generate are most useful in range-bound markets. To give an example, the most popular and common of oscillators, the RSI, will give a buy signal when the indicators value is below 30, and a sell signal when the value is above 70.

Most charting software provided by forex brokers include the capability to plot all kinds of oscillators on the price. Since oscillators of the same kind can give conflicting signals, it is perhaps a good idea to use only one oscillator in evaluating a single chart. In fact, since a large part of the perceived effectiveness of technical tools is the result of their wide-spread usage by traders, it’s not advisable to use a rare, obscure technical tool, however convinced the user may be of its effectiveness.

Oscillators are leading indicators, in that they’re supposed to give advance warning of a change in the direction of the price movement. How valid the signals they give are depends on the liquidity of the market and price pattern. In an environment of poor liquidity (like Christmas week, when most people are on vacation), the signals emitted by these indicators are likely to be almost useless, because a sudden and relatively small injection of liquidity is highly likely to disrupt the oscillator’s scenario. Similarly, in a strongly trending market, the RSI can touch 70, 80, and even higher levels without the much anticipated counter-trend movement materializing.

2. Moving Averages

We have mentioned several times that the price movements on a typical day are chaotic and unpredictable. The purpose of the various kinds of moving averages is to smooth out those fluctuations, and to provide the trader with a more easily evaluated picture of the trend. Moving averages can also be said to identify trends automatically: While in drawing trend lines, the trader has to use a lot of discretion in deciding which price movement is significant and which is not — the moving average simply takes all the available data and creates the trend.

The two most usual kinds of moving averages — simple and exponential — are calculated in a similar way, but with one little difference: The simple moving average adds all the closing prices together and divides them by the number of the periods (days, hours, etc). As data is updated, the average changes (that is, moves) and the indicator is thus plotted out on our screens. In calculating the SMA, all the data from different time periods are weighted equally: Yesterday’s price is just as important as the closing price of three months ago. But in calculating EMA (exponential moving average) a simple mathematical formula grants greater value to the prices of the most recent time period, and therefore recent values are emphasized.

There are many ways of making use of these indicators. For illustration purposes we’ll consider the moving average crossover method which is often used for determining entry and exit points.

Because the EMA values the most recent periods more, and thus is more sensitive to recent price changes, the trader using the crossover method will use those occasions when the EMA makes an outsized movement in either direction in comparison the SMA as entry and exit points. That is, when the EMA moves faster than the SMA, and crosses below or under the SMA line, the trader will make an attempt at opening a position if all his other conditions (fundamental, technical) are also met.

3. Pivot Points

Pivot point are calculated by taking the average of the previous high, low, and closing prices, but as with most technical indicators, there are a lot of different ways and approaches to calculating them. Fortunately, as forex brokers provide charting services that perform these calculations in place of the trader, all we need to discuss here is how technical analysts use pivot points to predict future price movements.

Technical analysis contends that if the pivot point is broken in an upward direction, the short term signal is that a new trend is being established, or at least that a short term bullish movement is underway, and vice versa if the pivot point is broken in the opposite direction. Another usage of the pivot point that we must mention is in determining the trigger point for a new trade or limit/stop order. Since the pivot point is considered the most important support and resistance point, it can be utilized as profit taking target, or a convenient price level for a stop loss order.

Pivot points are short term indicators, and must be updated each day with the incoming data. All other things being equal, the technically-minded trader will expect the greatest price fluctuations to occur at the pivot point, and the other technical support or resistance levels are expected to be of minor significance in comparison.

4. Fibonacci

Fibonacci numbers, discovered in the 15^th century by an Italian mathematician, are numerical patterns found throughout the nature in everything from the structure of leaves to patterns of sea waves.

But we’re only concerned with this mathematical curiosity in as much as it bears on our trading experience, and that’s where we’ll need to consider the Fibonacci retracement and extension levels.

Fibonacci retracement occurs when the market reacts to a price movement in the course of a trend with a movement on the opposite side, with the size of the opposite movement defined through multiplication with the Fibonacci numbers of 0.38, 0.5 and 0.61. These levels can be drawn by the charting software offered by the broker, and the trader should only know the existence of the various levels and their significance in determining the size of the usually temporary reversals. Fibonacci extension is the opposite of retracement: During the course of a continuing trend, the size of the next leg of the trend can often be calculated by multiplying the size of the previous leg with one of the Fibonacci numbers.

The reader should not worry at all if that description sounds complicated. The best way to learn about extension and retracement is practicing on the charting software with a game or mini account offered by the broker. All that you need to keep in mind is that the size of the extension or reversal is only clear in hindsight: There’s no way of knowing which of the three Fibonacci numbers we mentioned above will determine the size of the oncoming reaction or continuation.

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Support and Resistance forex

2009-12-05T17:56:00.001-08:00

Studies over the years on technical analysis have confirmed resistance and support lines to be performing relatively well in their predictions. Ther are a number of reasons for this:

Resistance and support are relatively easy to identify on charts. From the most seasoned analyst to the forex freshman, traders don’t have a lot of trouble identifying and drawing support and resistance lines. In consequence, there’s little disagreement about their location and interpretation, unlike the case with Fibonacci retracements or MACD where different starting points or different parameters can result in different results. Such is not the case with support and resistance lines, which are easier to identify and interpret.
Support and resistance lines often receive a lot of attention from news sources like Bloomberg or CNBC. The public is led to identify a particular price as a “decisive” or “key” level, and when it acts accordingly, the significance of these levels is easily established. The influence of the financial media in raising awareness of these price points is so great that even those who have little interest or understanding of the forex market can't avoid noticing the erasure of these levels.
Finally, support/resistance lines are not just imaginary lines drawn at the whim of the analyst. Multi-year, multi-month, multi-week support and resistance are often defended by large order clusters sometimes originating from sovereign actors (in other words, central banks or their equivalent). A few large banks such as Deutsche Bank, UBS and JPMorgan have an enormous dominance in terms of forex transaction volumes, and it’s hard to imagine a support or resistance line holding without their participation. Not only do these large firms have access to their own clients’ orders and allocations, but they also can move prices in either direction in relatively calmer markets by simply placing orders. Their orders and choices are thus noted by market participants at large, and contribute greatly to the establishment and validity of the concepts of support/resistance lines.

So what is a support or resistance line? To understand this, let us first consider how a price quote is created, as countless orders flow each day across computer screens and phone lines around the world:

When a dealer enters a buy order, the broker has the order filled by executing as many offers as possible until the amount the customer desires is reached. If the original order is a large market order, the broker will keep climbing on the price ladder until the order is fulfilled. Support and resistance points are created when the total orders in the market are not enough to clear the offers at a particular price level. When the orders are sell orders, and there are more than enough buyers at a particular price to exhaust the sellers, that price level is called a support; when there are more sellers than the buyers’ orders can clear, the price level is a resistance.

Technical analysis has an equal but different-sounding explanation of this concept. Instead of order flows and their fulfillment and exhaustion, technical analysis simply notes when a price level fails to be exceeded in either direction, and once that price is visited again, the analyst will warn of support or resistance at that level. The rationale behind this suggestion is provided by trader psychology: Since many participants expect a price level to resist or support the quote, that price level will act in the anticipated manner regardless of what the other variables suggest. In a sense, technical analysts claim that traders behave like pack animals.

During the course of an ordinary trading day it’s possible to identify innumerable support and resistance levels on charts of different time frames, and in many cases, support and resistance lines are indeed created for no other reason than that traders expect them to exist. But while this is true, how much can the rational trader benefit from this concept when it is based mostly on emotional responses?

Let us once more remember that we as human beings can only evaluate our environment through our brains. It’s always possible to predict the rational response to any event provided that one is in possession of the relevant data. But it’s far more difficult to predict the emotional response of anyone to any event, however abundant the data may be. There are countless examples of collective mania throughout history, from the Holocaust of the 20^th century to the Crusades of the 11th century and beyond. Emotions such as fear, hate or anger can cause humanity to behave in all sorts of unpredictable ways. So, on what basis can we claim to understand the mass-emotions of the markets through indicators such as the resistance and support levels?

If this is the case (and we can't really make such a claim), we’re faced with a question that we must somehow have already answered: What will be our criteria in determining which support or resistance line is trustworthy, and which one is not?

In general, traders should not try to wager a bet on the strength of any support or resistance line without the presence of data on order flows. Information on the order flows of central banks and other major financial institutions is often provided by financial news providers, and a forex broker will usually provide his client with news flow from at least one such source. As a particular support/resistance line fails to be breached a number of times, the names standing behind that line will be clearer. More importantly these large actors often have easily discernible motives behind their actions. Their behavior patterns become identifiable, and the patterns last longer than those of speculators. Consequently, their behavior is far more predictable than those of the smaller speculators.

The support of the Russian Central Bank for the Euro during the past years, for instance, was well-known to forex markets: In countless cases their appearance behind a price level was enough to sustain the market or change its direction. Many such examples can be given about the relationship of the UK’s pound with Middle Eastern central banks and their equivalents and that of the yen with Japan’s exporter-related accounts. A trader would often make a profit by siding with these actors when their presence was acknowledged. And if he didn’t know about their existence, he’d simply not take a position based on support or resistance. While some of these institutions will not be as powerful in the coming years as global trade and commodity markets cool down, the relationship between support and resistance lines and the large global financial actors will probably remain the same.

Now of course, there will be those who will rise up and rightfully attempt a rebuttal of our argument by pointing at the intra-day resistance level that failed to be breached three, four or five times, and held its own in the absence of any fundamental reason to justify its strength. And they will say, “Alright, so this resistance level was created by emotional responses, herd behavior, trader psychology, and so on, there were no large players, but what is so wrong about that? Ok, we can’t explain it, we can’t know the reasons that caused it, but we can still make a profit from that, right? So, maybe you should just shut up, and tell us how to do so.”

To this argument the response would be that the strength or weakness of the support and resistance lines that seem so clear to the person who wishes to profit from them, is only clear in hindsight: For every support line that holds four times, there are many that failed the third time. And for every resistance line that was unbroken three times, there were many that failed the second time. They all look good and profitable on the charts, but what will allow us to know which one will hold and which will fail? Since in a majority of cases the anticipated support and resistance level will fail, how are we going to decide which one will hold and which one will not?

Of course, this is not suggesting that the concepts of support and resistance are useless; quite the contrary, they have been proven to be meaningful and relevant to trading through research and experience, but we only submit that the trader look beyond the price action itself in establishing the validity of support or resistance lines.

To conclude, let us admit that no sane person of any knowledge of the forex market will deny that emotions play perhaps the greatest part in the formation of intraday and daily quotes. It is rarer that the emotional responses of traders dominate trading for months over realities, but it is by no means unheard of, or extreme. The problem on a trading method based on emotions is not in the method itself, but in the unpredictability of human emotional responses.

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Resistance and support

2009-12-05T17:56:00.000-08:00

Resistance and support lines are price levels which temporarily halt or reverse the continuous movement of the trend. When the trend is bearish, support lines are created where sellers are temporarily (or sometimes permanently) exhausted and cannot press the quote any lower. Conversely, during a bullish trend, the price level where buyers are checked is called a resistance line.

Studies over the years on technical analysis have confirmed resistance and support lines to be performing relatively well in their predictions. Ther are a number of reasons for this:

*

Resistance and support are relatively easy to identify on charts. From the most seasoned analyst to the forex freshman, traders don’t have a lot of trouble identifying and drawing support and resistance lines. In consequence, there’s little disagreement about their location and interpretation, unlike the case with Fibonacci retracements or MACD where different starting points or different parameters can result in different results. Such is not the case with support and resistance lines, which are easier to identify and interpret.
*

Support and resistance lines often receive a lot of attention from news sources like Bloomberg or CNBC. The public is led to identify a particular price as a “decisive” or “key” level, and when it acts accordingly, the significance of these levels is easily established. The influence of the financial media in raising awareness of these price points is so great that even those who have little interest or understanding of the forex market can't avoid noticing the erasure of these levels.
*

Finally, support/resistance lines are not just imaginary lines drawn at the whim of the analyst. Multi-year, multi-month, multi-week support and resistance are often defended by large order clusters sometimes originating from sovereign actors (in

Technical Analysis Forex

2009-11-28T08:29:00.000-08:00

In a previous chapter, we discussed what technical analysis is. In this section, we’ll take a look at the various indicators and patterns that are used in technical analysis.

The most basic tool of the technical analyst is the chart which depicts price action during a specified time period. Charts are useful for giving us historical information, and they can provide a snapshot of the market at the moment they are drawn.Let us look at the two main types of charts according to how they depict price movements:

Line Charts

The line chart is simply a graph of price points connected by lines. The vertical axis, as shown in the symbolic chart below, depicts prices, and the horizontal axis matches a particular time to each price quote on the vertical axis. Line charts are pretty simple and straightforward and the trader will have no difficulty in getting used to them with a tiny amount of practice.

The advantages provided by line charts are in clarity and simplicity: instead of cluttering the vision with highs, lows, opens and closes, the line chart gives a historical picture of the underlying trend, and the trader is free to make his interpretations. The line chart is perhaps best used to supply the trader with a basis on which he can build his trading strategy. Once he’s got a grasp of the underlying movement, he can use other, more detailed charting tools to precisely define where and when he will move to make a trade.

Candlestick charts

By the standards of technical analysis, the candlestick method is ancient. Its origin is thought to be 18^th century Japan, and legend credits a certain Homma Munehisa with its invention.

The candlestick chart packs a lot of information in a very concise and useful form: Let’s see an example in the graphic below:

The black candlestick signifies a market session that closed on a higher price quote. Conversely, the white candlestick tells us that the prices closed lower. The body of the candlestick shows the open and close values (when depicted on a price chart), and the top and bottom edge of the wick shows the highest and lowest values for the session.

Let us see the various types candlesticks the trader can encounter on any chart:

Hammer – a bullish pattern during a downtrend (long lower wick and small or no body); Shaven head - a bullish pattern during a downtrend & a bearish pattern during an uptrend (no upper wick); Hanging man - bearish pattern during an uptrend (long lower wick, small or no body; wick has the multiple length of the body.
Inverted hammer – signals bottom reversal; Shaven bottom - signaling bottom reversal, the hammer has no lower wick; Shooting star - a bearish pattern during an uptrend. The candlestick has a small body, a long upper wick, and a small or non-existent lower wick)
Doji – the candle body is squeezed to a thin line, neutral signal.
Long legged doji – signals a top reversal
Dragonfly doji – when there’s no upper wick, and a long lower wick, the candlestick signifies a trend reversal to the bullish side.
Gravestone doji – when there’s a long upper wick, and no lower wick, the candlestick signals a trend reversal to the bearish side.
Marubozu white – no wick, depicts a beginning or continuing bullish trend.
Marubozu black – no wick, depicts a beginning or continuing bearish trend.

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Conclusion — which style should you choose?

2009-11-21T12:34:00.000-08:00

None of these trading styles offer an unblocked path to success, or a sure way to doom for the trader; the successful trader can choose any method he feels comfortable with. If he adheres to the basic principles of money management and risk control, education and experience, coupled with emotional discipline will be all he needs for a successful career. Most importantly, prudent risk management will ensure that even in the case of failure, the trader will suffer only as much as he deemed tolerable, and the loss can even be considered the fee for the lessons learned, and the enjoyment or excitement derived from participating in the dynamic markets of forex.

Trading styles are useful in showing the many diverse approaches to trading. In that sense, it’s likely that the beginning trader will eventually develop his own style in time, and there’s no reason to assume that such a style will be inferior to the ones we discussed above. Let’s repeat our mantra once more: No indicator, no style, no method, no forex robot or technique will offer the sure path to success in the markets. Success is only achievable through study and discipline. When choosing a method it’s most important that you give foremost consideration to your own character, experience and knowledge, instead of worrying about the particularities of the method itself. In any case, the generalizations we outlined above are only valid for educational purposes: There’s no such thing as a pure scalper or a pure day trader. As mentioned before, flexibility in adapting to the market while not giving up discipline in managing our assets and risk is one of the prerequisites of a successful trading experience.
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Forex Scalping

2009-11-20T01:53:00.001-08:00

Forex scalping aims to make use of small price movements and the bid-ask spread in order to turn a quick profit in a short time. Although each profit is naturally small, significant sums may be gathered by persistent trading.

The most basic form of scalping is the usage of the bid-ask spread. The scalper attempts to make a very quick profit by exploiting this gap during periods of price fluctuations. As volatility causes the bid-ask spread to widen, the scalper moves very quickly to turn the price movement into profit. There are other traders who don’t utilize the bid-ask spread, but generally trade very small sums for very short periods with the hope of patiently accumulating gains over a longer time period.

Scalping can be a relatively low risk method for the consistent and disciplined trader who knows when to cut his losses and is cautious about taking only the trade that meets his predefined standards. Successful exploitation of the bid-ask spread can be especially fruitful, but it depends on the ability to avoid periods of stress and volatility in the markets. At times of great stress, the bid-ask spread can rapidly widen to unexpected levels and the stop-loss order placed by the scalper may rapidly lose its significance, wiping out the gains of considerable past effort. The scalper must have clear goals, discipline and acquire time-tested money management skills in order to avoid being swallowed when the market turns nasty.

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Forex swing trading

2009-11-17T06:26:00.000-08:00

Forex swing trading is a form of range trading. The swing trader attempts to capitalize on periods of market indecision, and aims to make use of support and resistance lines, channels and price patterns such as tops and bottoms in formulating his strategy.

This style offers greater odds of success for beginners as it doesn’t limit the trader’s attention to a couple of hours (unlike day trading), and because the swing trader doesn’t need to invest a lot of time trying to identify the perfect price for entry and exit. As long as the price remains within the range identified, and the periodic reversal patterns persist, the trade will return a profit. When the range breaks, the swing trader has no illusions about what he must do. His period of bounty is over; he can enjoy his profit and rest as he awaits the next suitable period.

Needless to say, the main requisite for successful swing trading, as with trend following in general, is the correct identification of the range or trend. In doing so, the employment of both fundamental and technical analysis perhaps offers the greatest rewards, but the trader will usually choose the method that he favors the most. In either case, gaining a good understanding of the type of market experienced for a particular currency pair and formulating a defined strategy on that basis is the best course. As previously mentioned, the swing trader does not need to be precise about the entry and exit points; all he needs to do is catch the main movement, taking profit as soon as the price action runs out of speed at a point close the limits of the range identified.

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Forex day trading

2009-11-15T04:01:00.000-08:00

Forex day trading is the style of the short-term speculator. The reasoning behind a day trading style, is that there are times when exceptionally fast market developments allow exceptional profits in a very short time. Day traders in general will not hold a position for more than a few days, and the best among them are alert, quick, decisive and disciplined about what they want from the market, and the ideal conditions for a trade.

This method requires that the trader be nimble, and that he flee from danger like a rat, and chase opportunity like a cheetah. Needless to say, such speed and alertness require strong nerves and will from the trader, and it’s crucial to know where and when to act without hesitation when the decision is made. Successful forex day traders have, in fact, predefined expectations from the market, and they will only react to the “perfect" scenario, where the conditions are ripe. Indeed, there are circumstances where a quick profit can be made by quick reaction to incoming data. The bull market of the 90’s was an exceptionally lucrative time for day trading stocks, as initial public offerings allowed massive profits to be made through the indiscriminate daily purchase of new firms.
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Trading styles

2009-11-15T03:45:00.000-08:00

What is a trading style? It’s simply what a trader or speculator enjoys or feels most comfortable doing while interacting with the market. They can be valid for both long and short term trading, and for different styles different indicators and technical patterns have greater significance. Nonetheless, we should always keep in mind that the market is not bound to submit to our choice of style. The day trader could easily find himself in a swing trading situation, and the swing trader may end up following the trend, depending on how the market decides to behave.

What is the proper style for a beginning trader?

There are in fact only two types of trading: long-term and short-term. While the beginning trader is excited about his “debut”, and desirous of maximal profits over a short period of time, the fact is that at his level of experience and knowledge, he’s the least suited to a short-term trading method. Because of the shorter periods of exposure to the market’s whims, scalping or day trading may sound like the surest ways to success for the beginner. But, because the market’s behavior is more or less random in the short term, the habitual day trader or scalper may in fact be exposing himself to much greater risk by minimizing foresight and predictive capability. It’s hard to know what the next move will be when dancing in the arms of the bipolar short-term market.

The beginner may benefit from some short-term, very low-risk trading activity to gain understanding of the various trading concepts and tools of technical analysis. But, as soon as he’s willing to embark on serious activity, he’d be well-advised to focus on trading psychology, rather than trading style.

Of course, once the trader feels confident that he knows what he’s doing and has a reasonable amount of experience and knowledge about the markets, he can make his own choices about which trading style, which indicators and which currency pair he’s most interested in trading. But, it’s important to keep in mind that the best style is a flexible style, and that adaptability and humility are better than any preconception about the kind of trader we’d like to be. Let the market make the choices. How much control do we have over its decisions, anyway?

Let us take a look at the several different kinds of trading styles for short term activity.
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Summary — forex analysis

2009-11-01T21:44:00.000-08:00

Needless to say, any method that works is a good method. Conversely, any trading method that fails — however convincing the arguments behind it — is useless. While this is so, it’s often hard to characterize what success or failure is for a forex trader. A trade that was a failure when it was closed can easily become greatly profitable for you a short while later, and vice versa. Many times the losses suffered by forex traders are caused by emotional problems related to a lack of knowledge or confidence, rather than any flaw of the method used. Thus, when determining which method you would like to use and how to use it, you must first determine your own goals and capabilities, so you can choose the most suitable method for your trading goals.

It’s quite clear that for long-term, investment-minded traders, fundamental analysis offers the greatest potential return over a long period of time. Those who focus on fundamental analysis will be able to ignore the day-to-day fluctuations in the currency markets, and will also be able to avoid the pitfalls associated with whipsaws and similar sudden and unexpected movements. However, doing so requires a great deal of patience and emotional resilience — not to mention a significant investment in time and energy — before you have enough confidence in your skills, and can ride through the sometimes scary corrections and counter-trend movements. To be sure, the trader can gain the necessary confidence through study and patience, which means that success in the forex market requires no special talent or intellectual genius.

For short term investors who want to get into the thick of the action in the market and make sense of the nonsense out there, technical analysis is obviously the best tool. Those with experience in forex trading know only too well that in the short-term, even the most convincing news releases or statistics might fail to move the market in the anticipated direction, and in some cases, the market may react unfathomably to fundamental factors. Technical analysis is the tool of the financial rodeo rider, who wants to tame the raging beast of the markets, and we can only admire him for his courage and be astonished at his success when he achieves it.
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Forex Technical Analysis

2009-11-01T21:37:00.000-08:00

The beginnings of technical analysis is usually dated to the Dow theory, and to the early part of the 20^th century. Over the years, many contributors have created indicators, oscillators and moving averages of all sorts to increase the arsenal which the trader can utilize to understand the forex market. But the basic principles of technical analysis have remained the same:

Prices discount all available information
Prices trend (in other words, price movements are not random)
Historical data is useful for predicting future developments

As noted previously, technical analysis is useful for analyzing price patterns that emerge as a result of global economic activity. Thus, it’s different from fundamental analysis: Its effectiveness is greatest when market participants are the most emotive; the total turnaround in the market is constant with little new money entering or exiting; and economic fundamentals are of short-term value only.

This may perhaps appear counterintuitive to what many have come to believe over the years. But in fact, those who are most successful in using technical analysis are those who follow the long-term trend, and the long-term trend is merely another name for what is called the “big picture”, as painted by fundamental analysis.

Technical studies are useful for determining entry and exit points, because the information provided by fundamental analysis is too vague when it comes to price and quotes. While not precise, technical analysis does provide the trader with a number of tools for determining points of action, and the trader can use any method that he feels comfortable with, provided he knows what he's doing.

On a final note, although the new forex trader may perhaps be overwhelmed by the vast number of indicators and such that are available for his use, the good news is that only one from a each type of indicator will usually provide all the data necessary for trading. Later, we will examine indicators in detail.

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Forex Fundament

2009-10-31T23:50:00.000-07:00

As we mentioned before, prices do not cause prices. The reasons that lie behind price movements in the forex market are the subject of fundamental analysis, and those familiar with trading stocks should have little trouble in becoming familiar with fundamental analysis of currencies. Just as stock traders measure the health of a publicly-traded company by examining its balance sheet, indebtedness and cash flow statistics, the forex trader decides on the soundness of a nation’s economy by considering such things as central bank interest rate differentials (which is the difference between the borrowing costs as decided by the central banks of different countries), trade surplus or deficits, along with employment trends, productivity, and a number of other factors.

Fundamental analysis states the causes of major price movements in a straightforward and clear manner. For instance, because of the ease of borrowing and the resultant abundance of global liquidity in recent years, the interest rate differential between two nations’ central banks has been the most important indicator in determining price trends in the forex market. While this is unlikely to remain so in today’s difficult environment, interest rates will remain one of the most important drivers of currency market trends for as long as financial actors are free to move capital across national borders.

Fundamental analysis attempts to discover and predict the causes of forex trends, and in doing so it uses a number of indicators to present a comprehensive picture of global finance. But beyond the indicators themselves, what really causes a currency pair to move in a particular direction? Are currency movements really decided by statistics and news flow only?

This question brings us to another definition of fundamental analysis: Fundamental analysis attempts to predict money flows into and out of a particular currency. Statistics are significant only as far as the markets regard them as a basis for directing cross-border money flows. A nation can have very low unemployment, a high current account surplus, excellent productivity rates, and very good statistics in general, and its currency can still do poorly against others — if, despite all those advantages, there’s a greater supply of it with respect to total demand. In other words, no indicator, no statistic or standard is enough to magically appreciate a currency versus another, if the general economic environment (i.e. the financial markets in general), is unwilling to make use of the advantages that a sound and healthy economy provides.

Later we will return and take a deeper look at fundamental analysis.

The strength of fundamental analysis lies in its ties with economic events at the root level. It is relatively straightforward about its descriptions, and its rules and principles are often simple and easy to understand. And, the fact that fundamental causes decide the major trends in forex markets is indisputable. The trader possesses a very reliable tool in this kind of analysis. The problem with fundamental analysis, on the other hand, is twofold: it’s very poor as a timing indicator; and markets do not always react to its dictates in a rational manner. What must be remembered when the market value of a currency is a lot different from its fundamental value, is that the market would not have tolerated an irrational quote if some people somewhere were not making a great profit from that irrationality. It is therefore imperative that the analyst identify the abnormality, examine the causes of it, and formulate a strategy to exploit the discrepancy.

If fundamental analysis is a poor method for deciding on the timing of a trade, what will you, the trader, use to define your entry and exit points? Which method will allow you to decide when to take a profit or accept a loss? This question leads us to introduce the subject of technical analysis.

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Forex analysis — analyzing the forex market

2009-10-31T23:49:00.000-07:00

So we know what the forex market is, and we know what we want to do with it: We want to make money. How do we make money? That’s where we must understand forex analysis.

Forex analysis is the tool with which people aim to make sense of the seemingly random developments in a typical day’s price action. Without analysis, all we’d have is a massive list of price quotes that's updated on our screens every single second, and there would be no way of making any sense of it.

As with every other event in nature, developments in the currency market manifest themselves through cause and effect which are analyzed through the two branches of forex analysis: fundamental and technical. One problem people often have when studying forex analysis is failing to understand that price action is the result of a series of events that are independent of the price action itself. In other words: prices do not cause prices. The study of those economic and political factors which cause price movements is called fundamental analysis. Prices do, however, create patterns (such as head and shoulders, triangles, double tops or bottoms, etc.), the study of which is the subject of technical analysis.

What causes prices to move in a particular direction? Obviously this is the most important question that one must have answered in order to make a profit in currency trading. Major geopolitical and economic events undoubtedly create the powerful, long lasting undercurrents in the forex market. But, there are factors such as daily trade flows, cross-border mergers, currency options expiration-related activity, and other psychological factors which distort the underlying picture for those who are not very familiar with currency trading.

But let’s first briefly examine the two types of analysis that we just mentioned, before returning to the subject of the previous paragraph.

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Major currencies and currency types

2009-10-30T06:14:00.000-07:00

There are a lot of nations in the world and consequently a large number of currencies to choose from when trading. The currencies of Brazil, Russia, China, the Eurozone, Turkey, Japan, South Africa and Canada are popular with large and small traders, for different reasons. What the market values most in a trade can change depending on government policies and the global economic environment. For example, during the flowery days of the carry trade, many traders would simply long (buy) the currency offering the highest interest rate, and short (sell) the one offering the lowest interest rate, with little consideration given to the underlying economic soundness. Such a strategy is less likely to be profitable in today’s chaotic environment with interest rates racing lower across the globe, and fundamental economic strength is once again the major concern in deciding on currency allocations.

In order to simplify the matter, let us group the currencies into four types and examine each of them briefly:

Reserve Currencies

There’s really only one true reserve currency in the world with dominance of about two-thirds of central bank accounts, and it is the US dollar, the currency of international trade. But there are also others, such as the Swiss Franc, Japanese Yen and to a greater extent, the Euro, which play the same role, and as such are of higher quality and offer greater safety in times of trouble.

Commodity Currencies

These are currencies of nations with a heavy dependence on commodity exports, such as the Canadian and Australian dollars or the Brazilian real, and their performance is closely related to the performance of the global commodity markets.

Exporter Currencies

These are currencies of the likes of Singapore, Malaysia, Taiwan, or China — although it’s difficult to trade the Ren Min Bi (RMB) due to capital controls — with healthy external trade surpluses. These nations often have a high private and corporate savings ratio, and are better placed to survive periods of financial difficulties as they have little need for external borrowing. As exporters, they will most often choose to keep their currencies priced lower against competitors to keep their products more competitive in the global markets.

High risk, high deficit, high yield currencies

In analogy with the bond market, one could also term these currencies junk currencies, in that the economies are usually dependent on external financing, with greatest domestic activity concentrated in real estate, finance, and tourism-related industries. Many emerging markets are members of this group, but there are also other, relatively advanced nations such as (alas!) the UK, or Iceland, which nowadays can be considered to belong to this category. Further examples would be Turkey, Romania and Hungary — as a group, they have suffered the worst of the troubles of 2008.

What use is this categorization to the trader? It's mainly for those who want some diversification in their currency portfolios, in accordance with the ancient wisdom of not putting all eggs in the same basket. The above categories suggest that good diversification cannot be achieved by, for example, allocating long positions to both the Turkish lira, and the Romanian leu in the same account, as both of these currencies share the junk status. Nor can the trader claim to diversify his positions by buying the Brazilian real, and selling both the Swiss franc and the Japanese yen to fund the purchase. Both the franc and the yen are exporter currencies, and they are likely to make similar moves in response to financial developments. Forex brokers and websites sometimes offer correlation charts (which depict the price relationship between currency pairs during a specific time period), and the interested reader can learn more on this subject by studying them. But in general, positions in different currencies in a single category are likely to react like a single position of a single currency to market events; the trader should always keep this in mind when managing his account.

Article Source

http://www.forextraders.com/learn-forex-trading-course/major-currency-pairs.html

Margin trading and leverage accounts

2009-10-30T06:12:00.000-07:00

It’s very important that the trader gain a good grasp of these two concepts before engaging in any deals, because leverage and margin determine the lifespan of any trading account in a far more decisive manner than either technical or fundamental analysis.

Margin trading is trading with borrowed funds, and is closely related to leveraging. The broker allows the trader to control a far greater amount of money in the market in exchange for a small deposit of funds, with the understanding that the sum borrowed must be returned in exact amount, with any losses or profits returned to the account of client (the trader).

The amount that the client can control is determined by a number called the leverage ratio, and even the occasional observer can notice this number being proclaimed loudly by brokers in the advertisements that they scatter everywhere online. It’s not that difficult to grasp what the leverage ratio does: it simply multiplies the trader’s potential losses and gains in the market by the specified amount. For instance at a leverage ratio of 1/100, the client (you) will be able to control 100,000 USD which makes a standard lot, for a deposit of a mere 1,000 USD, and every single pip gain or loss will be multiplied a hundred times. To put this in a better perspective, you need a movement of just 1% in the price quote before your account is doubled — or wiped out.

One will often come across notices on broker websites making the claim that leverage is a double-edged sword; that you can both lose and gain massively depending on what you do. But high leverage, for sure, is a sword with only one edge, and we will discuss why it is so later.

Article Source

http://www.forextraders.com/learn-forex-trading-course/margin-trading-and-leverage.html

Forex pips and lots

2009-10-28T23:42:00.000-07:00

A pip is the smallest amount of movement a price quote can make. In other words, each tick of the price quote is a pip. When EUR/USD moves from 1.2786 to 1.2787, for example, it has moved by one pip. You could also call it a point or a tick, but in forex traders’ jargon, pip is the word.

It’s a good idea to measure your profit or loss in pips rather than in the amount you actually lose or earn, since the trader’s performance can only be valued through his success in gathering pips. For instance, supposing trader A has a beginning capital of 100 USD, and trader B has only 10, it would take trader B ten times as much in terms of pips to achieve the same gain that was acquired by trader A in absolute dollar terms. In terms of their prowess in the market, however, if trader B were to make just 1/10 of what trader A makes, they’d still be equal, due to the the difference between their starting capital. This same logic can be utilized when assessing one’s own prowess, and if a diary is kept, it’s always better to note the loss or profit in pips, rather than cash, so as to keep a better track of performance.

It must also be remembered that one pip in the currency pair that is traded may not be the same amount in the trader’s base currency, that is, the currency with which he funds his account. For instance, if your currency is the British Pound, and you’re trading the EUR/USD, one pip movement in the currency pair would be a different amount in your base currency, depending on the quotes.

Another important term in trading forex is the lot, which is the smallest amount of currency you can trade at a particular level of leverage, and the standard lot size is 100,000 USD. Among today’s forex brokers, there are those who allow traders to enter bids without the use of lots (sometimes called mini lots), and the inexperienced trader may seek them before gaining enough confidence to start trading with a higher volume.

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Currency pairs — Understanding and reading forex quotes

2009-10-28T23:38:00.000-07:00

Our first grade in forex literacy is for understanding how to read the price quote. In forex, currencies are always quoted in pairs. In other words, it’s only possible to value a currency in terms of another one. If you want to buy 100 Euros, how are you going to pay for it? If you were to pay in euros, you’d not be currency trading, and when you use another currency to fund your purchase of the euros, you’re actually creating a forex quote.

It’s actually quite easy to evaluate forex quotes once you get the hang of it, and the fastest way to learn is by considering some examples:

EUR/USD 1.2786

So what does the above quote tell us? What it says is that 1 Euro is able to buy 1.27 units of the US currency. Or, continuing on our previous transaction, we would have to pay

127 USD for 100 Euros we wanted to buy.

But in fact this value is only the average of the bids (price to buy) and offers (price to sell) for a currency pair at a particular time. The bid-ask spread is usually very low for the most liquid pairs, such as the EUR/USD, but at times of illiquidity in the markets, as before a statistical news release, or a central bank decision, the spread can widen to much greater levels.

The quote represents the best pricing that the world market offers for a currency pair at a particular moment. A quote on a computer does not usually include all of the offers and bids all over the world, but because of the very liquid nature of the forex market, any significant difference in quotes across different parts of the world is very quickly eliminated through computer-based, automatic arbitrage, and consequently, except at times of market turmoil the difference between regional quotes is quite low.

So let’s say return to the EUR/USD quote. Our quote is at 1.2786, and the bid-ask spread is at 0.009, as stated by the broker. What this means is that there’s a difference of 0.9 cent between what you pay to buy the same currency pair, and what you’d receive if you were selling it. There’s always a spread in even the most liquid markets, but the spread is usually widened further by the brokerage firm, so that it can make a profit from the individual traders’ deals.

The important point to keep in mind when evaluating quotes is that one quote is valid for only a fraction of a second. At times of market tension, great fluctuations can occur within the scope of one minute, rendering the quote almost useless. Despite the great focus on prices and price patterns among many traders, it’s always advisable to keep the time of the day, of the year, and the emotional atmosphere of the market in mind while deciding on what we should do about a particular quote. For example, quotes during the last few weeks of the year, or in the Thanksgiving week, or at about an hour before the opening of the US market have far less value in determining future price direction and trends than those seen during an ordinary business day at regular hours. So, to repeat, the trader must not only know the price quote at a given moment, but also the seasonal, hourly, and emotional backgrounds that influence the quote before he decides to make a trade on the information.

That skill can be gained through practice, and is perhaps easier learned through experience than reading.
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Introduction to the forex market

2009-10-26T20:41:00.000-07:00

Many of us have been fascinated by the shiny, colorful world of currencies as children, and even those of us who have little interest in the forex market have engaged in some form of currency trading while traveling outside their homeland. And these days, one will easily find people discussing the advantages and weaknesses of the US dollar even in a casual gathering.

The forex market is the currency market: it’s where the value of each currency is determined versus every other currency in the world. If you exchange one US dollar for its equivalent value in Euros, you’re already a part of the forex market, and are creating the quotes you see reported on TV screens every day. There’s no difference between the actions of a tourist at an exchange bureau, and the transactions of banks in the international market, apart from size and maturity terms.

In today’s integrated and specialized economies it’s rare to find all the components of any product produced inside one country’s borders, and so, international trade is a major creator of global forex volume. Deepening financial interactions across the globe through partnerships, buyouts of firms and international loans, along with ever complex tools of investment have been increasing the size of the forex market in recent years. If global trade and finance were the body of world economy, the forex market would be the circulatory system; in other words, there doesn’t exist a deeper, more liquid market than that of currency trading. Almost every political or economical event of long-term significance is reflected in its workings, and understanding it results in a very good comprehension of finance and economics in general.

Participating in such a vast and significant mechanism can be a rewarding and exciting experience for the individual investor. But while this is true, success during your interactions with the giants will require more than a bit of diligence and patient study. The rewards can be immense: famous investors such as George Soros, Jim Rogers, large Wall Street firms such as Goldman Sachs, or banks like Citibank all make millions of dollars each year from trading in the forex market. In fact George Soros is notorious as being the man who broke the Bank of England: Through successful speculations, he was able to make 1 billion dollars in just about a week.
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Learn About Forex Currency Trading - Study Your Options

2009-10-24T07:56:00.000-07:00

If you study finance or have a career in a finance related field, chances are you have had some interaction or knowledge of the foreign exchange trading market. The sheer volume of trades in the foreign exchange market makes it the single largest financial market in the world. This is not a market for the timid or occasional trader. This is a very competitive market with players from global financial giants, retail currency traders, and governments of most countries in the world. To stay competitive in this spirited market you need to learn about forex currency trading.

Unfortunately, it's not as easy as it looks. The huge amount of information resources available regarding foreign currency trading can be daunting. For people who are new to the field, it's extremely difficult sorting the good information from the bad. Before relying on forex information you've found, determine if the source of the material is reliable.

You certainly don't want to bother with the sites that appear as search results simply due to search engine optimization. The major firms in the currency exchange industry provide on their sites a number of charts, graphs and other forms of analysis of foreign exchange information. These are international monetary corporations which maintain their good reputations by providing correct data and explanations. As you start to learn about forex currency trading, you will want to make their sites your initial locations.

If you are not just a student of finance curious about the foreign exchange market; and you foresee yourself earning a living trading forex, a structured course in foreign currency trading becomes inevitable. There are reputed financial institutions such as investment banks, stock exchanges etc. who have tied up with the leading universities and colleges in creating such structured courses in foreign exchange trading.

It would be wise if you don't restrict yourself to these structured courses alone. You can test yourself in order to obtain a certification in foreign exchange trading after you learn about forex currency trading. These certifications will also assist you in getting a job in financial institutions which specialize in currency trading.

There are prerequisites that must be met before you are ready to learn about forex currency trading. You must be firmly grounded in the basic principles of economics and capital markets.

If you are studying finance or are already working in the financial field, you must learn about forex currency trading to keep up with your competitors. Saying that is one thing, but it's much more difficult to actually do. The volume of data out there about this trade is enormous, and it can be confusing. To be certain of the credibility of forex information make sure that your information comes from a reputable source. If you foresee yourself earning a living trading forex, a structured course in foreign currency trading becomes inevitable. Financial institutions have tied up with universities and colleges to create structured courses in foreign exchange trading.

Article Source: http://EzineArticles.com/?expert=Sveinung_Skoglund

Foreax Trading School

2009-10-24T07:47:00.000-07:00

Knowledge is power, and when it comes to the Forex market knowledge is the difference between an earning trader and a losing trader. A well educated trader is the one who knows all the basic terminology and exploits it to his own benefit. As a Forex trader you never stop learning, this what gives you the advantage over other traders, this is what separates you form the herd of traders and instead of following this herd you lead it. A good Forex education will help you make the right trading decisions and make wise investments, and as you keep on learning and gaining more and more knowledge you will see actual results as gains from Forex trading.

Here at Studyforex you will find everything you need to become such a successful trader. If you are a novice or a professional trader you will find here all the basic terminology and all the articles regarding Foreign exchange education. The site is designed to guide you through a journey in the world of foreign exchange trading. Beginning with the origins of the Forex market and a little bit of history and moving on to more advanced topics for the more experienced traders. This site is aimed to give you all the tools and education you will need to start trading the Forex market and will help you to improve your trading using various FX trading indicators and going through more advanced topics.

Our Forex education section is set to lead you on the highway to success, but don’t be alarmed, all the articles are written by our team of professional and experienced traders and is written in a very simple manner. The articles are designed as a step by step course leading you from the simplest terms up to complex mathematical tools to make you the best FX trader you can be. So what are you waiting for? Let’s start trading….

Forex in Australian (Australian Forex)

2009-10-23T09:03:00.000-07:00

The Australian forex market is essentially about exchanging Australian dollars for another currency and vise versa. The demand for Australian dollars in the forex market has risen significantly since the currency was floated by the government in December 1983.

With about A$1.9 trillion worth of transactions taking place everyday, the Australian dollar is the sixth most traded currency in theforex market . The currency lags only the US dollar, the Japanese yen, the Euro, the British pound sterling and the Canadian dollar in terms of trading volume.

Australia Forex: Reasons for Popularity of the Australian Dollar
The Australian forex market has benefited from the popularity of the country’s currency. Here are some of the reasons for the popularity of the Australian dollar:

The relative lack of government intervention in controlling the value of the currency in the forex market.

Relatively high interest rate offered by the Royal Bank of Australia (RBA).
The strategic location of Australia in the Asia-Pacific region.
Free export and import of the currency up to A$10,000.
Relative stability in the country’s political and economic environment.
Lower impact of global recession on the Australian economy.

Australia Forex: Regulations for Brokers

Forex trading in Australia is regulated by the Australian Securities and Investment Commission (ASIC). The Australian law and regulations necessitate:

All brokers offering retail forex services to be registered with the ASIC.
All forex brokers to have an Australian Financial Services License. Alternatively, they could be licensed with the RBA.

Australian Forex: Importance of the Central Bank
The RBA plays a critical role in the Australian forex market. It meets 11 times in a year to discuss issues related to its monetary policy and interest rates. Its decision on interest rates can affect the value of the dollar in the Australianforex market.

Australia Forex: Most Active Trading Hours

The best hours to trade in the Australian currency is around the time when Tokyo trade opens. This is the time at which the Australian economic data, which has a direct impact on the value of the country’s currency, is released.

Bank of England

2009-10-22T06:33:00.000-07:00

Functions of the bank

It performs all the recognized functions of a central bank -- to maintain price stability, and subject to that, to support the economic policy of Her Majesty's Government (Bank of England Act 1998). It has a monopoly on the issue of banknotes in England and Wales (see Sterling); it is both the Government's banker and the bankers' bank; a "Lender of Last Resort"; it manages the country's foreign exchange and gold reserves and the Government's stock register; it used to be responsible for the regulation and supervision of the banking industry (see Johnson Matthey, BCCI, and Barings), although this responsibility was transferred to the Financial Services Authority in June 1998. Since 1997 the Monetary Policy Committee has had the responsibility for setting the official interest rate. Scottish and Northern Irish banks retain the right to issue their own banknotes, but they must be backed one to one with deposits in the Bank of England, excepting a few million pounds representing the value of notes they had in circulation in 1845. It maintains the Government's Consolidated Fund account.

The current Governor of the Bank of England is Sir Mervyn Allister King, who took over on June 30, 2003 from Sir Edward George.

History

The bank was founded along with the Bank of Scotland by William Paterson in 1694 to act as the English Government's banker; the Bank of Scotland was to be the Scottish Government's banker. He proposed a loan of £1.2m to the Government; in return the subscribers would be incorporated as the Governor and Company of the Bank of England with banking privileges including the issue of notes. The Royal Charter was granted on July 27, 1694. Public finances were in so dire a condition at the time that the terms of the loan were that it was to be serviced at a rate of 8% per annum, and there was also a service charge of £4000 per annum for the management of the loan. The first governor was Sir John Houblon, who is depicted in the £50 note issued in 1994. The charter was renewed in 1742, 1764, and 1781. In 1734 the Bank moved to its current location on Threadneedle Street, slowly acquiring the land to create the edifice seen today.

When the idea and reality of the National Debt came about during the 18th century this was also managed by the bank. By the charter renewal in 1781 it was also the bankers' bank - keeping enough gold to pay its notes on demand until February 26, 1797 when war had so diminished gold reserves that the Government prohibited the Bank from paying out in gold. This lasted until 1821.

The 1844 Bank Charter Act tied the issue of notes to the gold reserves and gave the bank sole rights with regard to the issue of banknotes. Private banks which had previously had that right retained it, provided that their headquarters were outside London and that they deposited security against the notes that they issued. A few English banks continued to issue their own notes until the last of them was taken over in the 1930s. The Scottish and Northern Irish private banks still have that right. Britain remained on the gold standard until 1931 when the gold and foreign exchange reserves were transferred to the Treasury. But their management was still handled by the Bank. In 1870 the Bank was given responsibility for interest rate policy.

During the governorship of Montagu Norman, which lasted from 1920 to 1944, the Bank made deliberate efforts to move away from commercial banking and become a central bank. In 1946, shortly after the end of Norman's tenure, the Bank was nationalised.

The nearest London Underground station, and thus a busy commuter stop, is Bank station.

In 1997 the bank's Monetary Policy Committee was given sole responsibility for setting interest rates to meet the Government's stated inflation target of 2.5%. This decision was taken by the Chancellor of the Exchequer, Gordon Brown immediately following the 1997 general election. However the idea was originally that of Conservative MP Nicholas Budgen who proposed it as a Private Members Bill in 1996, the bill failed as it had neither the support of the government or the opposition. The act of 1997 is almost verbatim what Budgen proposed in 1996. Should inflation miss the target by over 1%, the governor would have write a letter to the Chancellor of the Exchequer explaining why and how he would remedy the situation. This was an astute move for several reasons;

it removed the polically controversial responsibility from the government
it was very popular with the City of London, showing a sign of the new governments desire for a strong economy
- Following the announcement the FTSE 100 leapt rapidly and,
- the Pound reached its highest level against the Deutschmark since Sterling's exit from the ERM

Banknote issues

The Bank of England has issued banknotes since 1694. Notes were originally hand-written, although they were partially printed from 1725 onwards cashiers still had to sign each note and make them payable to someone. Notes were fully printed from 1855, no doubt to the relief of the banks' workers. Until 1928 all notes were "White Notes", printed in black and with a blank reverse. During the 20th century White Notes were issued in denominations between £5 and £1000, but in the 18th and 19th centuries there were White Notes for £1 and £2. In the twentieth century, the Bank issued notes for ten shillings and one pound for the first time on 22 November 1928 when the Bank took over responsibility for these denominations from the Treasury which had issued notes of these denominations three days after the declaration of war in 1914 in order to remove gold coins from circulation.

During the Second World War the German Operation Bernhard attempted to counterfeit various denominations between £5 and £50 in an attempt to destabilise the British economy, producing 500,000 notes each month in 1943 -- although most fell into Allied hands at the end of the war, forgeries were frequently appearing for years afterward, so all denominations of banknote above £5 were subsequently removed from circulation.

All old Bank of England notes remain exchangeable for current notes forever. Notes can either be taken in person to the Bank in London during normal business hours, or sent by post at the sender's risk to:

Exchanges,
Custodial Services,
Threadneedle Street,
London EC2R 8AH

Article Source

Foreign Exchange Market ( FOREX ) Currency CDs

2009-10-20T05:19:00.000-07:00

There’s been a lot of talk in the last year about the US dollar being replaced as a reserve currency, in part because of all the bailouts and “quantitative easing” done to jump-start our economy. With all the recent economic forums, such as the G20 in Pittsburgh, it’s no surprise that this has been a topic of conversation.

So, we started looking at ways to diversify ourselves off the US dollar. It’s possible that the dollar could be replaced as a reserve currency but more importantly, we realized that in the increasingly global economy, it’s dangerous to have all your money be from one country. There’s a reason why gold spiked to over $1,000 an ounce and it’s because people wanted stability.

However, if you don’t want to own gold, are there other options? I think a foreign exchange currency CD might be a good idea. Before we make any decisions, we should do some research about them in the first place. I’m going to use Everbank as an example because I already have a banking relationship with them and their website offers up a lot of good information about their products. For our review I’ll use the MarketSafe BRIC Certificate of Deposit as the example.

Why a Forex CD?

The idea behind foreign exchange, or Forex, is that you get to trade you dollars for some other currency. When the exchange rate changes, you either gain money or lose money. The name of the game is trying to figure out the trends and buy other currencies when the dollar is worth more and sell them back when the dollar is worth less. If you were to get into it you would find it’s a little more complicated, but that’s the gist.

Why a Forex CD? You get to dabble in foreign exchange currency trading without actually getting involved in any exchanging of foreign currency. More importantly, with this MarketSafe CD, you get to dabble in forex without putting any principal at risk. You get exposure to the Brazilian real, Russian ruble, Indian rupee, and the Chinese renminbi currencies in the form of a three-year CD.

If you think the value of the dollar will fall relative to this basket of four currencies in three years, then you’ll want to deposit money into the CD. If you don’t think it will, then you won’t. It’s as simple as that.

What is the Risk?

There is no risk that you would ever lose your principal with a MarketSafe CD but that doesn’t mean you don’t assume any risk. Inflation risk is the biggest problem you have to deal with. Let’s say the dollar increases in value relative to the BRIC currencies, then you would earn 0% over three years. That doesn’t sound bad right? Well, inflation, despite being 0.19% this last year, probably won’t be 0%. Inflation would make your dollars, having been locked up for three years, worth less and less each year. This risk exists for any investment… if you aren’t moving forward, you’re moving backwards.

Anytime you invest your money, you want to compare your investment against a safe return. You have to decide whether you are getting enough in anticipated return to take on the risk you assume with that investment. A three year (36-month) certificate of deposit currently yields somewhere between 2.50% – 2.80% APY, as of September 2009. Your principal is protected in the MarketSafe CD but your anticipated return has to at least beat your 100% safe alternative investment. If you were to earn 0%, you’ve actually lost 2.80% plus whatever inflation took out the back door.

Next Steps

For now we’re going to pass on the CD as we do some more research in the space. I’m always hesitant to lock up anything for such a long time but a little bit of money might not be a bad idea just to get a little exposure. Do you have any experience in Forex or Forex CDs? Or have you been looking at ways to diversify outside the US? Any and all directions you can point me in would be very helpful!

Source

Link Download

2009-10-18T08:21:00.000-07:00

Determination of Foreign Exchange Rates

2009-06-12T04:29:00.000-07:00

Exchange rates respond directly to all sorts of events, both tangible and psychological—

Business cycles;
Balance of payment statistics;
Political developments;
New tax laws;
Stock market news;
Inflationary expectations;
International investment patterns;
And government and central bank policies among others.

At the heart of this complex market are the same forces of demand and supply that determine the prices of goods and services in any free market. If at any given rate, the demand for a currency is greater than its supply, its price will rise. If supply exceeds demand, the price will fall.

The supply of a nation’s currency is influenced by that nation’s monetary authority, (usually its central bank), consistent with the amount of spending taking place in the economy. Government and central banks closely monitor economic activity to keep money supply at a level appropriate to achieve their economic goals.

Too much money è inflation è value of money declines è prices rise
Too little money è sluggish economic growth è rising unemployment

Monetary authorities must decide whether economic conditions call for a larger or smaller increase in the money supply.

Sources for currency demand on the FX market:

The currency of a growing economy with relative price stability and a wide variety of competitive goods and services will be more in demand than that of a country in political turmoil, with high inflation and few marketable exports.
Money will flow to wherever it can get the highest return with the least risk. If a nation’s financial instruments, such as stocks and bonds, offer relatively high rates of return at relatively low risk, foreigners will demand its currency to invest in them.
FX traders speculate within the market about how different events will move the exchange rates. For example:
- News of political instability in other countries drives up demand for U.S. dollars as investors are looking for a "safe haven" for their money.
- A country’s interest rates rise and its currency appreciates as foreign investors seek higher returns than they can get in their own countries.
- Developing nations undertaking successful economic reforms may experience currency appreciation as foreign investors seek new opportunities.

Foreign Exchange Rates

2009-06-12T04:28:00.000-07:00

Most common contact with foreign exchange occurs when we travel or buy things in other countries.

Suppose a U.S. tourist travelling in London wants to buy a sweater. Price tag is 100 pounds.
Current exchange rate		Price of sweater in dollars
$1.45 to £1 $1.30 to £1 $1.60 to £1	Pound falls Pound rises	100 x 1.45 = $145.00 100 x 1.30 = $130.00 100 x 1.60 = $160.00
Thus, small changes in exchange rates may not seem significant. But when billions of dollars are traded, even a hundredth of a percentage point change in exchange rates becomes important.

Stronger US dollar implies	U.S. can buy foreign goods more cheaply	è	Cost of purchasing foreign goods falls
Stronger US dollar implies	Foreigners find U.S. goods more expensive and demand falls	è	Does not help firms that produce for exports
Weaker U.S. dollar implies	Foreigners buy more U.S. goods	è	Helps firms that rely on exports
Weaker U.S. dollar implies	Foreign goods become more expensive	è	Demand for imports falls

It would seem logical that if the dollar weakens, the trade balance will improve, as exports would rise. However, this does not always happen. U.S. trade balance usually worsens for a few months.

The J–curve explains why the trade position does not improve soon after the weakening of a currency. Most import/export orders are taken months in advance. Immediately after a currency’s value drops, the volume of imports remains about the same, but the prices in terms of the home currency rise. On the other hand, the value of the domestic exports remains the same, and the difference in values worsens the trade balance until the imports and exports adjust to the new exchange rates.

Exchange rates are an important consideration when making international investment decisions. The money invested overseas incurs an exchange rate risk.

When an investor decides to "cash out," or bring his money home, any gains could be magnified or wiped out depending on the change in the exchange rates in the interim. Thus, changes in exchange rates can have many repercussions on an economy:

Affects the prices of imported goods
Affects the overall level of price and wage inflation
Influences tourism patterns
May influence consumers’ buying decisions and investors’ long-term commitments.

Foreign Exchange Market Participants

2009-06-12T04:27:00.000-07:00

There are four types of market participants—banks, brokers, customers, and central banks.

Banks and other financial institutions are the biggest participants. They earn profits by buying and selling currencies from and to each other. Roughly two-thirds of all FX transactions involve banks dealing directly with each other.
Brokers act as intermediaries between banks. Dealers call them to find out where they can get the best price for currencies. Such arrangements are beneficial since they afford anonymity to the buyer/seller. Brokers earn profit by charging a commission on the transactions they arrange.
Customers, mainly large companies, require foreign currency in the course of doing business or making investments. Some even have their own trading desks if their requirements are large. Other types of customers are individuals who buy foreign exchange to travel abroad or make purchases in foreign countries.
Central banks, which act on behalf of their governments, sometimes participate in the FX market to influence the value of their currencies.

With more than $1.2 trillion changing hands every day, the activity of these participants affects the value of every dollar, pound, yen or euro.

The participants in the FX market trade for a variety of reasons:

To earn short-term profits from fluctuations in exchange rates,
To protect themselves from loss due to changes in exchange rates, and
To acquire the foreign currency necessary to buy goods and services from other countries.

What Is Foreign Exchange Market: ?

2009-06-12T04:25:00.000-07:00

To buy foreign goods or services, or to invest in other countries, companies and individuals may need to first buy the currency of the country with which they are doing business. Generally, exporters prefer to be paid in their country’s currency or in U.S. dollars, which are accepted all over the world.

When Canadians buy oil from Saudi Arabia they may pay in U.S. dollars and not in Canadian dollars or Saudi riyals, even though the United States is not involved in the transaction.

The foreign exchange market, or the "FX" market, is where the buying and selling of different currencies takes place. The price of one currency in terms of another is called an exchange rate.

The market itself is actually a worldwide network of traders, connected by telephone lines and computer screens—there is no central headquarters. There are three main centers of trading, which handle the majority of all FX transactions—United Kingdom, United States, and Japan.

Transactions in Singapore, Switzerland, Hong Kong, Germany, France and Australia account for most of the remaining transactions in the market. Trading goes on 24 hours a day: at 8 a.m. the exchange market is first opening in London, while the trading day is ending in Singapore and Hong Kong. At 1 p.m. in London, the New York market opens for business and later in the afternoon the traders in San Francisco can also conduct business. As the market closes in San Francisco, the Singapore and Hong Kong markets are starting their day.

The FX market is fast paced, volatile and enormous—it is the largest market in the world. In 2001 on average, an estimated $1,210 billion was traded each day—roughly equivalent to every person in the world trading $195 each day.

Theory and Econometric Evidence

The flotation of exchange rates in the early 1970s saw a significant increase in the importance of foreign exchange markets and in the interest shown in them. Apart from the consequent institutional changes, this period also witnessed a revolution in macroeconomic analysis and finance theory based on the concept of rational expectations. This book provides an integrated approach to recent developments in the understanding of foreign exchange markets. It begins by charting the institutional background and looks at the recent history of movements in some of the major exchange rates. The theoretical sections focus on the economic and finance theory of the asset market approach, the macroeconomic models developed from this approach, and on interest rate parity theory. The empirical chapters draw on the authors’ own research from a high quality set of exchange rate and interest rate data. The statistical properties of exchange rates are analysed; the relationship between spot and forward rates is examined; and the modelling and impact of new information on the forward and spot relationship is considered. The final chapter is devoted to the estimation and testing of exchange rate models.

Insurance

2009-06-11T23:25:00.000-07:00

Do you understand about insurance..read here to know all.
Insurance is a system for lowering the loss of financial distribute risk of loss of a person or body to the other ..

Insurance Act No.2 of 1992 Th perasuransian is a business agreement between two or more parties, with which the insurer tie themselves to the Insured with insurance premiums, to provide reimbursement to the Insured for any loss, damage or loss of profits or the expected legal responsibility to third parties that may be suffered Insured, arising out of an event that is not certain, or provide a payment based on life or death that someone be.

Agency that provides risk-called "Insured", and accept the risk that the body called the "insurer". Agreement between the two bodies is called the policy: this is a legal contract that explains the terms and conditions protected. Costs paid by "tetanggung" to the "guarantor" for the risk borne by the "premium". This is usually determined by the "guarantor" for the funds that can be claimed in the future, administrative costs, and benefits.

For example, a couple buying a house worth Rp. 100 million. Knowing that they will lose their homes to bring them to financial ruin, they take the insurance policy in the form of home ownership. The policy will pay for replacement or repair their homes when the disaster occurred. Insurance companies on their premiums as much as Rp1 million per year. The risk of losing the house has been distributed to the owner's home insurance companies..thank you for visit.

Bubble in Emerging Markets FX?

2009-06-11T22:45:00.000-07:00

What’s wrong with a little optimism? Well, nothing, in theory. In practice, however, unbridled investor optimism usually spells disaster. Consider that emerging market stocks (based on the MSCI emerging-markets index) now trade for 15x-earnings, the highest level since December 2007. Does anyone remember what happened next? The index plummeted 22% in a matter of months.

Here are some more statistics. The MSCI index is now at an eight-month high, following a record 61% rise since February. $12 Billion have poured into emerging markets in the last four weeks alone. Consider this against the backdrop that “Earnings at companies in the MSCI emerging-markets gauge trailed analysts’ estimates by an average of 41 percent in the first quarter.”

Meanwhile, “The extra yield investors demand to own developing nations’ bonds instead of U.S. Treasuries fell…to 4.19 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index.” The index has now erased nearly all of its losses from the last year. In some ways, this is even more unbelievable than the rally in stocks, since it indicates that despite the current recession and strained finances, investors are just as willing to lend to companies in developing countries as they were prior to the downturn!

Who cares about stocks- tell me about currencies! “Unsurprisingly stock markets in Asia have been highly correlated with regional currencies over recent months, with almost all currencies in Asia registering a strong directional relationship with their respective equity markets.” The Indonesian Rupiah is up 11% this year and the Indian Rupee is now up 4%, to highlight only a couple. Only a few months ago, these currencies were tracking at double-digit percentage declines!

A culling of analysts’ soundbites reveal the usual lack of consensus. On the one hand, “The pattern signals an ‘imminent’ drop;” “Fund flows at their extremes are contrary indicators;” and “Investors are starting to doubt the sustainability of how much longer this very sharp rally can continue.” But for every bear there’s a bull: “There’s a lot of money looking for decent returns and that’s going to continue driving emerging markets.” In short, you can find literally thousands of analysts and their respective forecasts to support either hypothesis.

I would argue that the sustainability of this rally (both in stocks and in currencies) hinges on a return to GDP growth in emerging markets. [The IMF forecasts 1.6% growth in 2009 and 4% in 2010]. But given the gap between share prices and earnings, I’m frankly not convinced that investors actually care about whether the rally is supported by actual data. Instead, investors have complacently been swept up by the same herd mentality that produced the bubble of 2008, and could potentially lead to a rapid and painful collapse in what looks to be the bubble of 2009.souce

British Pound Rises to Seven Month High, but Holes are Beginning to Appear

2009-06-11T22:30:00.000-07:00

You may have noticed that the phrase “seven month high” appears quite frequently in recent Forex Blog posts, regardless of the currency being discussed. I offer this preface as context for Pound’s recent rally because it suggests that the factors driving the Pound are hardly unique from the factors driving other currencies. In other words, “It’s a mixture of a dollar-weakness story and a global-growth story.”

Of course, it would it be unfair to so glibly dismiss the Pound, so let’s look at the underlying picture. On the macro-level, the British economy is still anemic: “Gross domestic product dropped 1.9 percent in the latest quarter, the most since 1979, according to the Office for National Statistics. The International Monetary Fund now expects the British economy to shrink by 4.1 percent in 2009.” Without drilling too far into the data, suffice it to say that most of the indicators tell a similar story.

The only relative bright spots are the housing market and financial sector. Mortgage applications are rising, and there is evidence that housing prices are slowing in their descent, perhaps even nearing a bottom. Optimists, naturally, are arguing that this signals the entire economy is turning around. History and common sense, however, suggest that even if the most recent data is not a blip, it’s still unlikely that the UK will able to depend on the housing sector to drive future growth. Besides, there is anecdotal evidence to suggest that foreign buying (due to favorable exchange rates) is propping up real estate prices, rather than a change in market fundamentals.

The stabilization of financial markets is also good for the UK, as 1/3 of its economy is connected to the financial sector. “Sterling is basically a bet on global financial well-being…Now that the banking sector has stepped away from the Armageddon scenario, the prospects for London and the U.K. economy look better.” But as with housing, it’s unlikely that the financial sector will return to the glory days, in which case the UK will have to turn elsewhere in its search for growth.

What about the Bank of England’s heralded attempt at Quantitative easing? While it’s still to early to draw conclusions, the initial data is not good. In fact, the most recent data indicates that half of the bonds that the BOE bought last month (with freshly minted cash) were from foreign buyers, which causes inflation without any of the economic benefits from an increase in the domestic flow of money. Given that S&P recently downgraded the outlook for UK credit ratings, it’s no surprise that foreigners are moving towards the exits. In short, “With underlying weakness in money and credit - plus large gilt sales by overseas investors - we doubt that quantitative easing is playing much direct role in the economy’s possible turnaround,” summarized one analyst.

If you ask me, the Pound rally is grounded in nothing other than naive technical analysis, which relies on indicators that are largely self-fulfilling. In other words, if the Pound seems like it should rise, than it probably will, simply as a result of investor perception. “Citigroup Inc. said in a report last week the pound is ‘among the most undervalued major currencies…’ Barclays Plc predicts it will rise as much as 18 percent against the dollar and 11 percent versus the euro in the coming year. Goldman Sachs Group Inc. sees a 23 percent gain versus the dollar and 15 percent advance against the euro.” Call me skeptical, but it’s hard to understand what kind of analysis underlies these predictions other than simple intuition. Sure the Pound was probably oversold, but is a 20% rise is two months really justified?

The U.S. Commodity Futures Trading Commission data indicated a slight downtick, but “big speculative players continue to hold large net short positions in the pound versus the dollar,” which suggests that the savviest investors are not yet sold on the rally. Emerging markets offer growth and higher yield. Commodity currencies, such as the Australian and New Zealand dollars, rise in line with energy and commodity prices. Someone please tell me where the Pound fits into this?

Retail FX Trading Continues to Surge

2009-06-11T22:18:00.001-07:00

Pretty much every brochure advertising forex trading highlights the fact there is no such a thing as a bear market in forex. Stocks, bonds, and commodities can all lose value simultaneously (as happened when Lehman Brothers declared bankruptcy in October 2008) but it’s impossible for all currencies to decline simultaneously. A bear market in the Euro might be offset by a bull market in the Dollar; or Swiss Franc; or Brazilian Real. Regardless, you don’t have to search far to find currencies that are outperforming, whereas a stock picker would certainly have his work cut out for him during an economic recession.

I remind you of this cliche because in the current market environment, it has apparently taken on new significance. Anecdotal reports of investors frustrated with stocks, or having been burned by China, or disappointed by the collapse in oil, are flocking to forex by the thousands. Angry about suspended trading rules on stock markets? This could never happen in forex (at least not under current rules), since currencies are traded on multiple exchanges linked through a decentralized system.

Here are the stats: at Forex.com, “New accounts have increased about 30 percent a month in the last six months from pre-September levels, while the number of trades per day has risen almost 50 percent. GFT Forex said trading volume rose 187 percent from late 2007 to late 2008….By the end of 2006 [the last year apparently for which this type of data is available], average daily trade volume reached over $60 billion, a 500 percent increase from 2001…Trading volume generated by ‘retail aggregators’ — electronic trading platforms that cater to individual retail traders — rose almost 43 percent from 2007 to 2008.” This dwarfs both overall growth in forex, as well as retail growth in the bread-and-butter securities markets.

One trend worth drawing attention to is that new investors are focusing on the most popular currency pairs. [See Chart below, courtesy of Wikipedia]. It has been proposed that this is because of widening spreads (i.e. more PIPs) on less liquid pairs, but it is just as likely being caused by investors applying the stock market logic of “buy what you know” to forex. It is understandable that those new to the game would want to get their feet wet by dabbling in the Euro/Dollar/Yen, rather than diving right in to niche currencies such as the Mexican Peso or even Korean Won, whose movements are both more volatile and more difficult for the average trader to understand.

Foreign Exchange Market ( Forex )

2009-06-11T21:58:00.000-07:00

The foreign exchange market (currency, forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. [1]FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when worldover countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.