Currency Converter
Sunday, January 25, 2009
Saturday, January 24, 2009
Decision To make with Forex
Your decisions in Forex trading should make use of at least these four data sources:
1) Bid price
2) Ask price
3) Mid price
4) Indicative prices
You should know what spead your broker is offering on the currencies as this can help you in setting the slippage on each currency. You should be informed about the margin that your broker offers. Once you have decided the price at which you are going to buy the currency, the quantity to buy can only be appropriately fixed only after knowing the margin that the broker offers. The success of your currency trading venture depends a great deal on the restrictions set by your broker. For example, your broker may allow only ten pip stops from your initial entry price. The times at which the broker is available for trading is also important. Be fully aware of these broker restrictions and their potential effects on the profits earned through currency trading.
1) Bid price
2) Ask price
3) Mid price
4) Indicative prices
You should know what spead your broker is offering on the currencies as this can help you in setting the slippage on each currency. You should be informed about the margin that your broker offers. Once you have decided the price at which you are going to buy the currency, the quantity to buy can only be appropriately fixed only after knowing the margin that the broker offers. The success of your currency trading venture depends a great deal on the restrictions set by your broker. For example, your broker may allow only ten pip stops from your initial entry price. The times at which the broker is available for trading is also important. Be fully aware of these broker restrictions and their potential effects on the profits earned through currency trading.
Friday, January 9, 2009
Forex Futures 2
The profits of forex over currency futures trading are significant. The difference between the two instruments range from truth-seeking realities such as the history of each, their objective viewers, and their importance in the modern forex markets, to more concrete issues such as transactions fees, margin necessities, access to liquidity, easiness of use and the technical and educational support obtainable by sources of each service. These dissimilarities sketched below:
More Volume = Improved Liquidity. Daily money futures volume on the CME is now above 2% of the volume seen each day in the forex markets. Incomparable liquidity is one of many advantages that forex markets clutch more currency futures. The truth told this is old news. Any currency professional can tell you that cash has been king since daybreak of the modern currency markets in the early 1970's. The actual news is that individual dealers from every forex risk profile now have full right to use to the opportunities offered in the forex markets.
Forex markets give tighter bid to offer increases than currency futures markets. By reversing the futures cost to evaluate it to cash, you can willingly see that in the USD/CHF example over, inverting the futures selling price of .5894 - .5897 results in a currency price of 1.6958 - 1.6966, 8 pips vs. the 5-pip increase available in the forex currency markets.
Forex markets offer higher advantage and lower margin charge than those found in currency futures trading. When trading currency futures, buyers have one margin charge for "day" buy and sells and another for "overnight" situations. These forex margin rates can differ depending on business size. When trading cash markets, you have admission to the same margin rates day and night. Certainly, trading on margin enlarges equally your fx profits AND your losses.
Forex markets make use of easily understood and across the world used terms and cost quotes. Currency futures quotes are inversions of the cash value. For instance, if the cash price for USD/CHF is 1.7100/1.7105, the future corresponding is .5894/ .5897; a method followed only in the limits of futures trading.
Currency futures charges have the added difficulty of with an advance forex part that takes into account a time factor, interest rates and the interest disparities flanked by different currencies. The forex markets need no such changes, mathematical manipulation or thought for the interest rate factor of futures agreements.
More Volume = Improved Liquidity. Daily money futures volume on the CME is now above 2% of the volume seen each day in the forex markets. Incomparable liquidity is one of many advantages that forex markets clutch more currency futures. The truth told this is old news. Any currency professional can tell you that cash has been king since daybreak of the modern currency markets in the early 1970's. The actual news is that individual dealers from every forex risk profile now have full right to use to the opportunities offered in the forex markets.
Forex markets give tighter bid to offer increases than currency futures markets. By reversing the futures cost to evaluate it to cash, you can willingly see that in the USD/CHF example over, inverting the futures selling price of .5894 - .5897 results in a currency price of 1.6958 - 1.6966, 8 pips vs. the 5-pip increase available in the forex currency markets.
Forex markets offer higher advantage and lower margin charge than those found in currency futures trading. When trading currency futures, buyers have one margin charge for "day" buy and sells and another for "overnight" situations. These forex margin rates can differ depending on business size. When trading cash markets, you have admission to the same margin rates day and night. Certainly, trading on margin enlarges equally your fx profits AND your losses.
Forex markets make use of easily understood and across the world used terms and cost quotes. Currency futures quotes are inversions of the cash value. For instance, if the cash price for USD/CHF is 1.7100/1.7105, the future corresponding is .5894/ .5897; a method followed only in the limits of futures trading.
Currency futures charges have the added difficulty of with an advance forex part that takes into account a time factor, interest rates and the interest disparities flanked by different currencies. The forex markets need no such changes, mathematical manipulation or thought for the interest rate factor of futures agreements.
Managed Trading
Managed futures trading funds accounts have become very popular recently because of a stagnant and depressed stock and real estate market. Futures trading is non-correlated to stocks and real estate and is quickly becoming the investment vehicle of choice for many savvy investors. There is also no upward or downward trading bias. Managed futures trading funds usually have a longer term investment horizon and and can be put in qualified IRA accounts.
There is substantial risk of loss in managed futures trading accounts and only risk capital should be use for these investments.
Professionally managed futures trading accounts typically require larger investments of capital and broker and clearing firm compensations are usually fee oriented. In these managed accounts the investor must give power of attorney to the fund trader. These managed funds are similar in design to a stock mutual fund.
Feel free to request track records and prospectus information for our various managed futures trading accounts. Typically these accounts require a $50,000 initial investment but some futures funds managers do require less. Please specify in the request more than or less than $50,000 so we can send you appropriate managed futures fund information.
There is substantial risk of loss in managed futures trading accounts and only risk capital should be use for these investments.
Professionally managed futures trading accounts typically require larger investments of capital and broker and clearing firm compensations are usually fee oriented. In these managed accounts the investor must give power of attorney to the fund trader. These managed funds are similar in design to a stock mutual fund.
Feel free to request track records and prospectus information for our various managed futures trading accounts. Typically these accounts require a $50,000 initial investment but some futures funds managers do require less. Please specify in the request more than or less than $50,000 so we can send you appropriate managed futures fund information.
Commodity Futures
Serious commodity future online traders must take the time to study and practice their trading and risk management skills in order to be successful. Commodity future online trading is fast paced and perilous and may not be suitable for most investors because the risk of loss can be extreme.
Most brokerages that offer commodity future online trading also offer practice demo accounts. These commodity future online trading demo accounts usually include real time quotes, charts and even bid and ask prices for electronic markets. These accounts usually give the would be investor around $50,000 in virtual equity to practice their commodity trading skills for 30 days. These demo accounts are usually the last step in the educated commodity investors process in deciding whether commodity future trading is for them or not.
Most brokerages that offer commodity future online trading also offer practice demo accounts. These commodity future online trading demo accounts usually include real time quotes, charts and even bid and ask prices for electronic markets. These accounts usually give the would be investor around $50,000 in virtual equity to practice their commodity trading skills for 30 days. These demo accounts are usually the last step in the educated commodity investors process in deciding whether commodity future trading is for them or not.
Forex Fx Futures
Forex is the abbreviated term for foreign exchange which involves the multi-trillion dollar per day trading of currency pairs against each other. This market is virtually a 24 hour market that follows the sun beginning in Sydney, Australia and working around the world to New York beginning on Sunday at 5PM ET through Friday at 5PM ET. The 24 hour nature of forex has made it very popular with traders who do not have time to trade during normal business hours.
Futures contracts are a means for the user and producer of a particular commodity to contract for delivery of the commodity at a future date at a specific price. However, the futures markets are mainly used by producers and consumers to hedge against adverse price risk and for speculation purposes.
Forex and futures options give the purchaser the right but not the obligation to buy or sell the underlying forex pair or commodity. A put option gives the right to sell and a call gives the right to sell at a specific strike price. The purchaser of the option is at risk only for the premium paid for the option and any commissions or fees involved.
Forex, futures and their options carry a significant risk of loss and are very speculative in nature. Investors should only use risk capital when investing in these markets. Forex does not trade on an exchange
Futures contracts are a means for the user and producer of a particular commodity to contract for delivery of the commodity at a future date at a specific price. However, the futures markets are mainly used by producers and consumers to hedge against adverse price risk and for speculation purposes.
Forex and futures options give the purchaser the right but not the obligation to buy or sell the underlying forex pair or commodity. A put option gives the right to sell and a call gives the right to sell at a specific strike price. The purchaser of the option is at risk only for the premium paid for the option and any commissions or fees involved.
Forex, futures and their options carry a significant risk of loss and are very speculative in nature. Investors should only use risk capital when investing in these markets. Forex does not trade on an exchange
Wednesday, January 7, 2009
Long Term Profits In Forex Trading
The moment you make an execution or transaction, and transfer your money overseas, you’re automatically bounded by the Forex Rate. Many investors are taking advantage of this to make a profit. While many will no doubt lose money, but for those that are looking for long term profit…they are in fact lowering their risk.
This is how many experts trade in forex. As they see an opportunity in the future of a particular economy that’s affecting it’s currency, they try to capitalize on it.
The goal is the buy the currency at the lowest possible price and wait for the rates to go up and then sell it for a profit. Since forex rates are dependent on a large number of factors…it could take some time before you see any shifts in prices. However, the beauty of Forex Trading is that you can earn a profit whether a currency is low or high. This is big business for large corporations as it’s one of the quickest ways to build their assets.
You must stay close to the trends that’s happening everyday if you’re only looking for short term profits. Day trading is not that simple and takes time to monitor and analyze to become truly successful. Long Term Profits however are easier to obtain because all you need to do is look out for all the big changes in the country’s interest rates, laws, news and so on.
Many claim that even the unemployment rate can play a major role in changing currency rates, but you should always think of it as part of the overall strategy. However, interest rates are the number one factor affecting currency value. By keeping and eye on this information, you will begin to see opportunities in the FX market and take advantage of the changes to earn a share of these transactions.
There is no one true way to be successful in forex. Patience is definitely the key and if you’re willing to take the time to learn forex trading the right way, you will potentially make more profits. You will begin to understand the whole picture…..while developing killer forex strategies and be able to grab opportunities as they come within the shortest period possible.
This is how many experts trade in forex. As they see an opportunity in the future of a particular economy that’s affecting it’s currency, they try to capitalize on it.
The goal is the buy the currency at the lowest possible price and wait for the rates to go up and then sell it for a profit. Since forex rates are dependent on a large number of factors…it could take some time before you see any shifts in prices. However, the beauty of Forex Trading is that you can earn a profit whether a currency is low or high. This is big business for large corporations as it’s one of the quickest ways to build their assets.
You must stay close to the trends that’s happening everyday if you’re only looking for short term profits. Day trading is not that simple and takes time to monitor and analyze to become truly successful. Long Term Profits however are easier to obtain because all you need to do is look out for all the big changes in the country’s interest rates, laws, news and so on.
Many claim that even the unemployment rate can play a major role in changing currency rates, but you should always think of it as part of the overall strategy. However, interest rates are the number one factor affecting currency value. By keeping and eye on this information, you will begin to see opportunities in the FX market and take advantage of the changes to earn a share of these transactions.
There is no one true way to be successful in forex. Patience is definitely the key and if you’re willing to take the time to learn forex trading the right way, you will potentially make more profits. You will begin to understand the whole picture…..while developing killer forex strategies and be able to grab opportunities as they come within the shortest period possible.
Online Forex Trading
The Internet has made it easier than ever for the average person to get involved in speculative forms of day trading, like Forex trading.
In the past, Forex trades had to be carried out by calling up your broker’s ‘dealing desk’. Today, though, carrying out a trade is as simply as pointing and clicking from within your online trading account.
This is indeed a luxury but, as you may have guessed, there is both an upside and a downside to the technological ease of online trading.
One of the biggest problems is a phenomenon known as ’scalping’. Scalpers are traders who rely on the speed of electronic trading (and the ability to bypass the ‘dealing desk’) to ’scalp’ Pips.
In other words, they trade currencies on the smallest fluctuations in exchange rate. A scalper might trade a pair when it moves from 1.3435 to 1.3436, for example.
There’s technically nothing wrong with doing so, except that scalpers executes these types of trades hundreds of times daily. They may exit a trade before the broker even has time to deal with it, and this results in a loss…for the broker, that is.
Scalping is a risky strategy that is all to easy to perform online. So, the first thing you need to be sure of before you start trading is that you know what you’re doing. Scalping isn’t something you want to do as a beginner, regardless of whether you’re doing it intentionally or through sheer inexperience.
The second thing you’ll want to do is develop a long-term investment strategy. Forex is fun to ‘play’ with, and online accounts make it easy to jump in the game just to try it out. It has almost become a fad.
However, what the sad statistics bear out is that over half of all new Forex traders lose their money within a year. The foreign exchange market is seeing a lot of hype right now, and too many people are signing on in the hopes of making a quick buck. Forex is simply not that easy, though, and it is certainly not a get rich quick scheme for the average person.
So, before you start trading, make sure you take the time to educate yourself. There’s plenty of free information online, as well as top-notch training courses provided by brokers and expert investors.
Putting the necessary time up front into developing a long-range strategy, and educating yourself on the marketplace, will go a long way to assuring your success.
In the past, Forex trades had to be carried out by calling up your broker’s ‘dealing desk’. Today, though, carrying out a trade is as simply as pointing and clicking from within your online trading account.
This is indeed a luxury but, as you may have guessed, there is both an upside and a downside to the technological ease of online trading.
One of the biggest problems is a phenomenon known as ’scalping’. Scalpers are traders who rely on the speed of electronic trading (and the ability to bypass the ‘dealing desk’) to ’scalp’ Pips.
In other words, they trade currencies on the smallest fluctuations in exchange rate. A scalper might trade a pair when it moves from 1.3435 to 1.3436, for example.
There’s technically nothing wrong with doing so, except that scalpers executes these types of trades hundreds of times daily. They may exit a trade before the broker even has time to deal with it, and this results in a loss…for the broker, that is.
Scalping is a risky strategy that is all to easy to perform online. So, the first thing you need to be sure of before you start trading is that you know what you’re doing. Scalping isn’t something you want to do as a beginner, regardless of whether you’re doing it intentionally or through sheer inexperience.
The second thing you’ll want to do is develop a long-term investment strategy. Forex is fun to ‘play’ with, and online accounts make it easy to jump in the game just to try it out. It has almost become a fad.
However, what the sad statistics bear out is that over half of all new Forex traders lose their money within a year. The foreign exchange market is seeing a lot of hype right now, and too many people are signing on in the hopes of making a quick buck. Forex is simply not that easy, though, and it is certainly not a get rich quick scheme for the average person.
So, before you start trading, make sure you take the time to educate yourself. There’s plenty of free information online, as well as top-notch training courses provided by brokers and expert investors.
Putting the necessary time up front into developing a long-range strategy, and educating yourself on the marketplace, will go a long way to assuring your success.
Forex Order Types (OCO)
There are many strategies for risk management in Forex trading, just as there are with any other investment. One of the simplest to learn and use is employing different order types. A stop-loss order can help you limit losses, for example. A limit order can lock in profit gained.
Beyond these simple types, there’s one that is only slightly more sophisticated: the OCO order (One Cancels the Other). It’s easy to use and can be even more effective than the simpler types in controlling risk or maximizing returns.
Suppose a currency pair such as USD/CHF is trading at 1.4625. That is, the dollar is selling for 1.4625 Swiss Francs. But, as is common in Forex trading, that exchange rate can change rapidly and by a large amount. If it were to fall to, say 1.4600 within an hour or even a day, an investor might want to issue a stop loss order at 1.4575.
That figure is low enough that a small, temporary price fluctuation won’t liquidate the position at an unfavorable price. Stop orders convert to market orders and are subject to fulfillment once the stop price is reached.
If the price drops 5%, you may not want to get out. But you want to limit the potential downside loss at some point. If it dropped 20% in a day, you might wish you had gotten out after a 10% loss.
Similarly, if the price were to rise to 1.4900 you’d be delighted. But not everyone can time the market perfectly. You don’t have the option of putting in an order that says ’sell when the market price is at the peak of what it would be for the next three months’. Wouldn’t we all like to do that!
So you have to make a reasonable bet about where the peak is. Suppose the market starts to drop back. It could be a momentary fluctuation downward, or it could be the beginning of a precipitous drop. Since you can’t know which it is with certainty, you can lock in some profit by requesting a limit order.
If the market drops back to, say, 1.4725 your limit order can be executed and you realize a profit of 100 points. Not the peak, but much better than waiting any longer if the market were to continue downward.
Now for the best of both worlds. The OCO order allows an investor to request a broker to react to not just one condition, but to one of a pair of possible conditions. You place a stop order at, say 1.4575 AND a limit order at 1.4725 simultaneously. Whenever one condition is realized, the other part of the order is canceled.
In other areas of investment, this strategy is even used with different kinds of instruments. An OCO order might specify ‘Buy Microsoft at $28.00, or ARCO bonds at 115.25′. Whichever occurs first determines what is actually bought, stock or bonds, and the other part of the order is simply ignored.
Something similar can be done in Forex in which an OCO order is placed to buy euros at 1.1905 or Swiss Francs at 1.4700. Which types of ‘mix and match’ are available varies from broker to broker, and what type of account or relationship you have with them, as well.
Using OCO orders is just one more in what should be a whole toolkit of investing techniques. But it is one of the simpler ones to learn to use effectively.
If you’re a novice trader it’s wise to use the trial trading software available on a Forex website and get familiar with the different order techniques. Record the results over a few week period and compare to what they would have been with straight market orders. You’ll convince yourself experimentally that risk management and profit strategies actually do work.
Beyond these simple types, there’s one that is only slightly more sophisticated: the OCO order (One Cancels the Other). It’s easy to use and can be even more effective than the simpler types in controlling risk or maximizing returns.
Suppose a currency pair such as USD/CHF is trading at 1.4625. That is, the dollar is selling for 1.4625 Swiss Francs. But, as is common in Forex trading, that exchange rate can change rapidly and by a large amount. If it were to fall to, say 1.4600 within an hour or even a day, an investor might want to issue a stop loss order at 1.4575.
That figure is low enough that a small, temporary price fluctuation won’t liquidate the position at an unfavorable price. Stop orders convert to market orders and are subject to fulfillment once the stop price is reached.
If the price drops 5%, you may not want to get out. But you want to limit the potential downside loss at some point. If it dropped 20% in a day, you might wish you had gotten out after a 10% loss.
Similarly, if the price were to rise to 1.4900 you’d be delighted. But not everyone can time the market perfectly. You don’t have the option of putting in an order that says ’sell when the market price is at the peak of what it would be for the next three months’. Wouldn’t we all like to do that!
So you have to make a reasonable bet about where the peak is. Suppose the market starts to drop back. It could be a momentary fluctuation downward, or it could be the beginning of a precipitous drop. Since you can’t know which it is with certainty, you can lock in some profit by requesting a limit order.
If the market drops back to, say, 1.4725 your limit order can be executed and you realize a profit of 100 points. Not the peak, but much better than waiting any longer if the market were to continue downward.
Now for the best of both worlds. The OCO order allows an investor to request a broker to react to not just one condition, but to one of a pair of possible conditions. You place a stop order at, say 1.4575 AND a limit order at 1.4725 simultaneously. Whenever one condition is realized, the other part of the order is canceled.
In other areas of investment, this strategy is even used with different kinds of instruments. An OCO order might specify ‘Buy Microsoft at $28.00, or ARCO bonds at 115.25′. Whichever occurs first determines what is actually bought, stock or bonds, and the other part of the order is simply ignored.
Something similar can be done in Forex in which an OCO order is placed to buy euros at 1.1905 or Swiss Francs at 1.4700. Which types of ‘mix and match’ are available varies from broker to broker, and what type of account or relationship you have with them, as well.
Using OCO orders is just one more in what should be a whole toolkit of investing techniques. But it is one of the simpler ones to learn to use effectively.
If you’re a novice trader it’s wise to use the trial trading software available on a Forex website and get familiar with the different order techniques. Record the results over a few week period and compare to what they would have been with straight market orders. You’ll convince yourself experimentally that risk management and profit strategies actually do work.
Currency Trading vs Stock Investments
Forex Trading - Currency Trading vs Stock Investments
The title points up an important difference between forex and stock investing.
When buying stocks you’re making an investment in a company. Buying shares is short for ‘purchasing a share of ownership’. By contrast, no one is making an investment in Japan by buying yen. We leave aside politically motivated actions by large central governments. Currency is exchanged in order to facilitate the movement of goods and the payment of services between multiple countries, but that’s a relatively small percentage of the total $2 trillion daily volume. The largest amount is simple speculation.
Well, perhaps not very simple. Trading euros against dollars against yen against pounds against… in a twenty-four hour market with a dozen time zones… it gets complicated.
Margin differences between the two markets are enormous. Most stock brokers will leverage (lend investors money) up to 2:1. In currency trading 100:1 is common. Since price movements occur twenty-four hours per day every day, margin calls can occur while the investor is sleeping. That makes for a bad awakening.
Trading cycles are generally much shorter. Stock investments are made, even by professionals, on timelines of months or years. Currency trades are often completed within a day or even minutes. Yes, that happens in the equities markets, too. But, it isn’t the norm even though it’s more common than ever.
All these differences suggest some lessons for the investor interested in forex trading.
Do your homework.
Be aware of factors affecting currency rates. That includes not only the standard domestic economic indicators, but trade imbalance figures, central bank policy changes and others.
Watch the market.
Small, rapid changes can force your position into an area that motivates your broker to execute a margin call. Be prepared to cover your position or liquidate at times favorable to you. Know the broker’s margin call policy and practice. You’ll be required to sign a margin agreement when opening an account. Read it first.
Practice.
When starting out, take advantage of the demos offered by most brokers. Execute paper trades - trades that don’t execute on the real markets - using the real currency figures.
Get a feel for the amounts, the percentage changes and get used to converting currencies from one country to the next. You should be able to estimate without much thought how much 1,000 pounds is in dollars at the current exchange rate.
Opinions and size don’t matter.
Unlike stock markets, the size and complexity of the forex markets makes it virtually impossible for any investor, no matter how large, to dominate the price. Program trading, fund trading and so on that can cause large movements in particular equities has a negligible effect on currency prices.
Similarly, analyst projections have much less influence in currency trading. Many will read eagerly some influential columnist’s opinion of the future of IBM. Opinions of that kind are largely discounted in currency trading.
It’s a different world out there.
There are around 4,500 stocks listed on the NYSE and 3,500 on NASDAQ. And many more on other exchanges. A few hundred are major players. By contrast, only a dozen currencies account for 99% of all trades. With four major markets trading twenty-four hours per day, the action is very concentrated.
No need to be intimidated though. Currency trading has moved in the last decade from the realm of the professional trading millions at a click to mini-accounts of $250.
So, go make some money.
The title points up an important difference between forex and stock investing.
When buying stocks you’re making an investment in a company. Buying shares is short for ‘purchasing a share of ownership’. By contrast, no one is making an investment in Japan by buying yen. We leave aside politically motivated actions by large central governments. Currency is exchanged in order to facilitate the movement of goods and the payment of services between multiple countries, but that’s a relatively small percentage of the total $2 trillion daily volume. The largest amount is simple speculation.
Well, perhaps not very simple. Trading euros against dollars against yen against pounds against… in a twenty-four hour market with a dozen time zones… it gets complicated.
Margin differences between the two markets are enormous. Most stock brokers will leverage (lend investors money) up to 2:1. In currency trading 100:1 is common. Since price movements occur twenty-four hours per day every day, margin calls can occur while the investor is sleeping. That makes for a bad awakening.
Trading cycles are generally much shorter. Stock investments are made, even by professionals, on timelines of months or years. Currency trades are often completed within a day or even minutes. Yes, that happens in the equities markets, too. But, it isn’t the norm even though it’s more common than ever.
All these differences suggest some lessons for the investor interested in forex trading.
Do your homework.
Be aware of factors affecting currency rates. That includes not only the standard domestic economic indicators, but trade imbalance figures, central bank policy changes and others.
Watch the market.
Small, rapid changes can force your position into an area that motivates your broker to execute a margin call. Be prepared to cover your position or liquidate at times favorable to you. Know the broker’s margin call policy and practice. You’ll be required to sign a margin agreement when opening an account. Read it first.
Practice.
When starting out, take advantage of the demos offered by most brokers. Execute paper trades - trades that don’t execute on the real markets - using the real currency figures.
Get a feel for the amounts, the percentage changes and get used to converting currencies from one country to the next. You should be able to estimate without much thought how much 1,000 pounds is in dollars at the current exchange rate.
Opinions and size don’t matter.
Unlike stock markets, the size and complexity of the forex markets makes it virtually impossible for any investor, no matter how large, to dominate the price. Program trading, fund trading and so on that can cause large movements in particular equities has a negligible effect on currency prices.
Similarly, analyst projections have much less influence in currency trading. Many will read eagerly some influential columnist’s opinion of the future of IBM. Opinions of that kind are largely discounted in currency trading.
It’s a different world out there.
There are around 4,500 stocks listed on the NYSE and 3,500 on NASDAQ. And many more on other exchanges. A few hundred are major players. By contrast, only a dozen currencies account for 99% of all trades. With four major markets trading twenty-four hours per day, the action is very concentrated.
No need to be intimidated though. Currency trading has moved in the last decade from the realm of the professional trading millions at a click to mini-accounts of $250.
So, go make some money.
Margin Calls
Name Bid Ask Change %Change High Low Time
EUR/USD 1.1901 1.1903 -0.0091 -0.76% 1.2024 1.1891 15:26GBP/USD 1.7439 1.7442 -0.0004 -0.02% 1.7573 1.7410 07:01
The current ask price for EUR/USD is 1.1903. So the investor buys one euro (EUR) at the rate of 1.1903 dollars per euro. Trading one lot (100,000 units) means the investor pays 100,000 x $1.1903 = $119,030 and obtains 100,000 euros. The investor speculates that the euro is undervalued against the dollar, and turns out to be right. Now what?
EUR/USD is now listed at, let’s say, 1.1966/68. Since the investor owns euros, but wants to profit in dollars he now sells euros for dollars. Selling yields:
100,000 x $1.1966 = $119,660
The profit = $119,660 - $119,030 = $630.
Not bad for a day’s work, taking all of ten minutes. Of course, cockiness is unwise in currency trading, where rapid losses are just as quick to arrive as profits. But let’s be optimistic today.
The average investor often doesn’t have $100,000 or more to toss around. And one lot would be low in the world of currency trading where $20 million can change hands in the time it takes to make a mouse click. So, that’s where margins come in handy.
Suppose your broker offers a 1% margin. That means you put up 1%, the broker loans you the other 99%. Yes, that’s actually done, commonly. Your margin deposit is equivalent to 1,000 euros. 1% of $119,030 is 0.01 x $119,030 = $1,190.30. That’s the amount you actually invest to purchase one lot of euros at $1.1903.
When you sell, your margin is repaid and you receive the full $630, not 1% of $630 or $6.30. Since 1% = 1:100 you are leveraged 100 times over. In other words you receive the full 100 times $6.30 or $630. Whoever thought borrowing money could be so profitable!
So when purchasing 1 standard lot of 100,000 units of euros for $119,030 the investor has to provide only $1,1903 of his own cash. The broker provides the rest. Sweet deal!
But here’s what can go wrong…
You bought euros speculating that the euro was undervalued against the dollar. So you estimate the price of a euro (in dollars) will rise in the future, from 1.1903 to say 1.1906 and eventually it does. But before that happens the price falls, temporarily, to 1.1900. It loses ‘3 pips’.
Of course, at this stage no one knows how long ‘temporary’ is, nor whether the price will fall further or rise to your target selling price. Your broker, not knowing your credit worthiness or simply having bills of his own to pay, decides to cut his losses and liquidate your position. So he sells your euros for dollars and declares for you, without your prior knowledge or permission, a loss.
Brokers are entitled to do this, legally and ethically. They make no commission from you - they profit from playing spreads - and they are loaning you large sums of money for, in essence, zero interest.
Note, this is unlikely to happen on a drop of only three pips (we’re just keeping the numbers simple here), but it points to some important lessons.
Know your broker. You don’t have to be lifelong friends - they liquidate one another’s positions, too. But once you find a trustworthy and competent broker it’s desirable to keep them, rather than hopping to another the first time something isn’t done to your satisfaction.
That way, you’re more likely to receive a friendly warning call and you can shore up your position before the broker liquidates. No one likes surprise losses. Not that the others are welcomed, either. At minimum, you should be aware of the margin call policy.
Keep your credit healthy. If you don’t have enough capital to trade currency stick to stocks or mutual funds. Provide your broker with good reason to believe your credit is good so he’s not inclined to sell you out at the first sign of trouble.
Watch the market. Currency trading requires more diligence than stock or bond investing. Prices move quickly and large sums are involved. Currency prices are sensitive, even more so than other investments, to momentary political events, central bank pronouncements and other news items.
Those events are magnified by the fact that many countries are involved. Currencies trade in pairs, but professional traders are usually thinking of several different pairs at once. They watch euros against dollars and dollars against yen, playing small movements among pairs.
If you can’t pay attention, currency trading is not for you. That doesn’t mean you should be a day (or hour) trader in currency. That action is for the professional and they often lose money that way as well. They work for large banks and can afford to, temporarily. They have bigger pockets and will make it up tomorrow. But stay aware of your position.
Leverage is a terrific tool for the investor. But, as we’ve seen, there’s no such thing as a free lunch. Knowledge can keep you from getting eaten!
EUR/USD 1.1901 1.1903 -0.0091 -0.76% 1.2024 1.1891 15:26GBP/USD 1.7439 1.7442 -0.0004 -0.02% 1.7573 1.7410 07:01
The current ask price for EUR/USD is 1.1903. So the investor buys one euro (EUR) at the rate of 1.1903 dollars per euro. Trading one lot (100,000 units) means the investor pays 100,000 x $1.1903 = $119,030 and obtains 100,000 euros. The investor speculates that the euro is undervalued against the dollar, and turns out to be right. Now what?
EUR/USD is now listed at, let’s say, 1.1966/68. Since the investor owns euros, but wants to profit in dollars he now sells euros for dollars. Selling yields:
100,000 x $1.1966 = $119,660
The profit = $119,660 - $119,030 = $630.
Not bad for a day’s work, taking all of ten minutes. Of course, cockiness is unwise in currency trading, where rapid losses are just as quick to arrive as profits. But let’s be optimistic today.
The average investor often doesn’t have $100,000 or more to toss around. And one lot would be low in the world of currency trading where $20 million can change hands in the time it takes to make a mouse click. So, that’s where margins come in handy.
Suppose your broker offers a 1% margin. That means you put up 1%, the broker loans you the other 99%. Yes, that’s actually done, commonly. Your margin deposit is equivalent to 1,000 euros. 1% of $119,030 is 0.01 x $119,030 = $1,190.30. That’s the amount you actually invest to purchase one lot of euros at $1.1903.
When you sell, your margin is repaid and you receive the full $630, not 1% of $630 or $6.30. Since 1% = 1:100 you are leveraged 100 times over. In other words you receive the full 100 times $6.30 or $630. Whoever thought borrowing money could be so profitable!
So when purchasing 1 standard lot of 100,000 units of euros for $119,030 the investor has to provide only $1,1903 of his own cash. The broker provides the rest. Sweet deal!
But here’s what can go wrong…
You bought euros speculating that the euro was undervalued against the dollar. So you estimate the price of a euro (in dollars) will rise in the future, from 1.1903 to say 1.1906 and eventually it does. But before that happens the price falls, temporarily, to 1.1900. It loses ‘3 pips’.
Of course, at this stage no one knows how long ‘temporary’ is, nor whether the price will fall further or rise to your target selling price. Your broker, not knowing your credit worthiness or simply having bills of his own to pay, decides to cut his losses and liquidate your position. So he sells your euros for dollars and declares for you, without your prior knowledge or permission, a loss.
Brokers are entitled to do this, legally and ethically. They make no commission from you - they profit from playing spreads - and they are loaning you large sums of money for, in essence, zero interest.
Note, this is unlikely to happen on a drop of only three pips (we’re just keeping the numbers simple here), but it points to some important lessons.
Know your broker. You don’t have to be lifelong friends - they liquidate one another’s positions, too. But once you find a trustworthy and competent broker it’s desirable to keep them, rather than hopping to another the first time something isn’t done to your satisfaction.
That way, you’re more likely to receive a friendly warning call and you can shore up your position before the broker liquidates. No one likes surprise losses. Not that the others are welcomed, either. At minimum, you should be aware of the margin call policy.
Keep your credit healthy. If you don’t have enough capital to trade currency stick to stocks or mutual funds. Provide your broker with good reason to believe your credit is good so he’s not inclined to sell you out at the first sign of trouble.
Watch the market. Currency trading requires more diligence than stock or bond investing. Prices move quickly and large sums are involved. Currency prices are sensitive, even more so than other investments, to momentary political events, central bank pronouncements and other news items.
Those events are magnified by the fact that many countries are involved. Currencies trade in pairs, but professional traders are usually thinking of several different pairs at once. They watch euros against dollars and dollars against yen, playing small movements among pairs.
If you can’t pay attention, currency trading is not for you. That doesn’t mean you should be a day (or hour) trader in currency. That action is for the professional and they often lose money that way as well. They work for large banks and can afford to, temporarily. They have bigger pockets and will make it up tomorrow. But stay aware of your position.
Leverage is a terrific tool for the investor. But, as we’ve seen, there’s no such thing as a free lunch. Knowledge can keep you from getting eaten!
Forex Trading
Many of the common charts encountered in the toolkit of Forex traders are composed of a graphed series of technical indicators. So, in order to understand those charts, the student of Forex investing will do well to study those indicators.
Fortunately, it isn’t necessary to know exactly how to calculate them in order to use them. Software will do that for you. But, it’s helpful to have some idea of how they are arrived at, and what they mean, in order to evaluate their worth as trading tools.
Keep in mind, however, that none of the indicators - taken alone - tell the whole story. Nor do all of them together make one certain. Indicators are just that, they indicate. They do not predict with certainty. No mathematical tool used in Forex trading will do that. Beware of hyped promises.
Following are some of the more commonly used.
- Moving Average
Just as prices can be charted so can average prices. And, like the prices themselves, the averages change over time. The two most commonly calculated are the SMA (Simple Moving Average) and EMA (Exponential Moving Average).
The SMA is the average of prices taken at specified intervals, say an hour or a day. Each price is weighted equally in calculating the average. The more complicated EMA weights some prices more than others, on the premise that some are more relevant. Recent prices are considered more telling than those further back, hence these are weighted more in the calculation. For example, a 10-day EMA calculation will weight the last days more heavily than the first days.
Many software tools will indicate a buy signal when the current price rises above its moving average, since this suggests a rising market. A sell signal may be triggered when the price falls below the moving average.
- Bollinger Bands
Just as in futures and options trading, Bollinger Bands are a commonly used indicator. While their calculation involves some heavy-duty mathematics, their interpretation is considerably easier.
The bands are calculated as standard deviations above and below a simple moving average. The width of the bands will vary depending on volatility. As volatility rises, they become wider. As volatility decreases they narrow. Prices tend to stay within the upper and lower bands, with sharp price changes tending to occur after the bands tighten. If prices move outside the bands, the current trend will tend to continue.
A sell signal is suggested when the current price is above the moving average, close to the upper band. A buy signal is indicated when it moves to the lower band.
- RSI
The RSI, or Relative Strength Index, is a value between 0 and 100. A number above 70 usually suggests that a currency is overbought and therefore due for a price reversal. A value below 30 indicates a currency is oversold.
As a price is making a new high, but the RSI fails to surpass its previous high, the trend is said to ‘diverge’. This often indicates an impending reversal of the trend. When the RSI dips below a recent bottom, it is said to have executed a ‘failure swing’. That move is seen as tending to confirm the impending price reversal.
There are several other common indicators, including MACD (Moving Average Convergence/Divergence), Momentum, OBV (On Balance Volume), Money Flow Index, Parabolic SAR, Stochastic Oscillators and dozens even more esoteric.
All these were developed as statistical tools to help predict prices and trends. But keep in mind that, though some technical analysts claim to eschew looking for causes, all of them are based on assumptions when used as technical indicators.
As with any tool, they should form part of a strategy for trading. They should not be used as a substitute for studying the market and using proper risk management
Fortunately, it isn’t necessary to know exactly how to calculate them in order to use them. Software will do that for you. But, it’s helpful to have some idea of how they are arrived at, and what they mean, in order to evaluate their worth as trading tools.
Keep in mind, however, that none of the indicators - taken alone - tell the whole story. Nor do all of them together make one certain. Indicators are just that, they indicate. They do not predict with certainty. No mathematical tool used in Forex trading will do that. Beware of hyped promises.
Following are some of the more commonly used.
- Moving Average
Just as prices can be charted so can average prices. And, like the prices themselves, the averages change over time. The two most commonly calculated are the SMA (Simple Moving Average) and EMA (Exponential Moving Average).
The SMA is the average of prices taken at specified intervals, say an hour or a day. Each price is weighted equally in calculating the average. The more complicated EMA weights some prices more than others, on the premise that some are more relevant. Recent prices are considered more telling than those further back, hence these are weighted more in the calculation. For example, a 10-day EMA calculation will weight the last days more heavily than the first days.
Many software tools will indicate a buy signal when the current price rises above its moving average, since this suggests a rising market. A sell signal may be triggered when the price falls below the moving average.
- Bollinger Bands
Just as in futures and options trading, Bollinger Bands are a commonly used indicator. While their calculation involves some heavy-duty mathematics, their interpretation is considerably easier.
The bands are calculated as standard deviations above and below a simple moving average. The width of the bands will vary depending on volatility. As volatility rises, they become wider. As volatility decreases they narrow. Prices tend to stay within the upper and lower bands, with sharp price changes tending to occur after the bands tighten. If prices move outside the bands, the current trend will tend to continue.
A sell signal is suggested when the current price is above the moving average, close to the upper band. A buy signal is indicated when it moves to the lower band.
- RSI
The RSI, or Relative Strength Index, is a value between 0 and 100. A number above 70 usually suggests that a currency is overbought and therefore due for a price reversal. A value below 30 indicates a currency is oversold.
As a price is making a new high, but the RSI fails to surpass its previous high, the trend is said to ‘diverge’. This often indicates an impending reversal of the trend. When the RSI dips below a recent bottom, it is said to have executed a ‘failure swing’. That move is seen as tending to confirm the impending price reversal.
There are several other common indicators, including MACD (Moving Average Convergence/Divergence), Momentum, OBV (On Balance Volume), Money Flow Index, Parabolic SAR, Stochastic Oscillators and dozens even more esoteric.
All these were developed as statistical tools to help predict prices and trends. But keep in mind that, though some technical analysts claim to eschew looking for causes, all of them are based on assumptions when used as technical indicators.
As with any tool, they should form part of a strategy for trading. They should not be used as a substitute for studying the market and using proper risk management
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