People are introduced to the exciting world of foreign exchange in many ways: friends, current events, newspapers, television, and many others. For those of you who are new to forex, the following guidelines cover the basics of currency trading.
Step 1: "Practice makes perfect"
Demo trade. The demo account was designed to help traders gain familiarity with the speed and movements of the market. When you are demo trading, you should learn how to: 1) place market orders to enter a trade, 2) place stop-loss orders to protect your positions, and limit orders to take profits, 3) place OCO orders and If Done Orders to execute more advanced strategies.
Step 2: "Study, Study, Study".
Forex traders use fundamental analysis, technical analysis, quantitative analysis and sometimes a combination of all three to make their trading decisions. Fundamental analysis involves the use of economic, financial and political news to determine trading decisions. Technical analysis involves the study of Charts to predict future price movements based on past price patterns and trends. Quantitative analysis consists of the use of preset statistical models and properties in quantifying price formations such as averages, retracements as well as identifying oversold and undersold situations.
In order to help novice and experienced traders alike, MG has developed www.forexnews.com, a leading site on foreign exchange analysis, news and education. Comprehensive previews and summaries updated 4 times per day, insightful editorials covering the latest market developments and an open forum for discussing trading tips and ideas, are just some of the many features of Forexnews.com and MG's commitment to educating and informing Forex participants.
Step 3: Manage your money wisely.
You should always be aware of the amount of money in your account before placing a trade. If you think a long-term trend is developing, then you should consider whether you have enough funds to maintain your margin and withstand any movements against your position(s) that may occur. We encourage everyone who opens an account with us to ask themselves the following questions prior to entering each trade:
1) How much am I willing to risk?
2) What is my upside and downside potential?
3) What are the market conditions? (Is the market volatile or calm?)
4) What is the logic behind entering this trade?
5) When can I conclude if the assumptions/logic behind the trade are/is correct or wrong?
Before entering an order, you should consider both your entry and exit points. One of the mistakes most commonly made by traders, especially new traders, is letting emotions get in the way of their strategy.
Step 4: Stay Connected:
It is impossible to follow the forex market 24 hours day, 7 days a week. For better management of your account, we encourage you to use our Wireless Service and alert!FX™.
Step 5: Open a Live Account.
If you feel ready to trade this market, fill out our application forms and submit them today. Since the emotional factor may be higher than it was when you were demo-trading (as you are now committing real money), it is essential that you develop an effective strategy while demo-trading and plan to abide by it when trading your live account.
We hope you enjoy trading with us and wish you the best of luck!
Saturday, April 25, 2009
Forex History - The Evolution OF FX Markets
In 1967, a Chicago bank refused a college professor by the name of Milton Friedman a loan in pound sterling because he had intended to use the funds to short the British currency. Friedman, who had perceived sterling to be priced too high against the dollar, wanted to sell the currency, then later buy it back to repay the bank after the currency declined, thus pocketing a quick profit. The bank’s refusal to grant the loan was due to the Bretton Woods Agreement, established twenty years earlier, which fixed national currencies against the dollar, and set the dollar at a rate of $35 per ounce of gold.
The Bretton Woods Agreement, set up in 1944, aimed at installing international monetary stability by preventing money from fleeing across nations, and restricting speculation in the world currencies. Prior to the Agreement, the gold exchange standard--prevailing between 1876 and World War I--dominated the international economic system. Under the gold exchange, currencies gained a new phase of stability as they were backed by the price of gold. It abolished the age-old practice used by kings and rulers of arbitrarily debasing money and triggering inflation.
But the gold exchange standard didn’t lack faults. As an economy strengthened, it would import heavily from abroad until it ran down its gold reserves required to back its money; consequently, the money supply would shrink, interest rates rose and economic activity slowed to the extent of recession. Ultimately, prices of goods had hit bottom, appearing attractive to other nations, who would rush into buying sprees that injected the economy with gold until it increased its money supply, and drive down interest rates and recreate wealth into the economy. Such boom-bust patterns prevailed throughout the gold standard until the outbreak of World War I interrupted trade flows and the free movement of gold.
After the Wars, the Bretton Woods Agreement was founded, where participating countries agreed to try and maintain the value of their currency with a narrow margin against the dollar and a corresponding rate of gold as needed. Countries were prohibited from devaluing their currencies to their trade advantage and were only allowed to do so for devaluations of less than 10%. Into the 1950s, the ever-expanding volume of international trade led to massive movements of capital generated by post-war construction. That destabilized foreign exchange rates as setup in Bretton Woods.
The Agreement was finally abandoned in 1971, and the US dollar would no longer be convertible into gold. By 1973, currencies of major industrialized nations floated more freely, as they were controlled mainly by the forces of supply and demand. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s, giving rise to new financial instruments, market deregulation and trade liberalization.
In the 1980s, cross-border capital movements accelerated with the advent of computers and technology, extending market continuum through Asian, European and American time zones. Transactions in foreign exchange rocketed from about $70 billion a day in the 1980s, to more than $1.5 trillion a day two decades later.
A major catalyst to the acceleration of Forex trading was the rapid development of the eurodollar market; where US dollars are deposited in banks outside the US. Similarly, Euromarkets are those where assets are deposited outside the currency of origin. The Eurodollar market first came into being in the 1950s when Russia’s oil revenue-- all in dollars -- was deposited outside the US in fear of being frozen by US regulators. That gave rise to a vast offshore pool of dollars outside the control of US authorities. The US government imposed laws to restrict dollar lending to foreigners. Euromarkets were particularly attractive because they had far less regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euromarkets a beneficial center for holding excess liquidity, providing short-term loans and financing imports and exports.
London was, and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London’s convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euromarket.
The Bretton Woods Agreement, set up in 1944, aimed at installing international monetary stability by preventing money from fleeing across nations, and restricting speculation in the world currencies. Prior to the Agreement, the gold exchange standard--prevailing between 1876 and World War I--dominated the international economic system. Under the gold exchange, currencies gained a new phase of stability as they were backed by the price of gold. It abolished the age-old practice used by kings and rulers of arbitrarily debasing money and triggering inflation.
But the gold exchange standard didn’t lack faults. As an economy strengthened, it would import heavily from abroad until it ran down its gold reserves required to back its money; consequently, the money supply would shrink, interest rates rose and economic activity slowed to the extent of recession. Ultimately, prices of goods had hit bottom, appearing attractive to other nations, who would rush into buying sprees that injected the economy with gold until it increased its money supply, and drive down interest rates and recreate wealth into the economy. Such boom-bust patterns prevailed throughout the gold standard until the outbreak of World War I interrupted trade flows and the free movement of gold.
After the Wars, the Bretton Woods Agreement was founded, where participating countries agreed to try and maintain the value of their currency with a narrow margin against the dollar and a corresponding rate of gold as needed. Countries were prohibited from devaluing their currencies to their trade advantage and were only allowed to do so for devaluations of less than 10%. Into the 1950s, the ever-expanding volume of international trade led to massive movements of capital generated by post-war construction. That destabilized foreign exchange rates as setup in Bretton Woods.
The Agreement was finally abandoned in 1971, and the US dollar would no longer be convertible into gold. By 1973, currencies of major industrialized nations floated more freely, as they were controlled mainly by the forces of supply and demand. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s, giving rise to new financial instruments, market deregulation and trade liberalization.
In the 1980s, cross-border capital movements accelerated with the advent of computers and technology, extending market continuum through Asian, European and American time zones. Transactions in foreign exchange rocketed from about $70 billion a day in the 1980s, to more than $1.5 trillion a day two decades later.
| | |
The Explosion of the Euromarket
A major catalyst to the acceleration of Forex trading was the rapid development of the eurodollar market; where US dollars are deposited in banks outside the US. Similarly, Euromarkets are those where assets are deposited outside the currency of origin. The Eurodollar market first came into being in the 1950s when Russia’s oil revenue-- all in dollars -- was deposited outside the US in fear of being frozen by US regulators. That gave rise to a vast offshore pool of dollars outside the control of US authorities. The US government imposed laws to restrict dollar lending to foreigners. Euromarkets were particularly attractive because they had far less regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euromarkets a beneficial center for holding excess liquidity, providing short-term loans and financing imports and exports.
London was, and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London’s convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euromarket.
Forex Beginner
1: Will I get rich from Forex? Definitely! Are you ready to learn?
2: Online Currency Trading requires Patience
3: Forex - What is it?
4: Short data about the origin and development of the currency exchange market
5: Risks by the foreign exchange on Forex
6: Charts for the technical analysis
7: Forex Glossary
8: Forex Trading Education - The London Open Checklist
The Foreign Exchange market (also referred to as the Forex or FX market) is the largest financial market in the world, with over $1.5 trillion changing hands every day.
2: Online Currency Trading requires Patience
When the going gets tough, the tough get going. This adage often brings back the memories of my past days when I was trading initially in the currency exchange market. Indeed, there's nothing more hurtful than losing your invested money in the FX market. But, online currency trading is like life where you're got to learn from your wrong moves and keep moving on.
3: Forex - What is it?
The international currency market Forex is a special kind of the world financial market. Trader’s purpose on the Forex to get profit as the result of foreign currencies purchase and sale. The exchange rates of all currencies being in the market turnover are permanently changing under the action of the demand and supply alteration.
4: Short data about the origin and development of the currency exchange market
Currency trading has a long history and can be traced back to the ancient Middle East and Middle Ages when foreign exchange started to take shape after the international merchant bankers devised bills of exchange, which were transferable third-party payments that allowed flexibility and growth in foreign exchange dealings.
5: Risks by the foreign exchange on Forex
The Forex is essentially risk-bearing. By the evaluation of the grade of a possible risk accounted should be the following kinds of it: exchange rate risk, interest rate risk, and credit risk, country risk.
6: Charts for the technical analysis
Kinds of prices and time units. Charts for the technical analysis are being constructed in coordinates price (the vertical axis) � time (the horizontal axis)�. The following kinds of currency prices represented on charts are being distinguished on Forex:
7: Forex Glossary
Here are some of the most common terms used in FOREX trading. Ask Price ¨C Sometimes called the Offer Price, this is the market price for traders to buy currencies.
8: Forex Trading Education - The London Open Checklist
The start of the London trading session marks a period of increased volatility in the Forex market and a period of more opportunities to trade. As part of your Forex trading education, run through this checklist to see if you can identify good trade setups regularly at this time of day.
Forex Broker
1: CFD Broker - Make the Choice - Not A Mistake
2: Best CFD Broker - Australia
3: Finding A Forex Broker For Dummies
4: CFD Brokers Singapore - Who is the Best?
5: Finding a Forex Broker
6: Forex Broker - The 6 Steps to Finding the Best Forex Broker
7: Forex Broker- Tools to Find Best Forex Broker
8: Selecting the Right Forex Broker
9: 4 Tips For Choosing a Reputable Forex Broker
Today, this article will discuss about the CFD market, and how you can find a great online CFD broker when you do decide to jump on the wagon and become a CFD Trader. Most of the CFD Brokers today offer the ability to be able to trade online, CFD trade over the phone, or CFD trade from you mobile phone.
2: Best CFD Broker - Australia
The Contracts For Difference (CFD) Market is the largest financial market and everyday new investors plan to jump in when they learn of the benefits, that is, high returns on investment which is as high as 20% per month a month.
3: Finding A Forex Broker For Dummies
Online brokers give an important role to play when you open an online trading account. Every Last broker can offer different services and features. You must research all the online brokers to find the foremost broker to meet your needs.
4: CFD Brokers Singapore - Who is the Best?
Online brokers give an important role to play when you open an online trading account. Every Last broker can offer different services and features. You must research all the online brokers to find the foremost broker to meet your needs
5: Finding a Forex Broker
Most traders and investors out there know, the foreign exchange market is the largest market in the world. This is why we are seeing so many people making the transition from shares, options, futures to the Forex Markets. With the brilliant liquidity, much longer trading hours, we are seeing traders realize returns as much as 40% a month and in some cases even more.
6: Forex Broker - The 6 Steps to Finding the Best Forex Broker
Trading Forex, well one of the most important decisions that you can make is selecting a your Forex Broker, So here are 6 Golden Rules to use to Find the Best forex Broker
7: Forex Broker- Tools to Find Best Forex Broker
Time to Select a winning Forex Broker. This will help you find the best online brokers in the market. Finding the right Forex Broker is an important as selecting a winning trade. When you start trading you make sure you do your due dilligence on that stock or currency before you trade, well you should do exactly the same with selecting a Forex Broker. So what are the key requirements that you need?
8: Selecting the Right Forex Broker
Making a decision on which Forex broker to use to open a trading account can be difficult since there are so many brokers available. Because they all have different features, capabilities, advantages and weaknesses, some research must be done when making your selection. Below is a checklist to reference when deciding which broker to use in your Forex endeavors.
9: 4 Tips For Choosing a Reputable Forex Broker
For a normal trader, finding a Forex broker can be a difficult experience. While many potential traders fall into the hands of a not-so-reliable Forex brokers, there are many strategies in securing a reputable brokerage firm.
Forex Trading
1: Forex Brokers - Make the Right Choice Not A Mistake
2: How to Start Forex with a Great Training Course
3: Forex Trading - The top 5 Tips
4: Forex Trading Errors- How To Fix
5: 8 Traits Of the Great Forex Trader
6: FOREX Trading without Indicators
7: Forex Trading - The 3 Biggest Lies
8: Day Trading - How to Be Successful at it
9: How To Be Successful Forex Trading
10: Forex Market - Make Money in Choppy Markets
With the modern times of mobile communication, it is not unusual to find hidden in a home a trader or a broker who is doing their Forex Trading from the comfort of their own home. Today to be a forex trader all that you require is a computer setup to multi screen investing servers, the number of the casual or evens serious home based forex traders has grown a great deal of late and this is because of the internet and the popularity of certain commodity trades.
2: How to Start Forex with a Great Training Course
what to look for when choosing a forex training course.
3: Forex Trading - The top 5 Tips
We have all heard and read how much money we can make from Forex Trading, so what are the real rules and tips that will make us money from Forex Trading? Below we will uncover the real tips for Success.
4: Forex Trading Errors- How To Fix
When we are trading we will all from time to time make a mistake when forex trading and it is normal and sometimes can be looked upon as healthy, so as to know that the decisions will either make or break you. However, if this becomes severe to a point wherein you lose more than you can afford to, then you would have to take measures in order to avoid further damage.
5: 8 Traits Of the Great Forex Trader
To be a successful Forex Trader takes time, education and knowledge, but the great news is anyone can do it. You do not have to be a genius to be a Professional Forex Trader. There will be many people that disagree with the above and end up broker, because they people have been successful in other areas and they see Forex Trading simply as a financial game
6: FOREX Trading without Indicators
When it comes to trading most professional traders will be trading with indicators, so when most people hear that someone is trading with out them there is an instant look of bewilderment. To them it sounds like driving in the dark with no lights. But in fact it is the opposite.
7: Forex Trading - The 3 Biggest Lies
Everyone that is involved in Forex Trading for awhile would have all heard these 3 misconceptions about Forex Trading, but beginner traders continue to fall for them. These are also some of the reasons why many Forex Traders end up going broke.
8: Day Trading - How to Be Successful at it
The share market today is as volatile as we have seen it, as stock prices continue to fluctuate the only way to preserve your money is to sit on the sidelines and the chaos goes on in the financials and other sectors. With the wild swings in the market as it continues at times to make no sense. We have seen days of down 500 points, followed by days of up 450 points, actual trading sessions moving as much as 1000 points. How do we make sense of these crazy markets and more importantly how do we make money.
9: How To Be Successful Forex Trading
Today there are many people in the world that are using Forex to make money. Forex trading is buying and selling currencies to make profit from it. It can be a great money making business if you can do it right. It is the type of business that you can make thousands of Dollars each month if it is done correctly
10: Forex Market - Make Money in Choppy Markets
The Forex Markets do not create clear trend lines all the time. Quiet often we will experience very volatile markets and the prices can move dramatically up and down. So How do you make money from this?
Fundamental Analysis
1: The Euro Bull: New Paradigm of FOREX
2: How far can the dollar go down?
3: FOREX Fundamental Analysis
4: What is Fundamental Analysis
5: Fundamental Analysis On Forex Trading
The Euro Bull: The New paradigm of FOREX
As the EUR/USD breaks 1.50, investors should take another look at foreign exchange. 100/barrel oil, $1,000 gold, and $10/bushel wheat are not anomalies, nor is there a bull market in commodities. The US dollar is losing its value and its relevance as a world reserve currency.
As the EUR/USD breaks 1.50, investors should take another look at foreign exchange. 100/barrel oil, $1,000 gold, and $10/bushel wheat are not anomalies, nor is there a bull market in commodities. The US dollar is losing its value and its relevance as a world reserve currency.
2: How far can the dollar go down?
An explanation of how far dollar can go down - contrast with other markets and looking from value perspective.
3: FOREX Fundamental Analysis
Information on using fundamental analysis for FOREX trading.
4: What is Fundamental Analysis
Investors using fundamental analysis to make investment decisions are looking at the underlying aspects that determine company and stock valuations.
5: Fundamental Analysis On Forex Trading
Remember, fundamental analysis is a very effective way to forecast economic conditions, but not necessarily exact market prices.
Futures and Options
1: Forex Options Market Overview
2: Successful Options Trading Strategies
Forex option trading has emerged as an alternative investment vehicle for many traders and investors. As an investment tool, forex option trading provides both large and small investors with greater flexibility when determining the appropriate forex trading and hedging strategies to implement. With the plethora of real-time financial data and forex option trading software available to most investors through the internet, today's forex option market now includes an increasingly large number of individuals and corporations who are speculating and/or hedging foreign currency exposure via telephone or online forex trading platforms.
2: Successful Options Trading Strategies
When it comes to giving people the hope of becoming a millionaire overnight, the stock market excels. Every day we see evidence of stocks that have flown upwards as if they had wings, providing investors with a windfall of profits. It's inevitable that catching one of those stocks just before it takes off is an exciting possibility, inspiring the beginning trader to take the plunge.
Friday, April 24, 2009
What's Your Forex Trader's Personality?
Knowing your trader’s personality is very important if you want to maintain a healthy, pleasant and, most importantly, profitable lifestyle while working on Forex. People are different and what’s good for one can be bad for other. Some trading methods and techniques will work for the certain kind of traders, but they will fail when you try to use them.
The most notable difference between various trading styles is the frequency of trading. Traders that like action and often «want to do something» perform better when they open several positions per day. Those who don’t like the chaos of the daily trading and like to think a lot before doing something will enjoy the profit from a scarcer trading. There are 4 distinct types of the trader’s personalities by the trading frequency:
- Position trader — mostly fundamental analysis driven positions that are opened very rarely — only few per month, often just about 10-20 positions per year. This style doesn’t require constant market monitoring and is recommended for the busy people.
- Swing trader — trades more often than the position trader, holding his orders open for the days and weeks. Targets and stops are lower than those with the position trading, but there are many trades per year. This is not a day trading, but it’s neither a long-term trading.
- Day trader — one of the most popular types of traders. They trade every day, opening several positions and holding them for a few hours to a day. This style requires a lot of market monitoring and will probably fit only full-time Forex traders.
- Scalper — this is the most risky and dangerous trading style. Scalping involves holding a position open just for a few seconds or minutes to gain the small profit from each position. There are dozens of trades each day with the scalping. Almost all brokers prohibit scalping. Another problem with scalping is that the major part of the scalper’s profit is eaten by the broker’s spread.
Forex Resources for Daily Monitoring
Even the best Forex traders need to regularly refresh their knowledge and gain new information that is related to the currency trading. There are on-line Forex resources that provide information, news, books, communities, tools and other important advantages to the traders for free. Here is the list of the most useful Forex resources that are worth to be visited daily by every trader:
Bloomberg.com — business and currency news that create the fundamental background for the Forex market. I prefer to browse these news everyday before making any trading decisions.
Forexfactory.com — apart from the usual Forex tools, there are forums that are actually visited by many new and professional traders that share their experience with different trading systems, Forex brokers, expert advisors, etc.
Forex-tsd.com — a large Forex community focusing mainly on the technical tools for trading — such as expert advisors and indicators for various platforms (usually, MetaTrader 4).
Earnforex.com — a lot of useful and free information for all Forex traders, including books, brokers’ descriptions, reviews, articles and other goodies with the new updates almost everyday.
Talkgold Forex Forum — a very popular forum in the past, it still remains a place where many «old school» Forex traders share their knowledge and discuss Forex related issues.
Those are the resources that I visit everyday. If you know some other popular and useful sites for the Forex traders, you can mention them in the comments to this post.
Advantages of the Automated Forex Trading
rading with the expert advisors is seen by many (especially newbie) traders as the «holy grail» possibility. Such traders expect from each EA they find or buy the fast and risk-free profits. Of course, expert advisors are not the «holy grail» in Forex trading. Automated Forex trading is just another tool that can make the trader’s life a bit easier and sometimes even more profitable. Here is the list of the advantages of trading Forex with expert advisors:
- With expert advisors you can trade during the time you can’t trade manually. You can set up an expert advisor to trade for you when you are asleep, when you are away or when you are too busy to be involved in the market. Of course, you can hire someone else to trade for you, when you are away, but that’s rather ineffective decision.
- Strict following the trading system is another advantage of the automated Forex trading. If you have a strategy implemented in the expert advisor it will trade according to that strategy without any deviations. If you find it hard to follow your own system without modifying it constantly, try using an EA that would do all the work.
- Automated trading excludes any emotions form your market behavior. Computers and programs don’t have any emotions and won’t overtrade if they lose. If you are not very good at holding your emotions down, automated trading will definitely help you.
- Complicated strategies are not a problem for the expert advisors. For the live trader it’s not an easy task to monitor a dozen of indicators and compare each of them to the entry conditions, whereas expert advisors can do that easily and in no time at all.
- «Errare humanum est» said the Roman stoic; that means that despite your experience in Forex trading, you’ll make a lot of stupid mistakes through your trading career. Computers are not human, and if programmed without errors, expert advisors won’t make any errors during the trading.
- There are many things a live trader just can’t do — trading on multiple strategies, timeframes and currency pairs simultaneously is one of them. If you want to use your system on several currency pairs and timeframes — use expert advisor. If you want to test several systems at the same time — also use the expert advisor.
- The time of reaction, analysis and decision making can be critical in many Forex trading systems. Where manual trader just can’t do it fast enough, automated systems will work fine.
Disadvantages of the Automated Forex Trading
In my last post I’ve described the best advantages of the automated Forex trading. But, of course, I understand that the trading using the expert advisors isn’t always something good. Everything has its own pros and cons; so the automated trading has its own disadvantages and I’ll try to describe them in this article:
- No intuition to help your trading. Computers and programs simply don’t have anything similar to that mystical human feeling. While some traders don’t think that the intuition can be helpful in trading, others rely on it — such traders probably won’t be pleased with the automated trading.
- Smooth trade execution and uninterrupted run-time of the expert advisors is critical with many trading systems. Unfortunately, it’s something very hard to achieve running EA from your home or work PC. That means that you’d require some dedicated server to run your automated trading.
- Some types of strategies are simply impossible to implement into the real expert advisors. The chart pattern or wave analysis and fundamental analysis are extremely hard to code in the trading program. At the current level of the AI development these tasks are better performed by he live trader manually.
- The expert advisors should be made quality or otherwise their trading results will disappoint you. Unfortunately, not all expert advisors handle errors and other unexpected events correctly — sometimes this can lead to the huge losses. Moving your working EA from one broker to another can also be a problem, since broker servers differ and what works perfectly on one broker can stop working on another.
Must-Read Books of Forex Trader
Knowledge can make miracles happen, especially when you endeavor to succeed in the Forex market trading. And what is the second best source of knowledge (with the first best being your experience)? Books! Learning to trade is an easy, interesting and organized process, if you study the right books. Here is the list of the trading related books that will help you develop your skills and increase your confidence in the markets:
- School of Pipsology by BabyPips.com — it is the best Forex trading study manual as of now. And it’s also completely free. It’s written in a very easy language and offers a lot of explanations that are vitally needed by the beginning traders.
- Reminiscences of a Stock Operator by Edwin Lefevre — this book is based on the biography of the legendary stock trader Jesse Livermore, who is often seen as an icon of the financial trading success. It’s a good half-fiction read that will provide with some interesting thoughts on trading.
- Emotion Free Trading by Larry Levin — Forex trading is a very stressful activity with a huge part of your success depending on your emotional control. This book will try to teach to control your good and bad emotions and trade based solely on your strategy rules.
- Trade Your Way to Financial Freedom by Van K. Tharp — the author of this book is a financial genius, whose developments in the money management of the financial trading can be applied in any market and will open your eyes on some aspects of the money management that are usually hidden from the beginning Forex traders.
- Position-sizing Effects on Trader Performance: An experimental analysis by John Ginyard — it’s a pretty long scientific paper that describes and analyzes the experiments on position-sizing effects. If you lack the hard evidence of the most common money management rules — read this and you’ll have it.
Thursday, April 23, 2009
Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a variety of ways: Flights to qualityUnsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The Swiss franc has been a traditional safe haven during times of political or economic uncertainty.[11]Long-term trendsCurrency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends. [12]"Buy the rumor, sell the fact"This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[13] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.Economic numbersWhile economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.Technical trading considerationsAs in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns
Economic factors
These include:
(a)economic policy, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators. Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
Economic conditions include: Government budget deficits or surplusesThe market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.Balance of trade levels and trendsThe trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade.
Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.Inflation levels and trendsTypically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising [. This is because inflation erodes purchasing power, thus demand, for that particular currency.
However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.Economic growth and healthReports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health.
Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.Productivity of an economyIncreasing productivity in an economy should positively influence the value of its currency. It affects are more prominent if the increase is in the traded sector
(a)economic policy, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators. Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
Economic conditions include: Government budget deficits or surplusesThe market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.Balance of trade levels and trendsThe trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade.
Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.Inflation levels and trendsTypically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising [. This is because inflation erodes purchasing power, thus demand, for that particular currency.
However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.Economic growth and healthReports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health.
Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.Productivity of an economyIncreasing productivity in an economy should positively influence the value of its currency. It affects are more prominent if the increase is in the traded sector
Trading characteristics
| Rank | Currency | ISO 4217 code (Symbol) | % daily share (April 2007) |
|---|---|---|---|
| 1 |  United States dollar | USD ($) | 86.3% |
| 2 |  Euro | EUR (€) | 37.0% |
| 3 |  Japanese yen | JPY (¥) | 17.0% |
| 4 |  Pound sterling | GBP (£) | 15.0% |
| 5 |  Swiss franc | CHF (Fr) | 6.8% |
| 6 |  Australian dollar | AUD ($) | 6.7% |
| 7 |  Canadian dollar | CAD ($) | 4.2% |
| 8-9 |  Swedish krona | SEK (kr) | 2.8% |
| 8-9 |  Hong Kong dollar | HKD ($) | 2.8% |
| 10 |  Norwegian krone | NOK (kr) | 2.2% |
| 11 |  New Zealand dollar | NZD ($) | 1.9% |
| 12 |  Mexican peso | MXN ($) | 1.3% |
| 13 |  Singapore dollar | SGD ($) | 1.2% |
| 14 |  South Korean won | KRW (₩) | 1.1% |
| Other | 14.5% | ||
| Total | 200% | ||
Market participants
Unlike a stock market, where all participants have access to the same prices, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. The difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX-metal market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the foreign exchange market to align currencies to their economic needs.
Top 10 currency traders
| Rank | Name | Volume |
|---|---|---|
| 1 |  Deutsche Bank | 21.70% |
| 2 | UBS AG | 15.80% |
| 3 | Barclays Capital | 9.12% |
| 4 | Citi | 7.49% |
| 5 | Royal Bank of Scotland | 7.30% |
| 6 | JPMorgan | 4.19% |
| 7 | HSBC | 4.10% |
| 8 | Lehman Brothers | 3.58% |
| 9 | Goldman Sachs | 3.47% |
| 10 | Morgan Stanley | 2.86% |
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100/1.2300 for transfers, or say 1.2000/1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e., 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips.
Market size and liquidity
The foreign exchange market is unique because of
-
- the extreme liquidity of the market,
- its geographical dispersion,
- its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday),
- the variety of factors that affect exchange rates.the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)the use of leverage
Today's Currency World
In the 30 years since the collapse of the last gentlemanly agreement on currency rates, many momentous events have occurred that have affected currencies worldwide. The Japanese yen gained prominence because of Japan's heavy export relationship with the United States. The USSR collapsed. We have had several undeclared wars, the south Asian economies have risen and collapsed, and several investor bubbles have come and gone.
Each time, currencies have come away with a newly earned respect by the masses. There has also been a constant element of surprise that keeps you guessing what's next.
Current conditions, such as the United States' perpetual war on “terror”, the permanent introduction and dominance of the euro currency, the steady O.P.E.C. increases in oil prices, and gold's renaissance as a store of value, will likely have a tremendous impact on the future of what it means to trade currencies.
This could be a fundamental shift in the next phase of currency development.
Each time, currencies have come away with a newly earned respect by the masses. There has also been a constant element of surprise that keeps you guessing what's next.
Current conditions, such as the United States' perpetual war on “terror”, the permanent introduction and dominance of the euro currency, the steady O.P.E.C. increases in oil prices, and gold's renaissance as a store of value, will likely have a tremendous impact on the future of what it means to trade currencies.
This could be a fundamental shift in the next phase of currency development.
New Rules of Currency
In 1971, the Smithsonian Agreement replaced the Bretton Woods Agreement and authorized “forward currency contracts”, adding validity to the Eurodollar phenomenon. It didn’t work. A year later the European Joint Float was established. It, and the Smithsonian Agreement, were scrapped in 1973. Even though they were dissolved the concept of “forward currency contracts” stayed as part of the banking system.
Once currencies began to “free-float”, they immediately moved away from their gentlemanly 1% fluctuations on either side to huge price ranges, going anywhere from 20-25% daily.
From 1970-1973, the total foreign exchange volume went from US$25 Billion to US$100 Billion. With oil prices up, gold prices up, and an economy still reeling from the rapid currency shift, “stagflation”, rising inflation while real incomes remained the same, soon hit the United States.
Once currencies began to “free-float”, they immediately moved away from their gentlemanly 1% fluctuations on either side to huge price ranges, going anywhere from 20-25% daily.
From 1970-1973, the total foreign exchange volume went from US$25 Billion to US$100 Billion. With oil prices up, gold prices up, and an economy still reeling from the rapid currency shift, “stagflation”, rising inflation while real incomes remained the same, soon hit the United States.
The 1970's United States Currency Policy Meltdown
Once again, we are hit with the triumvirate of war, the restrictive gold standard, and dollars in foreign banks.
This time, each problem was feeding directly off of the others. The Vietnam Conflict had drained our gold reserves heavily. By 1970, Fort Knox only held US$12 Billion.
The growth of the oil business and the increase in foreign trade caused a boom in the demand for US dollars in foreign banks. Over US$ 47 Billion was sitting in overseas banks.
On paper, our gold reserves were over-leveraged by almost 4 to 1. As a nation, we did not know how to react to such an overbearing assault on our currency. Then along came the invention of the Eurodollar to make our nightmare worse.
Foreign banks with US dollars would make low-interest loans in US dollars to importers and exporters. Although the dollars were never repatriated, the US was still on the hook to exchange these “credit”-created dollars for the gold we kept on reserve.
Then came a miracle in disguise . The Bretton Woods Agreement collapsed. In the over-leveraged gold-dollar environment, many countries began to feel frustrated with the artificial peg.
In blatant defiance to the agreement in 1971, Germany declared that they would float the Deutsche mark. They were tired of the artificial peg that was keeping their economy depressed.
In the first hour of trading, over US$1 billion were exchanged for Deutsche marks. For the first time, the public had voiced their opinion against being so heavily weighted with dollars.
With Germany completely ignoring the Bretton Woods Agreement by floating their currency, the US government had nothing left to do but put the final nail in the coffin of the U.S.'s currency policy. The Bretton Woods Agreement was dissolved.
Three short months after the Deutsche mark began to float, the US moved off of the gold standard. Gold was allowed to float freely like any other currency. Oil, although priced in US dollars, soon switched to a peg against gold. Gold and oil prices jumped ten-fold.
The currency dynamics were soon changed on a global scale and it became accepted practice that countries began to float their own currency.
This time, each problem was feeding directly off of the others. The Vietnam Conflict had drained our gold reserves heavily. By 1970, Fort Knox only held US$12 Billion.
The growth of the oil business and the increase in foreign trade caused a boom in the demand for US dollars in foreign banks. Over US$ 47 Billion was sitting in overseas banks.
On paper, our gold reserves were over-leveraged by almost 4 to 1. As a nation, we did not know how to react to such an overbearing assault on our currency. Then along came the invention of the Eurodollar to make our nightmare worse.
Foreign banks with US dollars would make low-interest loans in US dollars to importers and exporters. Although the dollars were never repatriated, the US was still on the hook to exchange these “credit”-created dollars for the gold we kept on reserve.
Then came a miracle in disguise . The Bretton Woods Agreement collapsed. In the over-leveraged gold-dollar environment, many countries began to feel frustrated with the artificial peg.
In blatant defiance to the agreement in 1971, Germany declared that they would float the Deutsche mark. They were tired of the artificial peg that was keeping their economy depressed.
In the first hour of trading, over US$1 billion were exchanged for Deutsche marks. For the first time, the public had voiced their opinion against being so heavily weighted with dollars.
With Germany completely ignoring the Bretton Woods Agreement by floating their currency, the US government had nothing left to do but put the final nail in the coffin of the U.S.'s currency policy. The Bretton Woods Agreement was dissolved.
Three short months after the Deutsche mark began to float, the US moved off of the gold standard. Gold was allowed to float freely like any other currency. Oil, although priced in US dollars, soon switched to a peg against gold. Gold and oil prices jumped ten-fold.
The currency dynamics were soon changed on a global scale and it became accepted practice that countries began to float their own currency.
Pre-Currency Trading Era – The 1950s
Entering into the 1950s, the United States of America had a distinct advantage over war-torn Europe. While Germany was heavily sanctioned, England, France, Italy, and several other Old World nations were just coming to terms with the heavy investment needed to rebuild their countries.
As a way to make it easier for the rest of the world to rebuild, the Bretton Woods Agreement was adopted. It was innocuously simple: in an effort to keep the United States of America (USA) from buying everything in sight, the Bretton Woods Agreement kept the USA in check by requiring all foreign currencies be pegged to the US Dollar. Some pegs were strong, some pegs were weak, but at the end of the day they never moved more than 1% in any direction. Like today's problem with the Chinese Yuan, forced to a peg against the dollar, it kept a constant, controlled flow of US dollars out of the country.
The peg would not have been so bad if not for the fact that the US dollar also had a unique relationship with gold. Just like currencies, gold was pegged to the dollar at a fixed value of US$35/ounce. What made it even worse was that US currency, at the time, was directly exchangeable for gold. This strategy was fine as long as the Fort Knox gold reserves exceeded $23 billion.
After World War II, the USA became the primary economic super power. Many foreign countries began to acquire US currency in lieu of gold. The dollar gained prominence in a way no other currency ever had before.
At the same time, we began to see the rebuilding of the Old World and foreign trade began to gain momentum. In 1950, foreign countries held US $8 billion. We also saw the oil business begin its ascent as a prominent import/export industry.
As a way to make it easier for the rest of the world to rebuild, the Bretton Woods Agreement was adopted. It was innocuously simple: in an effort to keep the United States of America (USA) from buying everything in sight, the Bretton Woods Agreement kept the USA in check by requiring all foreign currencies be pegged to the US Dollar. Some pegs were strong, some pegs were weak, but at the end of the day they never moved more than 1% in any direction. Like today's problem with the Chinese Yuan, forced to a peg against the dollar, it kept a constant, controlled flow of US dollars out of the country.
The peg would not have been so bad if not for the fact that the US dollar also had a unique relationship with gold. Just like currencies, gold was pegged to the dollar at a fixed value of US$35/ounce. What made it even worse was that US currency, at the time, was directly exchangeable for gold. This strategy was fine as long as the Fort Knox gold reserves exceeded $23 billion.
After World War II, the USA became the primary economic super power. Many foreign countries began to acquire US currency in lieu of gold. The dollar gained prominence in a way no other currency ever had before.
At the same time, we began to see the rebuilding of the Old World and foreign trade began to gain momentum. In 1950, foreign countries held US $8 billion. We also saw the oil business begin its ascent as a prominent import/export industry.
The History of Forex
The Forex trading market is a relatively new phenomenon. Never before in the history of the world have we seen such an amazing event. In only 30 years, this industry has developed from almost nothing to a daily US$1.5 trillion market. How did this happen? Was it by design? Or was it by accident?
Well the answer falls somewhere in between. There are three distinct time frames that set the stage for today's style of currency trading. The first time frame is the pre-currency trading era of the 1950s. The second time frame is the worldwide, politically volatile atmosphere of the 1970s. The third time frame is what has occurred in this free market economy since the demise of the gold standard 30 years ago. In each time frame, there have been three catalysts: war, gold, and foreign banks- that have played a significant role in propelling currency development.
Well the answer falls somewhere in between. There are three distinct time frames that set the stage for today's style of currency trading. The first time frame is the pre-currency trading era of the 1950s. The second time frame is the worldwide, politically volatile atmosphere of the 1970s. The third time frame is what has occurred in this free market economy since the demise of the gold standard 30 years ago. In each time frame, there have been three catalysts: war, gold, and foreign banks- that have played a significant role in propelling currency development.
Foreign exchange market
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