Foreign exchange trading, while potentially very profitable, carries a high level of risk. It may therefore not be suitable for all investors -- especially those without much knowledge or experience.
Before investing, you should carefully weigh the risks. As with any investment, you could lose money. Do not invest money you cannot afford to lose.
In addition, the leveraged nature of foreign exchange trading means market movements will have an effect on your deposited funds. This may work against you as well as for you. You could lose your initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet a margin call within the time prescribed, your position will be liquidated and you will be responsible for any resulting losses.
You should seek advice from an independent financial advisor if you have any questions or doubts.
Wednesday, August 29, 2007
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Here's your A-to-Z guide of investment terms and definitions.
Here's your A-to-Z guide of investment terms and definitions.
Account - Record of all transactions.
Account Balance - Same as balance.
Accrual - The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals, over the period of each deal.
Adjustment - A change made in the internal economic policies to correct a payment imbalance or in the official currency rate.
Agent - An individual employed to act on behalf of another (the principal).
Aggregate Demand - The sum of government spending, personal consumption expenditures, and business expenditures.
All or None - A limit price order that instructs the broker to fill the whole order at the specified price or not at all.
Appreciation - An increase in the value of an asset.
Arbitrage - The purchase or sale of an instrument, and simultaneous taking of an equal and opposite position in a related market, to profit from small price differentials.
Ask Rate - The lowest price at which a financial instrument is offered for sale (as in bid/ask spread).
Ask Size - The amount of shares being offered for sale at the ask rate.
Asset Allocation - Investment practice that distributes funds among different markets (cash, forex, stocks, bonds, commodity, real estate) to achieve diversification for risk management purposes.
At Best - An instruction given to a dealer to buy or sell at the best rate that can be obtained.
At or Better - An order to deal at a specific rate or better.
Attorney in Fact - Someone who is allowed to transact business and execute documents on behalf of another person (holds power of attorney).
Back Office - The departments and processes related to the settlement of financial transactions (i.e. written confirmation and settlement of trades, record keeping).
Balance - Amount of money in an account.
Balance of Payments - A record of a nation's claims of transactions with the rest of the world over a particular time period. These inlcude merchandise, services and capital flows.
Balance of Trade - The value of a country's exports minus its imports.
Base Currency - The currency in which an investor or issuer maintains its books; the currency that other currencies are quoted against. In the forex market, the US Dollar is normally considered the 'base' currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair.
Basis - The difference between spot price and futures price.
Basis Point - One hundredth of a percent.
Bear - An investor who believes that prices/the market will decline.
Bear Market - A market distinguished by a prolonged period of declining prices, usually accompanied with widespread pessimism.
Bid - The price a buyer is prepared to purchase at; the price offered for a currency.
Bid/Ask Spread - See spread
Big Figure - Dealer phrase referring to the first few digits of an exchange rate. These digits rarely change in normal market fluctuations, and therefore are omitted in dealer quotes, especially in times of high market activity. For example, a USD/Yen rate might be 107.30/107.35, but would be quoted verbally without the first three digits; i.e. "30/35".
Bonds - Tradable debt securities issued by a borrower to raise capital. They pay either fixed or floating interest, known as the coupon. As interest rates fall, bond prices rise and vice versa.
Book - In a professional trading environment, a book is the summary of a trader's total positions.
Bretton Woods Accord of 1944 - An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and set the price of gold at US $35 per ounce. The agreement lasted until 1971.
Broker - An individual or firm that acts as an intermediary, putting together buyers and sellers (for a fee or commission).
Bull - An investor who believes that prices/the market will rise.
Bull Market - A market distinguished by a prolonged period of rising prices. (Opposite of bear market).
Bundesbank - The central bank of Germany.
Cable - Slang for the British Pound Sterling.
Candlestick Charts - A chart that indicates the trading ranges for the day as well as the opening and closing price.
Capital Markets - Markets for medium to long term investment (usually over 1 year).
Central Bank - A government or quasi-governmental organization that manages a country's monetary policy a prints a nation’s currency. For example, the US central bank is the Federal Reserve, others include the ECB, BOE, BOJ.
Chartist - An individual who uses charts and graphs and interprets historical data to find trends, predict future movements and perform technical analysis.
Clearing - The process of settling a trade.
Close a Position (Position Squaring) - To eliminate an investment from one's portfolio by either buying back a short position or selling a long position.
Collateral - Something of value given to secure a loan or as a guarantee of performance.
Commission - The fee a broker charges for a transaction.
Confirmation - A document exchanged by counterparts to a transaction that confirms the terms of said transaction.
Contagion - The tendency of an economic crisis to spread from one market to another.
Contract (Unit or Lot) - The standard unit of trading on certain exchanges.
Convertible Currency - A currency which can be exchanged freely for other currencies at market rates, or gold.
Cost of Carry - The cost associated with borrowing money in order to maintain a position. It is based on the interest parity, which determines the forward price.
Counter Currency - The second listed Currency in a Currency Pair.
Counter Party - The participant, either a bank or customer, with whom the financial transaction is made.
Country Risk - The risk associated with government intervention (does not include central bank intervention). Examples are legal and political events such as war, or civil unrest.
Credit Checking - Due to the large size of certain financial transactions that change hands, it is essential to check that the counter parties have room for the trade. Once the price has been agreed the credit is checked. If the credit is bad then no trade takes place. Credit is very important when trading, both in the Inter-bank market and between banks and their customers.
Credit Netting - Arrangements that exist to maximize free credit and speed the dealing process by reducing the need to constantly re-check credit.
Cross Rates - An exchange rate between two currencies.
Currency - A country’s unit of exchange issued by their government or central bank whose value is the basis for trade.
Currency Risk - The risk of incurring losses resulting from an adverse change in exchange rates.
Currency symbols:
AUD - Australian Dollar
CAD - Canadian Dollar
EUR - Euro
JPY - Japanese Yen
GBP - British Pound
CHF - Swiss Franc
Day Trading - Opening and closing the same position or positions within the same trading session.
Dealer - Someone who acts as a principal or counterpart to a transaction; places the order to buy or sell.
Deficit - A negative balance of trade (or payments); when expenditures are greater than income/revenue.
Delivery - An actual delivery where both sides transfer possession of the currencies traded.
Deposit - The borrowing and lending of cash. The rate that money is borrowed/lent at is known as the deposit rate (or depo rate).
Depreciation - A decline in the value of a currency, usually due to market forces.
Derivatives - Trades that are constructed or derived from another security (stock, bond, currency, or commodity).
Devaluation - The deliberate downward adjustment of a currency's value versus the value of another currency, normally caused by an official announcement.
Economic Exposure - The risk on a company's cash flow, stemming from foreign exchange fluctuations.
Economic Indicator - A statistic that indicates current economic growth and stability issued by the government or a non-government institution (i.e. Gross Domestic Product (GDP), Employment Rates, Trade Deficits, Industrial Production, and Business Inventories).
Efficient Market - A market in which the current price reflects all available information from past prices and volumes.
End Of Day (or Mark-to-Market) - Traders account for their positions in two ways: accrual or mark-to-market. An accrual system accounts only for cash flows when they occur, hence, it only shows a profit or loss when realized. The mark-to-market method values the trader's book at the end of each working day using the closing market rates or revaluation rates. Any profit or loss is booked and the trader will start the next day with a net position.
Estimated Annual Income - Projected yearly earnings.
Euro - The currency of the European Monetary Union (EMU) which replaced the European Currency Unit (ECU).
European Central Bank - The Central Bank for the European Monetary Union.
European Monetary Union - The principal goal of the EMU was to establish a single European currency called the Euro, which replaced the national currencies of the member EU countries in 2002. The current members of the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain and Portugal.
Exchange Rate Risk - See Currency Risk.
Federal Deposit Insurance Corporation (FDIC) - The regulatory agency responsible for administering bank depository insurance in the US.
Federal Reserve (Fed) - The Central Bank of the United States.
First In First Out (FIFO) - Open positions are closed according to the FIFO accounting rule. All positions opened within a particular currency pair are liquidated in the order in which they were originally opened.
Fixed Exchange Rate - An official exchange rate set by monetary authorities for one or more currencies.
Fixed Interest - The agreed interest rate remains constant for the term of the deal.
Flat (or Square) - To be neither long nor short.
Floating Rate Interest - As opposed to a fixed rate, the interest rate on this type of deal will fluctuate with market rates or benchmark rates.
Foreign Exchange (or Forex or FX) - The simultaneous buying of one currency and selling of another in an over-the-counter market.
Foreign Exchange Risk - See Currency Risk
Forex - Foreign Exchange.
Forward - A deal that will commence at an agreed date in the future.
Forward Points - The points (pips) added to or subtracted from the current exchange rate to calculate a forward price.
Forward Rate Agreements (FRAs) - Transactions that allow one to borrow/lend at a stated interest rate over a specific time period in the future.
Front Office - The trading room and other main business activities.
Fundamental Analysis - Thorough analysis of economic and political data with the goal of determining future movements in a financial market.
Futures - A way of trading financial instruments, currencies or commodities for a specific price on a specific date in the future. Unlike options, futures give the obligation (not the option) to buy or sell instruments at a later date. They can be used to both protect and to speculate against the future value of the underlying product.
FX - Foreign Exchange.
G7 - The seven leading industrial countries, being the US, Germany, Japan, France, the UK, Canada, and Italy.
Going Long - The purchase of a stock, commodity, or currency for investment or speculation.
Going Short - The selling of a currency or instrument not owned by the seller.
Gross Domestic Product - Total value of a country's output, income or expenditure produced within the country's borders.
Gross National Product - Gross domestic product plus income earned from investment or work abroad.
Good 'Til Cancelled Order (GTC) - An order to buy or sell at a specified price. This order remains open until filled or until the client cancels.
Hedge - An investment position or combination of positions that reduces the volatility of your portfolio value. One can take an offsetting position in a related security. Instruments used are varied and include forwards, futures, options, and combinations of all of them.
High/Low - Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day.
"Hit the bid" - Acceptance of purchasing at the offer or selling at the bid.
Inflation - An economic condition where there is an increase in the price of consumer goods, thereby eroding purchasing power.
Initial Margin - The required initial deposit of collateral to enter into a position as a guarantee on future performance
Interbank Rates - The Foreign Exchange rates at which large international banks quote other large international banks
Interest Rate Swaps - An exchange of two debt obligations that have different payment streams. The transaction usually exchanges two parallel loans; one fixed, the other floating.
Interest Rate Swap Points - Interest rates may be determined by a simple rule using the bid and offer spread on an fx rate. If the rate quoted is in foreign (non US) terms and the offered price is higher than the bid, then the interest rate in that nation is higher than the rate in the base nation for the particular time in question. If quoted in American terms, the opposite is true. Example – USD/ JPY quoted 105.75 to 105.65. Because the offered price is lower than the bid, then you know that rates are lower in Japan than in the US.
Intervention - Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.
ISDA (International Swaps and Derivatives Association) - The body that sets terms and conditions for derivative trades
Kiwi - Slang for the New Zealand dollar.
Leading Indicators - Economic variables that are considered to predict future economic activity (i.e. Unemployment, Consumer Price Index, Producer Price Index, Retail Sales, Personal Income, Prime Rate, Discount Rate, and Federal Funds Rate).
Leverage - Also called margin. The ratio of the amount used in a transaction to the required security deposit.
LIBOR - Stands for London Interbank Offer Rate. The interest rate that the largest international banks will lend to each other.
LIFFE - The London International Financial Futures Exchange. Consists of the three largest UK futures markets.
Limit Order - An order to buy at or below a specified price or to sell at or above a specified price.
Liquid and Illiquid Markets - The ability of a market to buy and sell at ease with no impact on price stability. A market is described as liquid if the spread between the bid and the offer is small. Another measure of liquidity is the presence of buyers and seller, with more players creating tighter spreads. Illiquid markets have few players, hence, wider dealing spreads.
Liquidation - To close an open position throgh the execution of an offsetting transaction.
Liquid Assets - Assets that can be easily converted into cash. Examples: money market fund shares, US Treasury Bills, bank deposits, etc.
Long - A position to purchase more of an instrument than is sold, hence, an appreciation in value if market prices increase.
Lot - A unit to measure the amount of the deal. The value of the deal always corresponds to an integer number of lots.
Margin - Customers must deposit funds as collateral to cover any potential losses from adverse movements in prices.
Margin Call - A requirement from a broker or dealer for additional funds or other collateral to bring the margin up to a required level to guarantee performance on a position that has moved against the customer.
Mark to Market (or End Of Day) - Traders account for their positions in two ways: accrual or mark-to-market. An accrual system accounts only for cash flows when they occur, hence, it only shows a profit or loss when realized. The mark-to-market method values the trader`s book at the end of each working day using the closing market rates or revaluation rates. Any profit or loss is booked and the trader will start the next day with a net position.
Market Maker - A dealer who supplies prices and is prepared to buy or sell at those stated bid and ask prices. A market maker runs a trading book.
Market Order - An order to buy/sell at the best price available when the order reaches the market.
Market Risk - Risk relating to the market in general and cannot be diversified away by hedging or holding a variety of securities.
Maturity - The date a debt becomes due for payment.
Mine and Yours - To announce that a trader wants to buy he/she may say or type Mine. This would also be known as taking the offer. To sell he will use Yours. This would be known as `hitting the bid`.
Money Markets - Refers to investments that are short-term (i.e. under one year) and whose participants include banks and other financial institutions. Examples include Deposits, Certificates of Deposit, Repurchase Agreements, Overnight Index Swaps and Commercial Paper. Short-term investments are safe and highly liquid.
Net Position - The amount of currency bought or sold which has not yet been offset by opposite transactions.
Net Worth - Amount of assets which exceed liabilities. May also be known as stockholders equity or net assets.
Off Balance Sheet - Products such as Interest Rate Swaps and Forward Rate Agreements are examples of 'off balance sheet' products. Also, financing from other sources other than equity and debt are listed.
Offer - The price, or rate, that a willing seller is prepared to sell at.
Offsetting Transaction - A trade that serves to cancel or offset some or all of the market risk of an open position.
One Cancels Other Order (O.C.O. Order) - A contingent order where the execution of one part of the order automatically cancels the other part.
Open Order - An order to buy or sell when a market moves to its designated price.
Open Position - A deal not yet reversed or settled and the investor is subject to exchange rate movements.
Options - An agreement that allows the holder to have the option to buy/sell a specific security at a certain price within a certain time. Two types of options – call and put. A call is the right to buy while a put is the right to sell.
Order - An order is an instruction, from a client to a broker to trade. An order can be placed at a specific price or at the market price. Also, it can be good until filled or until close of business.
Overnight - A trade that remains open until the next business day.
Over The Counter (OTC) - Used to describe any transaction that is not conducted over an exchange.
Pegging - A form of price stabilization; typically used to stabilize a country’s currency by making it fixed to the exchange rate with another country.
Pips (or Points) - The term used in currency market to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point (0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY).
Political Risk - Changes in a country’s governmental policy, which may have an adverse effect on an investor's position.
Position - A trading view expressed by buying or selling. It can refer to the amount of a currency either owned or owed by an investor.
Premium - In the currency markets, it is the amount of points added to the spot price to determine a forward or futures price.
Price Transparency - Every market participant has equal access to the description of quotes.
Profit /Loss or "P/L" or Gain/Loss - The actual "realized" gain or loss resulting fromtrading activities on Closed Positions, plus the theoretical "unrealized" gain or loss on Open Positions that have been Mark-to-Market.
Quote - An indicative market price; shows the highest bid and/or lowest ask price available on a security at any given time.
Rally - A recovery in price after a period of decline.
Range - The difference between the highest and lowest price of a future recorded during a given trading session.
Rate - The price of one currency in terms of another, typically used for dealing purposes.
Realized and Unrealized Profit and Loss - One using an accrual type accounting system has an “unrealized profit” until he sells his shares. Upon the sale of one’s shares, the profit becomes “realized.”
Re-purchase (or Repo) - This type of trade involves the sale and later re-purchase of an instrument, at a specified time and date. Occurs in the short-term money market.
Resistance - A term used in technical analysis indicating a specific price level at which a currency will have the inability to cross above. Recurring failure for the price to move above that point produces a pattern that can usually be shaped by a straight line.
Revaluation Rates - The revaluation rates are the market rates used when a trader runs an end-of-day to establish profit and loss for the day.
Risk - Exposure to uncertain change, the variability of returns significantly the likelihood of less-than-expected returns.
Risk Capital - The amount of money that an individual can afford to invest, which, if lost would not affect their lifestyle.
Risk Management - To hedge one's risk they will employ financial analysis and trading techniques.
Rollover - The settlement of a deal is rolled forward to another value date with the cost of this process based on the interest rate differential of the two currencies.
Round trip - Buying and selling of a specified amount of currency.
Settlement - The finalizing of a transaction, the trade and the counterparts are entered into the books.
Short - To go 'short' is to have sold an instrument without actually owning it, and to hold a short position with expectations that the price will decline so it can be bought back in the future at a profit.
Short Position - An investment position that results from short selling. Benefits from a decline in market price because the position has not been covered yet.
Spot - A transaction that occurs immediately, but the funds will usually change hands within two days after deal is struck.
Spot Price - The current market price. Spot transaction settlements usually occurs within two business days.
Spread - The difference between the bid and offer (ask) prices; used to measure market liquidity. Narrower spreads usually signify high liquidity.
Square - Purchase and sales are in balance and thus the dealer has no open position.
Sterling - Slang for British Pound.
Stop Order - An order to buy/sell at an agreed price. One could also have a pre-arranged stop order, whereby an open position is automatically liquidated when a specified price is reached or passed.
Support Levels - A term used in technical analysis indicating a specific price level at which a currency will have the inability to cross below. Recurring failure for the price to move below that point produces a pattern that can usually be shaped by a straight line.
Swaps - A swap occurs when one currency is temporarily exchanged for another, then the currency is held and exchanged later after a fixed period of time. To calculate the swap take the interest rate differential between the two underlying currencies, thus it may be used for speculative purposes to exploit anticipated movement in the interest rates.
Swissy - Market slang for Swiss Franc.
Technical Analysis - An effort to forecast future market activity by analyzing market data such as charts, price trends, and volume.
Tick - Minimum price move.
Ticker - Shows current and/or recent history of a currency either in the format of a graph or table.
Tomorrow Next (Tom/Next) - Simultaneous buying and selling of a currency for delivery the following day.
Transaction Cost - The cost associated with buying or selling of a financial instrument.
Transaction Date - The date on which the trade occurs.
Turnover - The volume traded, or level of trading, over a specified period, usually daily or yearly.
Two-Way Price - Both the bid and offer rate is quoted for a Forex transaction.
Unrealized Gain/Loss - The theoretical gain or loss on Open Positions valued at current market rates, as determined by the broker in its sole discretion. Unrealized Gains' Losses become Profits/Losses when position is closed.
Uptick - A new price quote that is higher than the preceding quote for the same currency.
Uptick Rule - In the U.S., a regulation which states that a security may not be sold short unless the trade prior to the short sale was at a price lower than the price at which the short sale is executed.
US Prime Rate - The interest rate at which US banks will lend to their prime corporate customers.
Value Date - The date that both parties of a transaction agree to exchange payments.
Variation Margin - An additional margin requirement that a broker will need from a client due to market fluctuation.
Volatility - A statistical measure of a market or a security’s price movements over time and is calculated by using standard deviation. Associated with high volatility is a high degree of risk.
Volume - The number, or value, of securities traded during a specific period.
Warrants - Warrants are a form of traded option. They are the right to purchase shares or bonds issued by a company at a specific price within a specified time span.
Whipsaw - A term used to describe a condition in a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.
Yard - Another term for a billion.
Account - Record of all transactions.
Account Balance - Same as balance.
Accrual - The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals, over the period of each deal.
Adjustment - A change made in the internal economic policies to correct a payment imbalance or in the official currency rate.
Agent - An individual employed to act on behalf of another (the principal).
Aggregate Demand - The sum of government spending, personal consumption expenditures, and business expenditures.
All or None - A limit price order that instructs the broker to fill the whole order at the specified price or not at all.
Appreciation - An increase in the value of an asset.
Arbitrage - The purchase or sale of an instrument, and simultaneous taking of an equal and opposite position in a related market, to profit from small price differentials.
Ask Rate - The lowest price at which a financial instrument is offered for sale (as in bid/ask spread).
Ask Size - The amount of shares being offered for sale at the ask rate.
Asset Allocation - Investment practice that distributes funds among different markets (cash, forex, stocks, bonds, commodity, real estate) to achieve diversification for risk management purposes.
At Best - An instruction given to a dealer to buy or sell at the best rate that can be obtained.
At or Better - An order to deal at a specific rate or better.
Attorney in Fact - Someone who is allowed to transact business and execute documents on behalf of another person (holds power of attorney).
Back Office - The departments and processes related to the settlement of financial transactions (i.e. written confirmation and settlement of trades, record keeping).
Balance - Amount of money in an account.
Balance of Payments - A record of a nation's claims of transactions with the rest of the world over a particular time period. These inlcude merchandise, services and capital flows.
Balance of Trade - The value of a country's exports minus its imports.
Base Currency - The currency in which an investor or issuer maintains its books; the currency that other currencies are quoted against. In the forex market, the US Dollar is normally considered the 'base' currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair.
Basis - The difference between spot price and futures price.
Basis Point - One hundredth of a percent.
Bear - An investor who believes that prices/the market will decline.
Bear Market - A market distinguished by a prolonged period of declining prices, usually accompanied with widespread pessimism.
Bid - The price a buyer is prepared to purchase at; the price offered for a currency.
Bid/Ask Spread - See spread
Big Figure - Dealer phrase referring to the first few digits of an exchange rate. These digits rarely change in normal market fluctuations, and therefore are omitted in dealer quotes, especially in times of high market activity. For example, a USD/Yen rate might be 107.30/107.35, but would be quoted verbally without the first three digits; i.e. "30/35".
Bonds - Tradable debt securities issued by a borrower to raise capital. They pay either fixed or floating interest, known as the coupon. As interest rates fall, bond prices rise and vice versa.
Book - In a professional trading environment, a book is the summary of a trader's total positions.
Bretton Woods Accord of 1944 - An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and set the price of gold at US $35 per ounce. The agreement lasted until 1971.
Broker - An individual or firm that acts as an intermediary, putting together buyers and sellers (for a fee or commission).
Bull - An investor who believes that prices/the market will rise.
Bull Market - A market distinguished by a prolonged period of rising prices. (Opposite of bear market).
Bundesbank - The central bank of Germany.
Cable - Slang for the British Pound Sterling.
Candlestick Charts - A chart that indicates the trading ranges for the day as well as the opening and closing price.
Capital Markets - Markets for medium to long term investment (usually over 1 year).
Central Bank - A government or quasi-governmental organization that manages a country's monetary policy a prints a nation’s currency. For example, the US central bank is the Federal Reserve, others include the ECB, BOE, BOJ.
Chartist - An individual who uses charts and graphs and interprets historical data to find trends, predict future movements and perform technical analysis.
Clearing - The process of settling a trade.
Close a Position (Position Squaring) - To eliminate an investment from one's portfolio by either buying back a short position or selling a long position.
Collateral - Something of value given to secure a loan or as a guarantee of performance.
Commission - The fee a broker charges for a transaction.
Confirmation - A document exchanged by counterparts to a transaction that confirms the terms of said transaction.
Contagion - The tendency of an economic crisis to spread from one market to another.
Contract (Unit or Lot) - The standard unit of trading on certain exchanges.
Convertible Currency - A currency which can be exchanged freely for other currencies at market rates, or gold.
Cost of Carry - The cost associated with borrowing money in order to maintain a position. It is based on the interest parity, which determines the forward price.
Counter Currency - The second listed Currency in a Currency Pair.
Counter Party - The participant, either a bank or customer, with whom the financial transaction is made.
Country Risk - The risk associated with government intervention (does not include central bank intervention). Examples are legal and political events such as war, or civil unrest.
Credit Checking - Due to the large size of certain financial transactions that change hands, it is essential to check that the counter parties have room for the trade. Once the price has been agreed the credit is checked. If the credit is bad then no trade takes place. Credit is very important when trading, both in the Inter-bank market and between banks and their customers.
Credit Netting - Arrangements that exist to maximize free credit and speed the dealing process by reducing the need to constantly re-check credit.
Cross Rates - An exchange rate between two currencies.
Currency - A country’s unit of exchange issued by their government or central bank whose value is the basis for trade.
Currency Risk - The risk of incurring losses resulting from an adverse change in exchange rates.
Currency symbols:
AUD - Australian Dollar
CAD - Canadian Dollar
EUR - Euro
JPY - Japanese Yen
GBP - British Pound
CHF - Swiss Franc
Day Trading - Opening and closing the same position or positions within the same trading session.
Dealer - Someone who acts as a principal or counterpart to a transaction; places the order to buy or sell.
Deficit - A negative balance of trade (or payments); when expenditures are greater than income/revenue.
Delivery - An actual delivery where both sides transfer possession of the currencies traded.
Deposit - The borrowing and lending of cash. The rate that money is borrowed/lent at is known as the deposit rate (or depo rate).
Depreciation - A decline in the value of a currency, usually due to market forces.
Derivatives - Trades that are constructed or derived from another security (stock, bond, currency, or commodity).
Devaluation - The deliberate downward adjustment of a currency's value versus the value of another currency, normally caused by an official announcement.
Economic Exposure - The risk on a company's cash flow, stemming from foreign exchange fluctuations.
Economic Indicator - A statistic that indicates current economic growth and stability issued by the government or a non-government institution (i.e. Gross Domestic Product (GDP), Employment Rates, Trade Deficits, Industrial Production, and Business Inventories).
Efficient Market - A market in which the current price reflects all available information from past prices and volumes.
End Of Day (or Mark-to-Market) - Traders account for their positions in two ways: accrual or mark-to-market. An accrual system accounts only for cash flows when they occur, hence, it only shows a profit or loss when realized. The mark-to-market method values the trader's book at the end of each working day using the closing market rates or revaluation rates. Any profit or loss is booked and the trader will start the next day with a net position.
Estimated Annual Income - Projected yearly earnings.
Euro - The currency of the European Monetary Union (EMU) which replaced the European Currency Unit (ECU).
European Central Bank - The Central Bank for the European Monetary Union.
European Monetary Union - The principal goal of the EMU was to establish a single European currency called the Euro, which replaced the national currencies of the member EU countries in 2002. The current members of the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain and Portugal.
Exchange Rate Risk - See Currency Risk.
Federal Deposit Insurance Corporation (FDIC) - The regulatory agency responsible for administering bank depository insurance in the US.
Federal Reserve (Fed) - The Central Bank of the United States.
First In First Out (FIFO) - Open positions are closed according to the FIFO accounting rule. All positions opened within a particular currency pair are liquidated in the order in which they were originally opened.
Fixed Exchange Rate - An official exchange rate set by monetary authorities for one or more currencies.
Fixed Interest - The agreed interest rate remains constant for the term of the deal.
Flat (or Square) - To be neither long nor short.
Floating Rate Interest - As opposed to a fixed rate, the interest rate on this type of deal will fluctuate with market rates or benchmark rates.
Foreign Exchange (or Forex or FX) - The simultaneous buying of one currency and selling of another in an over-the-counter market.
Foreign Exchange Risk - See Currency Risk
Forex - Foreign Exchange.
Forward - A deal that will commence at an agreed date in the future.
Forward Points - The points (pips) added to or subtracted from the current exchange rate to calculate a forward price.
Forward Rate Agreements (FRAs) - Transactions that allow one to borrow/lend at a stated interest rate over a specific time period in the future.
Front Office - The trading room and other main business activities.
Fundamental Analysis - Thorough analysis of economic and political data with the goal of determining future movements in a financial market.
Futures - A way of trading financial instruments, currencies or commodities for a specific price on a specific date in the future. Unlike options, futures give the obligation (not the option) to buy or sell instruments at a later date. They can be used to both protect and to speculate against the future value of the underlying product.
FX - Foreign Exchange.
G7 - The seven leading industrial countries, being the US, Germany, Japan, France, the UK, Canada, and Italy.
Going Long - The purchase of a stock, commodity, or currency for investment or speculation.
Going Short - The selling of a currency or instrument not owned by the seller.
Gross Domestic Product - Total value of a country's output, income or expenditure produced within the country's borders.
Gross National Product - Gross domestic product plus income earned from investment or work abroad.
Good 'Til Cancelled Order (GTC) - An order to buy or sell at a specified price. This order remains open until filled or until the client cancels.
Hedge - An investment position or combination of positions that reduces the volatility of your portfolio value. One can take an offsetting position in a related security. Instruments used are varied and include forwards, futures, options, and combinations of all of them.
High/Low - Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day.
"Hit the bid" - Acceptance of purchasing at the offer or selling at the bid.
Inflation - An economic condition where there is an increase in the price of consumer goods, thereby eroding purchasing power.
Initial Margin - The required initial deposit of collateral to enter into a position as a guarantee on future performance
Interbank Rates - The Foreign Exchange rates at which large international banks quote other large international banks
Interest Rate Swaps - An exchange of two debt obligations that have different payment streams. The transaction usually exchanges two parallel loans; one fixed, the other floating.
Interest Rate Swap Points - Interest rates may be determined by a simple rule using the bid and offer spread on an fx rate. If the rate quoted is in foreign (non US) terms and the offered price is higher than the bid, then the interest rate in that nation is higher than the rate in the base nation for the particular time in question. If quoted in American terms, the opposite is true. Example – USD/ JPY quoted 105.75 to 105.65. Because the offered price is lower than the bid, then you know that rates are lower in Japan than in the US.
Intervention - Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.
ISDA (International Swaps and Derivatives Association) - The body that sets terms and conditions for derivative trades
Kiwi - Slang for the New Zealand dollar.
Leading Indicators - Economic variables that are considered to predict future economic activity (i.e. Unemployment, Consumer Price Index, Producer Price Index, Retail Sales, Personal Income, Prime Rate, Discount Rate, and Federal Funds Rate).
Leverage - Also called margin. The ratio of the amount used in a transaction to the required security deposit.
LIBOR - Stands for London Interbank Offer Rate. The interest rate that the largest international banks will lend to each other.
LIFFE - The London International Financial Futures Exchange. Consists of the three largest UK futures markets.
Limit Order - An order to buy at or below a specified price or to sell at or above a specified price.
Liquid and Illiquid Markets - The ability of a market to buy and sell at ease with no impact on price stability. A market is described as liquid if the spread between the bid and the offer is small. Another measure of liquidity is the presence of buyers and seller, with more players creating tighter spreads. Illiquid markets have few players, hence, wider dealing spreads.
Liquidation - To close an open position throgh the execution of an offsetting transaction.
Liquid Assets - Assets that can be easily converted into cash. Examples: money market fund shares, US Treasury Bills, bank deposits, etc.
Long - A position to purchase more of an instrument than is sold, hence, an appreciation in value if market prices increase.
Lot - A unit to measure the amount of the deal. The value of the deal always corresponds to an integer number of lots.
Margin - Customers must deposit funds as collateral to cover any potential losses from adverse movements in prices.
Margin Call - A requirement from a broker or dealer for additional funds or other collateral to bring the margin up to a required level to guarantee performance on a position that has moved against the customer.
Mark to Market (or End Of Day) - Traders account for their positions in two ways: accrual or mark-to-market. An accrual system accounts only for cash flows when they occur, hence, it only shows a profit or loss when realized. The mark-to-market method values the trader`s book at the end of each working day using the closing market rates or revaluation rates. Any profit or loss is booked and the trader will start the next day with a net position.
Market Maker - A dealer who supplies prices and is prepared to buy or sell at those stated bid and ask prices. A market maker runs a trading book.
Market Order - An order to buy/sell at the best price available when the order reaches the market.
Market Risk - Risk relating to the market in general and cannot be diversified away by hedging or holding a variety of securities.
Maturity - The date a debt becomes due for payment.
Mine and Yours - To announce that a trader wants to buy he/she may say or type Mine. This would also be known as taking the offer. To sell he will use Yours. This would be known as `hitting the bid`.
Money Markets - Refers to investments that are short-term (i.e. under one year) and whose participants include banks and other financial institutions. Examples include Deposits, Certificates of Deposit, Repurchase Agreements, Overnight Index Swaps and Commercial Paper. Short-term investments are safe and highly liquid.
Net Position - The amount of currency bought or sold which has not yet been offset by opposite transactions.
Net Worth - Amount of assets which exceed liabilities. May also be known as stockholders equity or net assets.
Off Balance Sheet - Products such as Interest Rate Swaps and Forward Rate Agreements are examples of 'off balance sheet' products. Also, financing from other sources other than equity and debt are listed.
Offer - The price, or rate, that a willing seller is prepared to sell at.
Offsetting Transaction - A trade that serves to cancel or offset some or all of the market risk of an open position.
One Cancels Other Order (O.C.O. Order) - A contingent order where the execution of one part of the order automatically cancels the other part.
Open Order - An order to buy or sell when a market moves to its designated price.
Open Position - A deal not yet reversed or settled and the investor is subject to exchange rate movements.
Options - An agreement that allows the holder to have the option to buy/sell a specific security at a certain price within a certain time. Two types of options – call and put. A call is the right to buy while a put is the right to sell.
Order - An order is an instruction, from a client to a broker to trade. An order can be placed at a specific price or at the market price. Also, it can be good until filled or until close of business.
Overnight - A trade that remains open until the next business day.
Over The Counter (OTC) - Used to describe any transaction that is not conducted over an exchange.
Pegging - A form of price stabilization; typically used to stabilize a country’s currency by making it fixed to the exchange rate with another country.
Pips (or Points) - The term used in currency market to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point (0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY).
Political Risk - Changes in a country’s governmental policy, which may have an adverse effect on an investor's position.
Position - A trading view expressed by buying or selling. It can refer to the amount of a currency either owned or owed by an investor.
Premium - In the currency markets, it is the amount of points added to the spot price to determine a forward or futures price.
Price Transparency - Every market participant has equal access to the description of quotes.
Profit /Loss or "P/L" or Gain/Loss - The actual "realized" gain or loss resulting fromtrading activities on Closed Positions, plus the theoretical "unrealized" gain or loss on Open Positions that have been Mark-to-Market.
Quote - An indicative market price; shows the highest bid and/or lowest ask price available on a security at any given time.
Rally - A recovery in price after a period of decline.
Range - The difference between the highest and lowest price of a future recorded during a given trading session.
Rate - The price of one currency in terms of another, typically used for dealing purposes.
Realized and Unrealized Profit and Loss - One using an accrual type accounting system has an “unrealized profit” until he sells his shares. Upon the sale of one’s shares, the profit becomes “realized.”
Re-purchase (or Repo) - This type of trade involves the sale and later re-purchase of an instrument, at a specified time and date. Occurs in the short-term money market.
Resistance - A term used in technical analysis indicating a specific price level at which a currency will have the inability to cross above. Recurring failure for the price to move above that point produces a pattern that can usually be shaped by a straight line.
Revaluation Rates - The revaluation rates are the market rates used when a trader runs an end-of-day to establish profit and loss for the day.
Risk - Exposure to uncertain change, the variability of returns significantly the likelihood of less-than-expected returns.
Risk Capital - The amount of money that an individual can afford to invest, which, if lost would not affect their lifestyle.
Risk Management - To hedge one's risk they will employ financial analysis and trading techniques.
Rollover - The settlement of a deal is rolled forward to another value date with the cost of this process based on the interest rate differential of the two currencies.
Round trip - Buying and selling of a specified amount of currency.
Settlement - The finalizing of a transaction, the trade and the counterparts are entered into the books.
Short - To go 'short' is to have sold an instrument without actually owning it, and to hold a short position with expectations that the price will decline so it can be bought back in the future at a profit.
Short Position - An investment position that results from short selling. Benefits from a decline in market price because the position has not been covered yet.
Spot - A transaction that occurs immediately, but the funds will usually change hands within two days after deal is struck.
Spot Price - The current market price. Spot transaction settlements usually occurs within two business days.
Spread - The difference between the bid and offer (ask) prices; used to measure market liquidity. Narrower spreads usually signify high liquidity.
Square - Purchase and sales are in balance and thus the dealer has no open position.
Sterling - Slang for British Pound.
Stop Order - An order to buy/sell at an agreed price. One could also have a pre-arranged stop order, whereby an open position is automatically liquidated when a specified price is reached or passed.
Support Levels - A term used in technical analysis indicating a specific price level at which a currency will have the inability to cross below. Recurring failure for the price to move below that point produces a pattern that can usually be shaped by a straight line.
Swaps - A swap occurs when one currency is temporarily exchanged for another, then the currency is held and exchanged later after a fixed period of time. To calculate the swap take the interest rate differential between the two underlying currencies, thus it may be used for speculative purposes to exploit anticipated movement in the interest rates.
Swissy - Market slang for Swiss Franc.
Technical Analysis - An effort to forecast future market activity by analyzing market data such as charts, price trends, and volume.
Tick - Minimum price move.
Ticker - Shows current and/or recent history of a currency either in the format of a graph or table.
Tomorrow Next (Tom/Next) - Simultaneous buying and selling of a currency for delivery the following day.
Transaction Cost - The cost associated with buying or selling of a financial instrument.
Transaction Date - The date on which the trade occurs.
Turnover - The volume traded, or level of trading, over a specified period, usually daily or yearly.
Two-Way Price - Both the bid and offer rate is quoted for a Forex transaction.
Unrealized Gain/Loss - The theoretical gain or loss on Open Positions valued at current market rates, as determined by the broker in its sole discretion. Unrealized Gains' Losses become Profits/Losses when position is closed.
Uptick - A new price quote that is higher than the preceding quote for the same currency.
Uptick Rule - In the U.S., a regulation which states that a security may not be sold short unless the trade prior to the short sale was at a price lower than the price at which the short sale is executed.
US Prime Rate - The interest rate at which US banks will lend to their prime corporate customers.
Value Date - The date that both parties of a transaction agree to exchange payments.
Variation Margin - An additional margin requirement that a broker will need from a client due to market fluctuation.
Volatility - A statistical measure of a market or a security’s price movements over time and is calculated by using standard deviation. Associated with high volatility is a high degree of risk.
Volume - The number, or value, of securities traded during a specific period.
Warrants - Warrants are a form of traded option. They are the right to purchase shares or bonds issued by a company at a specific price within a specified time span.
Whipsaw - A term used to describe a condition in a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.
Yard - Another term for a billion.
Summary
As you can see, the buying and selling of currencies is necessary as it supports trade between countries in today's global marketplace and, as the major world currencies often work against one another, will continue to be. There is so much money to be made from currency transactions.
The major players in the market today are buying and selling in single deals and they are often running into many millions of dollars. The smaller players (as usual), like the brokerage houses and individual brokers, are often trading in single deals that consist of as little as one hundred thousand dollars.
Nowadays, you can join this market and, providing you take the time to learn everything that there is to know of the currency markets and have a little bit of capital to invest, you can have a great time and earn a very reasonable income from your trading efforts when you do it online.
As you have learned here you will not be able to trade on your own and will need to use a broker, but many brokers will allow you to open an account online and start trading with anywhere between $250 and $1,000. Many of them will let you try a free demo just to let you get the nag of it.
Forex trading is not for everybody but its major advantage is that it is a highly liquid market that does not involve the commission payments and paperwork which many people find a problem like with other forms of trading. It is, however, a technical market and you should not try it unless you are absolutely ready to take the time to learn the basic principles that make up this currency market and become competent
in the use of some of the tools at your disposal.
It is not necessary to become an expert in these markets to profit from them. With a little time and effort you can quite easily gain enough of an understanding of the currency markets to start making money online and off and, eventually you will be surprised at just how quickly you can become quite an expert.
This guide has given you all of the knowledge you need to make money if you really want to. All you have to do is follow the advice mentioned here and do your research. Next thing you know, you will be earning steady income from the forex trading market in no time at all!
The major players in the market today are buying and selling in single deals and they are often running into many millions of dollars. The smaller players (as usual), like the brokerage houses and individual brokers, are often trading in single deals that consist of as little as one hundred thousand dollars.
Nowadays, you can join this market and, providing you take the time to learn everything that there is to know of the currency markets and have a little bit of capital to invest, you can have a great time and earn a very reasonable income from your trading efforts when you do it online.
As you have learned here you will not be able to trade on your own and will need to use a broker, but many brokers will allow you to open an account online and start trading with anywhere between $250 and $1,000. Many of them will let you try a free demo just to let you get the nag of it.
Forex trading is not for everybody but its major advantage is that it is a highly liquid market that does not involve the commission payments and paperwork which many people find a problem like with other forms of trading. It is, however, a technical market and you should not try it unless you are absolutely ready to take the time to learn the basic principles that make up this currency market and become competent
in the use of some of the tools at your disposal.
It is not necessary to become an expert in these markets to profit from them. With a little time and effort you can quite easily gain enough of an understanding of the currency markets to start making money online and off and, eventually you will be surprised at just how quickly you can become quite an expert.
This guide has given you all of the knowledge you need to make money if you really want to. All you have to do is follow the advice mentioned here and do your research. Next thing you know, you will be earning steady income from the forex trading market in no time at all!
Only trade positive expectancy systems
If you have a positive expectancy trading system, the only factors that will decide how much money you will make per year are the number of trades the system actually makes, how much capital you allocate to the system, and how accurately you use the trading signals.
If you do not know whether your trading system is positive expectancy then it makes no sense for you to be trading it in the first place. Expectancy is calculated using the profit or loss on each trade; divided by the initial risk, and then taking the average of this number of a series of trades. Systems that have positive expectancy will make money most of the time and those with negative expectancy will lose money.
Successful traders only trade systems when the odds of success are in their favor so that they know that making money is the final result of accurately implementing the system and not just pure luck.
You will want to minimize all of you trading business costs
Some trading systems can offer you only marginal profitability, and trading implementation costs (commission, spread, and slippage) can be the difference between making a profit and making a loss.
With the simple availability of modern electronic brokers, and fully-automated trade processing and execution, it is definitely worth the effort in looking for a very low cost way to implement your trading system.
High commission, wide spreads, and large amounts of slippage can be lowered drastically and easily by carefully choosing the right broker. This can be the difference between a system being useable or not. Paying too much for trade implementation is a way to lose money that you can actually avoid.
Educate yourself
In order for you to be able to compete at the highest level in the trading business and be a successful player, you must be well-educated about what you are doing. Being well-educated means that you have thoroughly researched and tested your trading ideas and know why your trading system worked in the past and is still working.
It means that you understand all the technology and applications that your system needs to perform with accuracy. It means understanding your goal and objectives and how trading will help you achieve them. It means understanding yourself and how your personality will affect your results.
In order to succeed as a forex trader, you really need to become an expert in your own trading business to understand how it the dots are all connected, when it is broken, and how it can be improved. This takes commitment, hard work, dedication, and more hard work.
Avoid trading scared money
No one ever made any money trading when they had to do it to pay their bills at the end of the month. Having a requirement to make a certain amount of dollars per month or you will be financially in trouble is the best way I know to completely mess up all trading discipline, rules, objectives, and leads faster than you’d expect to disaster.
Trading is about taking a reasonable amount of risk in order to achieve a good reward. The markets and how and when they give up their profits is nothing that you can control. You should never trade if you need the money to pay bills. Do not trade if your business and personal expenses are not covered by another income stream or cash reserve. This is how hasty decisions are made.
Dealing with your losses
One of the most important rules of Forex trading is to keep your losses as small as possible. With small Forex trading losses, you can outlast those times when the market moves against you, and be well positioned for when the trend turns around.
The one proven method to keeping your losses small is to set your maximum loss before you even open a Forex trading position.
The maximum loss is the greatest amount of capital that you are comfortable losing on any one trade. With your maximum loss set as a small percentage of your Forex trading effort, a string of losses won’t stop you from trading for any particular amount of time. Unlike the 95% of Forex traders out there who lose money because they haven’t implemented wise money management rules to their Forex trading system, you will be ok with this money management rule.
To use as an example... If I had a Forex trading float of $2000, and I began trading with $200 a trade, it would be reasonable for me to experience three losses in a row. This would reduce my Forex trading capital to $800. It would then be decided that they’re going to bet $400 on the next trade because they think they have a higher chance of winning after having lost three times already.
If that trader did bet $200 dollars on the next trade because they thought they were going to win, their capital could be reduced to $500 dollars. The chances of making money now are practically nil because I would need to make 150% on the next trade just to break even. If the maximum loss had been determined, and stuck to, they
would not be in this position.
In this case, the reason for failure was because the trader risked too much money, and didn’t apply good money management to the play.
Remember, the goal here is to keep our losses as small as possible while also making sure that we open a large enough position to capitalize on profits and minimize losses. With your money management rules in place, in your Forex trading system, you will always be able to do this.
If you do not know whether your trading system is positive expectancy then it makes no sense for you to be trading it in the first place. Expectancy is calculated using the profit or loss on each trade; divided by the initial risk, and then taking the average of this number of a series of trades. Systems that have positive expectancy will make money most of the time and those with negative expectancy will lose money.
Successful traders only trade systems when the odds of success are in their favor so that they know that making money is the final result of accurately implementing the system and not just pure luck.
You will want to minimize all of you trading business costs
Some trading systems can offer you only marginal profitability, and trading implementation costs (commission, spread, and slippage) can be the difference between making a profit and making a loss.
With the simple availability of modern electronic brokers, and fully-automated trade processing and execution, it is definitely worth the effort in looking for a very low cost way to implement your trading system.
High commission, wide spreads, and large amounts of slippage can be lowered drastically and easily by carefully choosing the right broker. This can be the difference between a system being useable or not. Paying too much for trade implementation is a way to lose money that you can actually avoid.
Educate yourself
In order for you to be able to compete at the highest level in the trading business and be a successful player, you must be well-educated about what you are doing. Being well-educated means that you have thoroughly researched and tested your trading ideas and know why your trading system worked in the past and is still working.
It means that you understand all the technology and applications that your system needs to perform with accuracy. It means understanding your goal and objectives and how trading will help you achieve them. It means understanding yourself and how your personality will affect your results.
In order to succeed as a forex trader, you really need to become an expert in your own trading business to understand how it the dots are all connected, when it is broken, and how it can be improved. This takes commitment, hard work, dedication, and more hard work.
Avoid trading scared money
No one ever made any money trading when they had to do it to pay their bills at the end of the month. Having a requirement to make a certain amount of dollars per month or you will be financially in trouble is the best way I know to completely mess up all trading discipline, rules, objectives, and leads faster than you’d expect to disaster.
Trading is about taking a reasonable amount of risk in order to achieve a good reward. The markets and how and when they give up their profits is nothing that you can control. You should never trade if you need the money to pay bills. Do not trade if your business and personal expenses are not covered by another income stream or cash reserve. This is how hasty decisions are made.
Dealing with your losses
One of the most important rules of Forex trading is to keep your losses as small as possible. With small Forex trading losses, you can outlast those times when the market moves against you, and be well positioned for when the trend turns around.
The one proven method to keeping your losses small is to set your maximum loss before you even open a Forex trading position.
The maximum loss is the greatest amount of capital that you are comfortable losing on any one trade. With your maximum loss set as a small percentage of your Forex trading effort, a string of losses won’t stop you from trading for any particular amount of time. Unlike the 95% of Forex traders out there who lose money because they haven’t implemented wise money management rules to their Forex trading system, you will be ok with this money management rule.
To use as an example... If I had a Forex trading float of $2000, and I began trading with $200 a trade, it would be reasonable for me to experience three losses in a row. This would reduce my Forex trading capital to $800. It would then be decided that they’re going to bet $400 on the next trade because they think they have a higher chance of winning after having lost three times already.
If that trader did bet $200 dollars on the next trade because they thought they were going to win, their capital could be reduced to $500 dollars. The chances of making money now are practically nil because I would need to make 150% on the next trade just to break even. If the maximum loss had been determined, and stuck to, they
would not be in this position.
In this case, the reason for failure was because the trader risked too much money, and didn’t apply good money management to the play.
Remember, the goal here is to keep our losses as small as possible while also making sure that we open a large enough position to capitalize on profits and minimize losses. With your money management rules in place, in your Forex trading system, you will always be able to do this.
Cut your losses short
This is actually the sister rule to the one mentioned above, and is usually just as difficult to do (even if it is very easy to define). In the same way that profitability comes from a few large winning trades, capital preservation so comes from avoiding the few large losers that the market will see fit to send you each year.
Setting a maximum loss point before you enter the trade so you know ahead of time approximately how much you are risking on this position is pretty straight up.
You just have to have an exit price that tells you that your trade is a losing one you should exit before it gets any bigger. Because of gaps at the open, or limit moves in futures we can never be 100% sure that we can get out with our maximum loss, but simply having the rules, and always sticking to them will save us from the nasty trades that just keep on going against our position until we have lost more than many winning trades can make back.
If you have a losing position that is at your maximum loss point, you should just get out right away. You can’t hope that it will turn around for as it isn’t common sense.
Being that trades are either winners or losers, and this one is shouting ‘Loser’ at you, the chances that it will turn around and become a large winner is decidedly small.
Why would you want to risk any more money on a trade that has already shown itself to be a loser when you could simply close it out (accept the loss) and move on. This will leave you in a much better place financially and mentally, than holding on to your position and hoping it will go back your way.
Even if it did do this, the mental energy and negative feelings from holding the losing position are just not worth it. this is why you should always stick to your rules and exit a position if it hits your stop point.
Never add to a losing trade
One of the few trade management rules that you should never break is ‘Never add to a losing trade’. Trades are split into winners and losers, and if a trade is a loser, the chances of it turning right around and becoming a winner are too small for you to want to risk more money on. If it actually is a winner disguised as a loser, why not wait until it shows it is a winner before you add to it.
If you do this you will notice that nearly every time the trade ends up hitting your stop loss and does not change direction. Sometimes the trade turns around before it hits your stop and becomes a winner and you can count yourself very lucky if it does.
Sometimes the trade hits your stop loss and then turns around and becomes a winner and you can count yourself unlucky. Whatever happens, it is never worth adding to a loser, hoping that it will eventually be a winner. The odds of success are just too low to risk more capital in addition to the initial risk.
Don’t take too much risk
One of the most devastating mistakes that any trader can make is in risking too much of their capital on a single trade. One thing is certain in trading and that is if you lose all your capital you are out of the game indefinitely. Why should you risk so much when you could be prevented from continuing?
There is a useful saying in poker than going all-in works every time but once. It is the same thing in trading. If you risk all of your account on every trade it only takes one loser to wipe you out, so you will be out of the game at some point as it is only a question of time.
In general, you should only risk 1-3% of the available capital allocated to a system on any individual trade. This is calculated using the size and, the difference between our entry price and our maximum stop
price, and the amount of capital that is allocated to the system.
With these things combined we are almost certain never to lose all of our trading capital. In fact, the chance of us hitting our maximum drawdown for the year is extremely low.
All trades that you make should be of a size that almost seems pointless to your future fortune. If you are worried about the size of a trade then it is too big and you should use a lower amount immediately.
Remember that longevity in any trading market is the key to making money by trading. You should trade slowly over a long time with minimal risk, is always preferable to rapidly with too much risk.
Setting a maximum loss point before you enter the trade so you know ahead of time approximately how much you are risking on this position is pretty straight up.
You just have to have an exit price that tells you that your trade is a losing one you should exit before it gets any bigger. Because of gaps at the open, or limit moves in futures we can never be 100% sure that we can get out with our maximum loss, but simply having the rules, and always sticking to them will save us from the nasty trades that just keep on going against our position until we have lost more than many winning trades can make back.
If you have a losing position that is at your maximum loss point, you should just get out right away. You can’t hope that it will turn around for as it isn’t common sense.
Being that trades are either winners or losers, and this one is shouting ‘Loser’ at you, the chances that it will turn around and become a large winner is decidedly small.
Why would you want to risk any more money on a trade that has already shown itself to be a loser when you could simply close it out (accept the loss) and move on. This will leave you in a much better place financially and mentally, than holding on to your position and hoping it will go back your way.
Even if it did do this, the mental energy and negative feelings from holding the losing position are just not worth it. this is why you should always stick to your rules and exit a position if it hits your stop point.
Never add to a losing trade
One of the few trade management rules that you should never break is ‘Never add to a losing trade’. Trades are split into winners and losers, and if a trade is a loser, the chances of it turning right around and becoming a winner are too small for you to want to risk more money on. If it actually is a winner disguised as a loser, why not wait until it shows it is a winner before you add to it.
If you do this you will notice that nearly every time the trade ends up hitting your stop loss and does not change direction. Sometimes the trade turns around before it hits your stop and becomes a winner and you can count yourself very lucky if it does.
Sometimes the trade hits your stop loss and then turns around and becomes a winner and you can count yourself unlucky. Whatever happens, it is never worth adding to a loser, hoping that it will eventually be a winner. The odds of success are just too low to risk more capital in addition to the initial risk.
Don’t take too much risk
One of the most devastating mistakes that any trader can make is in risking too much of their capital on a single trade. One thing is certain in trading and that is if you lose all your capital you are out of the game indefinitely. Why should you risk so much when you could be prevented from continuing?
There is a useful saying in poker than going all-in works every time but once. It is the same thing in trading. If you risk all of your account on every trade it only takes one loser to wipe you out, so you will be out of the game at some point as it is only a question of time.
In general, you should only risk 1-3% of the available capital allocated to a system on any individual trade. This is calculated using the size and, the difference between our entry price and our maximum stop
price, and the amount of capital that is allocated to the system.
With these things combined we are almost certain never to lose all of our trading capital. In fact, the chance of us hitting our maximum drawdown for the year is extremely low.
All trades that you make should be of a size that almost seems pointless to your future fortune. If you are worried about the size of a trade then it is too big and you should use a lower amount immediately.
Remember that longevity in any trading market is the key to making money by trading. You should trade slowly over a long time with minimal risk, is always preferable to rapidly with too much risk.
Forex Trading -- Rules of Thumb
In this section we will be covering the few important rules that should never be broken in trading. If you can apply these rules consistently, and with the right amount of discipline, you will be well on the way to being a profitable trader.
The following are rules that can significantly improve your chances of success if they are understood, practiced, and implemented consistently in your trading. These rules have been learned the hard way, mostly through trial-and-error, and the inevitable mistakes that everyone makes when they start a trading business.
Set up and implement specific goals and objectives
Few things are more important to your trading success than having set specific goals and objectives for what you are trying to achieve. It is amazing to me how often we hit our targets, meet our objectives, and reach our goals best when we speak aloud and write them down.
For any business to be successful it must have measurable objectives that you are actually able to achievable. In trading, the primary objective is obviously to make money, but it is important to have other objectives that are not strictly cash-related.
We must always remember that reward and risk go hand-in-hand in trading and that we can’t expect to achieve high returns without planning and bracing for high risk (draw-downs).
Your objectives and goals have to be very specific to you, but they must also include the following characteristics if they are going to be useful:
• Be measurable in accordance to completion and timeframe involved
• Be realistic and achievable
• Be worth the time and effort involved
• Be positive
As an example, here are some actual objectives (Please bear in mind that this is only a partial list):
• Create 2 new positive-expectancy trading systems each and every year
• Seek to make less errors implementing your trading systems each year
• Work to achieve a return to maximum draw-down ratio of 1.5:1
• Take 2 weeks vacation from trading during each year
You should also note that only one of them is meant to be about making money, and that has a measurable objective that is very similar to a draw-down, and it is not guaranteed. If you know what you are trying to gain in your trading, and when you are trying to achieve it, the whole of your efforts will be more focused on meeting your objectives.
This also helps to guide you to only pay attention to things you really want to achieve with your time and resources that you have available. This will also give you a way that you can effectively measure the success and progress of your trading strategy.
Generally traders who have well-defined objectives will be much more successful than those that do not have pre-defined goals.
Be consistent and disciplined
In order for you to be able to realize the full potential of your trading systems it is very important that you take every trading entry, adjust every stop, and close out every trade when your pre-defined trading system says you should.
This takes an extreme amount of confidence in your trading systems, good and reliable technology, and the unwavering discipline to stick to your trading plan no matter what happens.
The good thing about have an underlying assumption about being consistent and disciplined is that you have a pre-defined plan for every situation that you may face in your trading, so that you know how you are defining what being consistent really means. Your plan needs to include at least the following items in it if it is going to be successful:
• All of your trading rules for entering, adding to, and getting out of your positions
• What you are planning to do if your trading computer, internet connection, broker, power, telephone etc. fails to be of any real use or break down
• What you will do if for some reason you are unable to trade
• What you will do if you lose a certain percentage of your account
• What you will do if all the markets are closed and you can’t get out of your current positions
Unless you write down the answers to all these scenarios, you cannot be properly consistent and disciplined in your approach to trading and if you lose money you will not know if it is because you didn’t follow your plan, your plan is incomplete, your systems do not work, or if it is because you are simply going through a losing period.
Let your profits run
This rule is undoubtedly the key to being a successful trader. It is in these three simple words however that are easier said than done. When we get a profitable trade going it is our natural fear of losing the unrealized cash starts and we truly want to close it out now and quit while we are ahead.
Most trading actually consists of long periods of small winners and losers, that is quickly followed by a few huge winners that make the difference between overall profitability and simply breaking even or even losing thanks to the trading costs(commissions, spread, and slippage).
It is our ability to let the huge winners become huge. This is what determines how we will perform overall during the course of the year. The key here is in letting a winning streak run is to have trailing stops that are generally outside the daily noise of the market so that they are not so tight as to get stopped out during ‘normal’ trading process.
This means that you need to be prepared to give up a relatively large portion of a winning trade’s open profit and it is also the thing that makes this so hard to implement. In fact, we should be adding to a winner and widening stops rather than trying to figure out how tight
our stops can be to capture the largest amount of profit.
The trade has already shown you if it intends to be a winner, and the chances are it is a low-risk idea if you were to add to the position now rather than ‘strangle it’ with stops that are too tight.
It is very important that your management rules leave room for large winning trades, and that the rules are pre-defined and understood before you place the trade in the first place. This will allow you to stick to your rules when you do get the big winner.
The following are rules that can significantly improve your chances of success if they are understood, practiced, and implemented consistently in your trading. These rules have been learned the hard way, mostly through trial-and-error, and the inevitable mistakes that everyone makes when they start a trading business.
Set up and implement specific goals and objectives
Few things are more important to your trading success than having set specific goals and objectives for what you are trying to achieve. It is amazing to me how often we hit our targets, meet our objectives, and reach our goals best when we speak aloud and write them down.
For any business to be successful it must have measurable objectives that you are actually able to achievable. In trading, the primary objective is obviously to make money, but it is important to have other objectives that are not strictly cash-related.
We must always remember that reward and risk go hand-in-hand in trading and that we can’t expect to achieve high returns without planning and bracing for high risk (draw-downs).
Your objectives and goals have to be very specific to you, but they must also include the following characteristics if they are going to be useful:
• Be measurable in accordance to completion and timeframe involved
• Be realistic and achievable
• Be worth the time and effort involved
• Be positive
As an example, here are some actual objectives (Please bear in mind that this is only a partial list):
• Create 2 new positive-expectancy trading systems each and every year
• Seek to make less errors implementing your trading systems each year
• Work to achieve a return to maximum draw-down ratio of 1.5:1
• Take 2 weeks vacation from trading during each year
You should also note that only one of them is meant to be about making money, and that has a measurable objective that is very similar to a draw-down, and it is not guaranteed. If you know what you are trying to gain in your trading, and when you are trying to achieve it, the whole of your efforts will be more focused on meeting your objectives.
This also helps to guide you to only pay attention to things you really want to achieve with your time and resources that you have available. This will also give you a way that you can effectively measure the success and progress of your trading strategy.
Generally traders who have well-defined objectives will be much more successful than those that do not have pre-defined goals.
Be consistent and disciplined
In order for you to be able to realize the full potential of your trading systems it is very important that you take every trading entry, adjust every stop, and close out every trade when your pre-defined trading system says you should.
This takes an extreme amount of confidence in your trading systems, good and reliable technology, and the unwavering discipline to stick to your trading plan no matter what happens.
The good thing about have an underlying assumption about being consistent and disciplined is that you have a pre-defined plan for every situation that you may face in your trading, so that you know how you are defining what being consistent really means. Your plan needs to include at least the following items in it if it is going to be successful:
• All of your trading rules for entering, adding to, and getting out of your positions
• What you are planning to do if your trading computer, internet connection, broker, power, telephone etc. fails to be of any real use or break down
• What you will do if for some reason you are unable to trade
• What you will do if you lose a certain percentage of your account
• What you will do if all the markets are closed and you can’t get out of your current positions
Unless you write down the answers to all these scenarios, you cannot be properly consistent and disciplined in your approach to trading and if you lose money you will not know if it is because you didn’t follow your plan, your plan is incomplete, your systems do not work, or if it is because you are simply going through a losing period.
Let your profits run
This rule is undoubtedly the key to being a successful trader. It is in these three simple words however that are easier said than done. When we get a profitable trade going it is our natural fear of losing the unrealized cash starts and we truly want to close it out now and quit while we are ahead.
Most trading actually consists of long periods of small winners and losers, that is quickly followed by a few huge winners that make the difference between overall profitability and simply breaking even or even losing thanks to the trading costs(commissions, spread, and slippage).
It is our ability to let the huge winners become huge. This is what determines how we will perform overall during the course of the year. The key here is in letting a winning streak run is to have trailing stops that are generally outside the daily noise of the market so that they are not so tight as to get stopped out during ‘normal’ trading process.
This means that you need to be prepared to give up a relatively large portion of a winning trade’s open profit and it is also the thing that makes this so hard to implement. In fact, we should be adding to a winner and widening stops rather than trying to figure out how tight
our stops can be to capture the largest amount of profit.
The trade has already shown you if it intends to be a winner, and the chances are it is a low-risk idea if you were to add to the position now rather than ‘strangle it’ with stops that are too tight.
It is very important that your management rules leave room for large winning trades, and that the rules are pre-defined and understood before you place the trade in the first place. This will allow you to stick to your rules when you do get the big winner.
Successful Trading Tips
There is no doubt that trading requires more than a few quick tips for success. You need experience, fortitude, capital and, above all, a solid trading system.
However, for the average beginner and those who perhaps are losing their focus because of significant draw-downs, keeping things simple can help to introduce much needed focus into your trading.
To that end, here are some tips that you can use for trading that can help you get a handle on these exciting markets.
1. Never add to a position that is losing.
2. Always determine a stop and a profit objective before you start entering a trade. Place stops that are based on market information, and not your account balance. If a "proper" stop is too expensive, it isn’t worth it to make the trade.
3. Remember the power of a position. You should never make a market judgment when you have a position.
4. Your decision to exit a trade means that you are able to perceive changing circumstances. You shouldn’t think you can pick a price, exit at the market.
5. In a Bull market, you never want to sell a dull market, in Bear market, you should certainly never buy a dull market.
6. There are times, due to a lack of liquidity, or excessive volatility, when you should not trade at all.
7. Trading systems that work in an up market may not work in a down market. It is good to know this and remember it.
8. There are at least three types of markets like up trending, range bound, and down trading, and you should have a different trading strategy for each.
9. Up market and down market patterns are ALWAYS there, and it is only that one is always more dominant. In an up market, for example, it is very easy to take sell signal after sell signal, only to be stopped repeatedly. Select trades that move along with the trend.
10. A buy signal that fails is really just a sell signal. A sell signal that fails is a buy signal.
11. It's always easier to enter a losing trade.
12. During the blowout stage of the market, up or down, the risk managers are usually issuing margin call position liquidation orders. They don't generally check the screen for overbought or oversold; they just keep issuing liquidation orders. It is best to make sure that you don't stand in the way.
13. It’s good to be superstitious; in that you shouldn’t trade if something bothers you.
14. Buy the news that you hear, sell the factual news.
15. News is only important when the market doesn't react in the direction of the news.
16. It helps for you to read today's paper tomorrow. When you read yesterday's paper each day with the knowledge of what the market already did, it will remind you that what happened yesterday has nothing to do with what will happen today.
17. You should never enter a new trade in the direction of a gap.
Never let the market make you make a trade.
18. The first and last tick are always the most expensive. Get in late and out early.
19. When everyone else is in, it's time for you to get out.
20. Never trade when you are sick.
21. You should only change your unit of trading under a plan of attained goals. You should also have a plan for reducing size when your trading is cold or market volume is down.
However, for the average beginner and those who perhaps are losing their focus because of significant draw-downs, keeping things simple can help to introduce much needed focus into your trading.
To that end, here are some tips that you can use for trading that can help you get a handle on these exciting markets.
1. Never add to a position that is losing.
2. Always determine a stop and a profit objective before you start entering a trade. Place stops that are based on market information, and not your account balance. If a "proper" stop is too expensive, it isn’t worth it to make the trade.
3. Remember the power of a position. You should never make a market judgment when you have a position.
4. Your decision to exit a trade means that you are able to perceive changing circumstances. You shouldn’t think you can pick a price, exit at the market.
5. In a Bull market, you never want to sell a dull market, in Bear market, you should certainly never buy a dull market.
6. There are times, due to a lack of liquidity, or excessive volatility, when you should not trade at all.
7. Trading systems that work in an up market may not work in a down market. It is good to know this and remember it.
8. There are at least three types of markets like up trending, range bound, and down trading, and you should have a different trading strategy for each.
9. Up market and down market patterns are ALWAYS there, and it is only that one is always more dominant. In an up market, for example, it is very easy to take sell signal after sell signal, only to be stopped repeatedly. Select trades that move along with the trend.
10. A buy signal that fails is really just a sell signal. A sell signal that fails is a buy signal.
11. It's always easier to enter a losing trade.
12. During the blowout stage of the market, up or down, the risk managers are usually issuing margin call position liquidation orders. They don't generally check the screen for overbought or oversold; they just keep issuing liquidation orders. It is best to make sure that you don't stand in the way.
13. It’s good to be superstitious; in that you shouldn’t trade if something bothers you.
14. Buy the news that you hear, sell the factual news.
15. News is only important when the market doesn't react in the direction of the news.
16. It helps for you to read today's paper tomorrow. When you read yesterday's paper each day with the knowledge of what the market already did, it will remind you that what happened yesterday has nothing to do with what will happen today.
17. You should never enter a new trade in the direction of a gap.
Never let the market make you make a trade.
18. The first and last tick are always the most expensive. Get in late and out early.
19. When everyone else is in, it's time for you to get out.
20. Never trade when you are sick.
21. You should only change your unit of trading under a plan of attained goals. You should also have a plan for reducing size when your trading is cold or market volume is down.
Understanding Forex Spreads
Forex is always priced in pairs between two different types of currencies. When you make a trade, you have to buy one currency and sell another at the same time. If you want to exit the trade, you must buy/sell the opposite position. For example, when you think the price of the Euro is going to rise against the US Dollar. In order for you to enter a trade, you will have to buy Euros and sell US Dollars.
If you want to leave the trade, you will have to sell Euros and buy back US Dollars. You will be hoping that you were right in your guess and that the exchange rate for EU/USD has actually risen, which means that you will get more Euros back than when you bought them, which is how you will make a profit.
These days just about every forex broker is claiming to have the tightest spreads in the industry. But marketing does have the ability to be deceiving. The topic of spreads in the forex spot market is very complicated and often not easy to understand. However, nothing affects your trading profitability more.
First of all in order to understand the spread, you need to know what it is. A spread is the difference between the ask price (the price you buy at) and the bid price (the price you sell at) that is quoted in the pips. If the quote between EUR/USD at a given moment is 1.2222/4, then the spread equals 2 pips. If the quote is 1.22225/40, then the spread is going to equal 1.5 pips.
The spread is how brokers make their money. Wider spreads will result in a higher asking price and a lower bid price. The consequence to this is that you have to pay more when you buy and get less when you sell, which makes it more difficult to realize a profit
Brokers generally don’t earn the full spread, especially when they hedge client positions. The spread helps to compensate for the market maker for taking on risk from the time it starts a client trade to when the broker's net exposure is hedged (which could possibly be at a different price).
Spreads are important because they affect the return on your trading strategy in a big way. As a trader, your sole interest is buying low and selling high (like futures and commodities trading). Wider spreads means buying higher and having to sell lower. A half-pip lower spread doesn't necessarily sound like much, but it can easily mean the difference between a profitable trading strategy and one that isn’t profitable.
The tighter the spread is the better things are going to be for you. However tight spreads are only meaningful when they are paired up with good execution. Quality of execution will decide whether you actually receive tight spreads. A good example of this is when your screen shows a tight spread, but your trade is filled a few pips to your disadvantage or is mysteriously rejected.
When this occurs repeatedly, it means that your broker is showing tight spreads but is effectively delivering wider spreads. Rejected trades, delayed execution, slipping, and stop-hunting are strategies that some brokers use to get rid of the promise of tight spreads.
Spreads should always be considered in conjunction with depth of book. Oddly enough, when it comes to economies of scale, forex doesn't even act like most other markets. On the inter-bank market, for example; the larger the ticket size, the larger the spread is.
So when you see a 1-pip spread on an ECN platform, you have to wonder if that spread valid for a $2M, $5M or $10M trade, which it probably isn’t. In many cases, the tight spread that is offered applies only to a capped trade sizes that are very inadequate for most of the common trading strategies.
Spread policies change a great deal from broker to broker, and the policies are often difficult to see through. This certainly makes comparing brokers much more difficult. Some brokers actually offer fixed spreads that are guaranteed to remain the same regardless of market liquidity. But since fixed spreads are traditionally higher than average variable spreads, you are paying an insurance premium during most of the trading day so that you can get protection from short-term volatility.
Other brokers offer traders variable spreads depending on market liquidity. Spreads are tighter when there is good market liquidity but they will widen as liquidity dries up. When it comes to choosing between fixed and variable rates, the choice depends on your individual trading pattern. If you trade primarily on news announcements that you hear, you may be better off with fixed spreads. But only if quality of execution is good.
Some brokers have different spreads for different clients based on their accounts. For example; those clients that have larger accounts or those who make larger trades may receive tighter spreads, while the clients that are referred by an introducing broker might receive wider spreads in order to cover the costs of the referral. Some offer
the same spreads to everyone.
Problems can come up when you are trying to learn about a company's spread policy because this information, along with information on trade execution and order-book depth is rather difficult to get. Because of this, many traders get caught up in all of the promises they hear, and take a broker's words at face value. This can be dangerous. The only real way to find out is to try out various brokers or talk to those who have.
If you want to leave the trade, you will have to sell Euros and buy back US Dollars. You will be hoping that you were right in your guess and that the exchange rate for EU/USD has actually risen, which means that you will get more Euros back than when you bought them, which is how you will make a profit.
These days just about every forex broker is claiming to have the tightest spreads in the industry. But marketing does have the ability to be deceiving. The topic of spreads in the forex spot market is very complicated and often not easy to understand. However, nothing affects your trading profitability more.
First of all in order to understand the spread, you need to know what it is. A spread is the difference between the ask price (the price you buy at) and the bid price (the price you sell at) that is quoted in the pips. If the quote between EUR/USD at a given moment is 1.2222/4, then the spread equals 2 pips. If the quote is 1.22225/40, then the spread is going to equal 1.5 pips.
The spread is how brokers make their money. Wider spreads will result in a higher asking price and a lower bid price. The consequence to this is that you have to pay more when you buy and get less when you sell, which makes it more difficult to realize a profit
Brokers generally don’t earn the full spread, especially when they hedge client positions. The spread helps to compensate for the market maker for taking on risk from the time it starts a client trade to when the broker's net exposure is hedged (which could possibly be at a different price).
Spreads are important because they affect the return on your trading strategy in a big way. As a trader, your sole interest is buying low and selling high (like futures and commodities trading). Wider spreads means buying higher and having to sell lower. A half-pip lower spread doesn't necessarily sound like much, but it can easily mean the difference between a profitable trading strategy and one that isn’t profitable.
The tighter the spread is the better things are going to be for you. However tight spreads are only meaningful when they are paired up with good execution. Quality of execution will decide whether you actually receive tight spreads. A good example of this is when your screen shows a tight spread, but your trade is filled a few pips to your disadvantage or is mysteriously rejected.
When this occurs repeatedly, it means that your broker is showing tight spreads but is effectively delivering wider spreads. Rejected trades, delayed execution, slipping, and stop-hunting are strategies that some brokers use to get rid of the promise of tight spreads.
Spreads should always be considered in conjunction with depth of book. Oddly enough, when it comes to economies of scale, forex doesn't even act like most other markets. On the inter-bank market, for example; the larger the ticket size, the larger the spread is.
So when you see a 1-pip spread on an ECN platform, you have to wonder if that spread valid for a $2M, $5M or $10M trade, which it probably isn’t. In many cases, the tight spread that is offered applies only to a capped trade sizes that are very inadequate for most of the common trading strategies.
Spread policies change a great deal from broker to broker, and the policies are often difficult to see through. This certainly makes comparing brokers much more difficult. Some brokers actually offer fixed spreads that are guaranteed to remain the same regardless of market liquidity. But since fixed spreads are traditionally higher than average variable spreads, you are paying an insurance premium during most of the trading day so that you can get protection from short-term volatility.
Other brokers offer traders variable spreads depending on market liquidity. Spreads are tighter when there is good market liquidity but they will widen as liquidity dries up. When it comes to choosing between fixed and variable rates, the choice depends on your individual trading pattern. If you trade primarily on news announcements that you hear, you may be better off with fixed spreads. But only if quality of execution is good.
Some brokers have different spreads for different clients based on their accounts. For example; those clients that have larger accounts or those who make larger trades may receive tighter spreads, while the clients that are referred by an introducing broker might receive wider spreads in order to cover the costs of the referral. Some offer
the same spreads to everyone.
Problems can come up when you are trying to learn about a company's spread policy because this information, along with information on trade execution and order-book depth is rather difficult to get. Because of this, many traders get caught up in all of the promises they hear, and take a broker's words at face value. This can be dangerous. The only real way to find out is to try out various brokers or talk to those who have.
Technical Analysis
Most successful traders will develop a strategy and perfect it over a specific period of time. Some people will focus on one particular study or calculation, while still some others use broad spectrum analysis as a means of determining their trades. Most experts would likely suggest that you try using a combination of both fundamental and technical analysis, with which you can make long-term projections and also determine entry and exit points. Of course, in the end, it is the individual trader who has to decide what works best for him.
When you are ready to get started in the Forex market, you should open a demo account and paper trade so that you can practice until you can make a consistent profit. Many people who fail have a tendency to jump into the Forex market and quickly lose a lot of money because of a lack of experience. It is important to take your time and learn to trade properly before you start committing capital.
You also need to be ale to trade without emotion. You can’t keep track of all stop-loss points if you don't have the ability to execute them on time. You must always set your stop-loss and take-profit points to execute automatically, and don't change them unless you absolutely have to. Make your decisions and stick to them. Otherwise you will drive yourself and your brokers crazy.
You should also realize that you need to follow the trends. If you go against the trend, you are just messing with your money because the Forex market tends to trend more often than anything else and you
will have a higher chance of success in trading with the trend.
The Forex market is the largest market in the world, and every day people are becoming increasingly interested in it. But before you begin trading, make sure your broker meets certain criteria, and take the time to find a trading strategy that works for you.
When you are ready to get started in the Forex market, you should open a demo account and paper trade so that you can practice until you can make a consistent profit. Many people who fail have a tendency to jump into the Forex market and quickly lose a lot of money because of a lack of experience. It is important to take your time and learn to trade properly before you start committing capital.
You also need to be ale to trade without emotion. You can’t keep track of all stop-loss points if you don't have the ability to execute them on time. You must always set your stop-loss and take-profit points to execute automatically, and don't change them unless you absolutely have to. Make your decisions and stick to them. Otherwise you will drive yourself and your brokers crazy.
You should also realize that you need to follow the trends. If you go against the trend, you are just messing with your money because the Forex market tends to trend more often than anything else and you
will have a higher chance of success in trading with the trend.
The Forex market is the largest market in the world, and every day people are becoming increasingly interested in it. But before you begin trading, make sure your broker meets certain criteria, and take the time to find a trading strategy that works for you.
Brokers that you need to avoid
Just like there are brokers that you want, there are also brokers that you will want to stay away from. For example brokers who are prone to prematurely buying or selling near preset points (commonly referred to as sniping and hunting) are trifling things that are committed by brokers who only seek to increase profits.
Obviously, no broker would actually admit to doing this, but there are ways to know if a broker has committed this offense.
Unfortunately, the only way that you can really determine which brokers do this and which brokers don't is to talk to fellow traders. There is no actual list or organization that reports this kind of activity. The point here is that you have to talk to others in person or visit online discussion forums to find out who is an honest broker.
Strict Margin Rules
When you are trading with borrowed money, your broker should have a say in how much risk you are able to take. With this in mind, your broker can buy or sell at its discretion, which can be a really bad thing for you.
Let's just say that you have a margin account, and your position takes a headlong nosedive before it begins to rebound to all-time highs. Even if you have enough cash to cover it, some brokers will liquidate your position on a margin call at that low. This action on their part can cost you dearly. You talk to others in person or visit online discussion forums to find out who the honest brokers are.
Signing up for a Forex account is a great deal like getting an equity account. The only major difference is that, for Forex accounts, you are obligated to sign a margin agreement.
This agreement basically says that you are trading with borrowed money, and, because of this the brokerage firm has the right to interfere with your trades in order to protect its interests. Once you sign up, all you have to do is fund your account and you'll be ready to trade right away.
Basic Forex Strategy
Technical analysis and fundamental analysis are the two basic areas of strategy in the Forex market which is the exact same as in the equity markets. However, technical analysis is by far the most common strategy that is used by individual Forex traders. Here is a brief overview of both forms of analysis and how they directly apply to forex trading:
Fundamental Analysis
If you think it's hard enough to value one company, you should try valuing a whole country instead. Fundamental analysis in the forex market is often an extremely difficult one, and it's usually used only as a means to predict long-term trends. However it is important to mention that some traders do trade short term strictly on news releases. There are a lot of different fundamental indicators of the currency values released at many different times. Here are a few of them to get you started:
• Non-farm Payrolls
• Purchasing Managers Index (PMI)
• Consumer Price Index (CPI)
• Retail Sales
• Durable Goods
You need to know that these reports are not the only fundamental factors that you have to watch. There are also quite a variety of meetings where you can get some quotes and commentary that can affect markets just as much as any report. These meetings are often brought out to discuss any interest rates, inflation, and other issues
that have the ability to affect currency values.
Even changes in how things are worded when addressing certain issues such as the Federal Reserve chairman's comments on interest rates; can cause a volatile market. Two important meetings that you have to watch out for are the Federal Open Market Committee and Humphrey Hawkins Hearings.
Just by reading the reports and examining the commentary, it can help Forex fundamental analysts to get a better understanding of any and all long-term market trends and also to allow short-term traders to be able to profit from extraordinary happenings. If you do decide to follow a fundamental strategy, you will want to be sure to keep an economic calendar handy at all times so you know when these reports are released. Your broker may also be able to provide you with real-time access to this kind of information.
Obviously, no broker would actually admit to doing this, but there are ways to know if a broker has committed this offense.
Unfortunately, the only way that you can really determine which brokers do this and which brokers don't is to talk to fellow traders. There is no actual list or organization that reports this kind of activity. The point here is that you have to talk to others in person or visit online discussion forums to find out who is an honest broker.
Strict Margin Rules
When you are trading with borrowed money, your broker should have a say in how much risk you are able to take. With this in mind, your broker can buy or sell at its discretion, which can be a really bad thing for you.
Let's just say that you have a margin account, and your position takes a headlong nosedive before it begins to rebound to all-time highs. Even if you have enough cash to cover it, some brokers will liquidate your position on a margin call at that low. This action on their part can cost you dearly. You talk to others in person or visit online discussion forums to find out who the honest brokers are.
Signing up for a Forex account is a great deal like getting an equity account. The only major difference is that, for Forex accounts, you are obligated to sign a margin agreement.
This agreement basically says that you are trading with borrowed money, and, because of this the brokerage firm has the right to interfere with your trades in order to protect its interests. Once you sign up, all you have to do is fund your account and you'll be ready to trade right away.
Basic Forex Strategy
Technical analysis and fundamental analysis are the two basic areas of strategy in the Forex market which is the exact same as in the equity markets. However, technical analysis is by far the most common strategy that is used by individual Forex traders. Here is a brief overview of both forms of analysis and how they directly apply to forex trading:
Fundamental Analysis
If you think it's hard enough to value one company, you should try valuing a whole country instead. Fundamental analysis in the forex market is often an extremely difficult one, and it's usually used only as a means to predict long-term trends. However it is important to mention that some traders do trade short term strictly on news releases. There are a lot of different fundamental indicators of the currency values released at many different times. Here are a few of them to get you started:
• Non-farm Payrolls
• Purchasing Managers Index (PMI)
• Consumer Price Index (CPI)
• Retail Sales
• Durable Goods
You need to know that these reports are not the only fundamental factors that you have to watch. There are also quite a variety of meetings where you can get some quotes and commentary that can affect markets just as much as any report. These meetings are often brought out to discuss any interest rates, inflation, and other issues
that have the ability to affect currency values.
Even changes in how things are worded when addressing certain issues such as the Federal Reserve chairman's comments on interest rates; can cause a volatile market. Two important meetings that you have to watch out for are the Federal Open Market Committee and Humphrey Hawkins Hearings.
Just by reading the reports and examining the commentary, it can help Forex fundamental analysts to get a better understanding of any and all long-term market trends and also to allow short-term traders to be able to profit from extraordinary happenings. If you do decide to follow a fundamental strategy, you will want to be sure to keep an economic calendar handy at all times so you know when these reports are released. Your broker may also be able to provide you with real-time access to this kind of information.
Getting Started
When it comes to getting started in forex trading, there are quite a few things that you have to consider first. The first thing that you need to do is to find and choose the right broker to help you in making your trades.
When you are choosing a Broker you need to know that there are many Forex brokers to choose from, just as in any other market. Here are some things that you need to look for in making your choice:
Low Spreads
The spread, which is calculated in pips, is the difference between the price at which a currency can be bought and the price at which it can be sold at any specific point in time. Forex brokers don't charge a commission, so this difference is how they are going to make money.
When you are comparing brokers, you will find that the difference in spreads in Forex is as large as the difference in commissions in the stock arena. What this means is that lower spreads will save you money and therefore, look for a broker that offers low spreads.
Quality of the Institution
Unlike equity brokers, Forex brokers are usually attached to large banks or lending institutions because of the large amounts of capital that is required. Also, Forex brokers should be registered with the Futures Commission Merchant (FCM) as well as regulated by the Commodity Futures Trading Commission (CFTC).
You can find this and other financial information and statistics about a Forex brokerage on the company’s website or the website of its parent company. You will want to make sure that your broker is backed by a reliable institution.
Extensive Tools and Research
Forex brokers offer many different trading platforms for their clients just like brokers in other markets do. These different trading platforms often show real-time charts, technical analysis tools, real-time news and data, and even support for the various trading systems.
Before you commit to any one broker in specific, you will need to be sure to request free trials so that you can test their different trading platforms. Brokers usually provide technical as well as fundamental commentaries, economic calendars, and other research as a means of assisting you. Basically, you will want to find a broker who will give you everything that you need to succeed.
A Variety of Leverage Options
Leverage is a key necessity in Forex trading because the price deviations (the sources of profit) are just set at mere fractions of a cent. Leverage, which is expressed as a ratio between total capitals that is available to actual capital, which is the amount of money a broker will lend you for trading.
For example, when you have a ratio of 100:1, this means that your broker would lend you $100 for every $1 of actual capital. Many brokerage firms will offer you as much as 250:1.
Of course, you need to remember that lower leverage also means lower risk of a margin call, but it also means that you will get a lower bang for your buck (and vice-versa). Basically if you have limited capital, you need to make sure that your broker offers high leverage.
If capital is not a problem, you can rest assured that any broker that has a wide variety of leverage options should suffice. A variety of options lets you vary the amount of risk you are willing to take. For example, less leverage (and therefore less risk) may be preferable if you are dealing with highly volatile (exotic) currency pairs.
Account Types
Many brokers will offer you two or more types of accounts. The smallest account is known as a mini account and it requires you to
trade with a minimum of maybe $300.
This offers you a high amount of leverage (which you need in order to make money with so little initial capital). The standard account allows you to trade at a variety of different leverages, but it also requires a minimum initial capital of $2,000 to get you started.
Lastly, there are premium accounts, which often require significant amounts of capital to get you started. It also lets you use different amounts of leverage and often offer additional tools and services. You will need to make sure that the broker you choose has the right leverage, tools, and services that are relevant to the amount of capital that you are able to work with.
When you are choosing a Broker you need to know that there are many Forex brokers to choose from, just as in any other market. Here are some things that you need to look for in making your choice:
Low Spreads
The spread, which is calculated in pips, is the difference between the price at which a currency can be bought and the price at which it can be sold at any specific point in time. Forex brokers don't charge a commission, so this difference is how they are going to make money.
When you are comparing brokers, you will find that the difference in spreads in Forex is as large as the difference in commissions in the stock arena. What this means is that lower spreads will save you money and therefore, look for a broker that offers low spreads.
Quality of the Institution
Unlike equity brokers, Forex brokers are usually attached to large banks or lending institutions because of the large amounts of capital that is required. Also, Forex brokers should be registered with the Futures Commission Merchant (FCM) as well as regulated by the Commodity Futures Trading Commission (CFTC).
You can find this and other financial information and statistics about a Forex brokerage on the company’s website or the website of its parent company. You will want to make sure that your broker is backed by a reliable institution.
Extensive Tools and Research
Forex brokers offer many different trading platforms for their clients just like brokers in other markets do. These different trading platforms often show real-time charts, technical analysis tools, real-time news and data, and even support for the various trading systems.
Before you commit to any one broker in specific, you will need to be sure to request free trials so that you can test their different trading platforms. Brokers usually provide technical as well as fundamental commentaries, economic calendars, and other research as a means of assisting you. Basically, you will want to find a broker who will give you everything that you need to succeed.
A Variety of Leverage Options
Leverage is a key necessity in Forex trading because the price deviations (the sources of profit) are just set at mere fractions of a cent. Leverage, which is expressed as a ratio between total capitals that is available to actual capital, which is the amount of money a broker will lend you for trading.
For example, when you have a ratio of 100:1, this means that your broker would lend you $100 for every $1 of actual capital. Many brokerage firms will offer you as much as 250:1.
Of course, you need to remember that lower leverage also means lower risk of a margin call, but it also means that you will get a lower bang for your buck (and vice-versa). Basically if you have limited capital, you need to make sure that your broker offers high leverage.
If capital is not a problem, you can rest assured that any broker that has a wide variety of leverage options should suffice. A variety of options lets you vary the amount of risk you are willing to take. For example, less leverage (and therefore less risk) may be preferable if you are dealing with highly volatile (exotic) currency pairs.
Account Types
Many brokers will offer you two or more types of accounts. The smallest account is known as a mini account and it requires you to
trade with a minimum of maybe $300.
This offers you a high amount of leverage (which you need in order to make money with so little initial capital). The standard account allows you to trade at a variety of different leverages, but it also requires a minimum initial capital of $2,000 to get you started.
Lastly, there are premium accounts, which often require significant amounts of capital to get you started. It also lets you use different amounts of leverage and often offer additional tools and services. You will need to make sure that the broker you choose has the right leverage, tools, and services that are relevant to the amount of capital that you are able to work with.
Part 2
2. No Commission and No Exchange Fees
When you trade in futures, you have to pay exchange and brokerage fees. Trading forex has the advantage of being commission free. This is far better for you. Currency trading is a worldwide inter-bank market that lets buyers to be matched with sellers in an instant.
Even though you do not have to pay a commission charge to a broker to match the buyer up with the seller, the spread is usually larger than it is when you are trading futures.
For example, if you are trading a Japanese Yen/US Dollar pair, forex trade would have about a 3 point spread (worth $30). Trading a JY futures trade would most likely have a spread of 1 point (worth $10) but you would also be charged the broker's commission on top of that. This price could be as low as $10 in-and-out for self-directed online trading, or as high as $50 for full-service trading. It is however, all inclusive pricing though.
You are going to have to compare both online forex and your specific futures commission charge to see which commission is the greater one.
3. Limited Risk and Guaranteed Stops
When you are trading futures, your risk can be unlimited. For example, if you thought that the prices for Live Cattle were going to continue their upward trend in December 2003, just before the discovery of Mad Cow Disease found in US cattle.
The price for it after that fell dramatically, which moved the limit down several days in a row. You would not have been able to leave your position and this could have wiped out the entire equity in your account as a result. As the price just kept on falling, you would have been obligated to find even more money to make up the deficit in your account.
4. Rollover of Positions
When futures contracts expire, you have to plan ahead if you are going to rollover your trades. Forex positions expire every two days and you need to rollover each trade just so that you can stay in your position.
5. 24-Hour Marketplace
With futures, you are generally limited to trading only during the few hours that each market is open in any one day. If a major news story breaks out when the markets are closed, you will not have a way of getting out of it until the market reopens, which could be many hours away.
Forex, on the other hand, is a 24/5 market. The day begins in New York, and follows the sun around the globe through Europe, Asia, Australia and back to the US again. You can trade any time you like Monday-Friday.
6. Free market place
Foreign exchange is perhaps the largest market in the world with an average daily volume of US$1.4 trillion. That is 46 times as large as all the futures markets put together! With the huge number of people trading forex around the globe, it is very hard for even governments
to control the price of their own currency.
Forex trading is simply a great alternative to futures and commodities trading. Unless you are a broker, you will likely want to get some help in forex trading to help ensure that your venture is successful. As with all trading, there are always some risks involved, but if you follow this comprehensive to successful forex trading, the whole process should be much easier. Let’s get started!
When you trade in futures, you have to pay exchange and brokerage fees. Trading forex has the advantage of being commission free. This is far better for you. Currency trading is a worldwide inter-bank market that lets buyers to be matched with sellers in an instant.
Even though you do not have to pay a commission charge to a broker to match the buyer up with the seller, the spread is usually larger than it is when you are trading futures.
For example, if you are trading a Japanese Yen/US Dollar pair, forex trade would have about a 3 point spread (worth $30). Trading a JY futures trade would most likely have a spread of 1 point (worth $10) but you would also be charged the broker's commission on top of that. This price could be as low as $10 in-and-out for self-directed online trading, or as high as $50 for full-service trading. It is however, all inclusive pricing though.
You are going to have to compare both online forex and your specific futures commission charge to see which commission is the greater one.
3. Limited Risk and Guaranteed Stops
When you are trading futures, your risk can be unlimited. For example, if you thought that the prices for Live Cattle were going to continue their upward trend in December 2003, just before the discovery of Mad Cow Disease found in US cattle.
The price for it after that fell dramatically, which moved the limit down several days in a row. You would not have been able to leave your position and this could have wiped out the entire equity in your account as a result. As the price just kept on falling, you would have been obligated to find even more money to make up the deficit in your account.
4. Rollover of Positions
When futures contracts expire, you have to plan ahead if you are going to rollover your trades. Forex positions expire every two days and you need to rollover each trade just so that you can stay in your position.
5. 24-Hour Marketplace
With futures, you are generally limited to trading only during the few hours that each market is open in any one day. If a major news story breaks out when the markets are closed, you will not have a way of getting out of it until the market reopens, which could be many hours away.
Forex, on the other hand, is a 24/5 market. The day begins in New York, and follows the sun around the globe through Europe, Asia, Australia and back to the US again. You can trade any time you like Monday-Friday.
6. Free market place
Foreign exchange is perhaps the largest market in the world with an average daily volume of US$1.4 trillion. That is 46 times as large as all the futures markets put together! With the huge number of people trading forex around the globe, it is very hard for even governments
to control the price of their own currency.
Forex trading is simply a great alternative to futures and commodities trading. Unless you are a broker, you will likely want to get some help in forex trading to help ensure that your venture is successful. As with all trading, there are always some risks involved, but if you follow this comprehensive to successful forex trading, the whole process should be much easier. Let’s get started!
Why Trade Forex?
The cash/spot Forex markets possess certain unique attributes that offer an unmatched potential for profitable trading in any market condition or any stage of the business cycle. It leaves one to wonder why bother? The answer to that is very simple. It boasts:
A 24-hour market: A trader has the chance to take advantage of all of the profitable market conditions at any time which means that there is no waiting for the 'opening bell' like the exchange.
Highest liquidity: The Forex market is the most liquid market in the world. That means that a trader can enter or exit the market whenever they want during almost any market condition minimal execution barriers or risk and no daily trading limit.
High leverage: A leverage ratio of up to 400 is normal when compared to a leverage ratio of 2 (50% margin requirement) in the equity markets. Of course, this makes trading in the cash/spot forex market awkward a swell because it makes the risk of the down side loss much higher in the same way that it makes the profit potential on the upside much prettier.
Low transaction cost: The retail transaction cost (the bid/ask spread) is actually less than 0.1% (10 pips) under the normal market conditions. At larger dealers, the spread could be less than 5 pips, and may expand a great deal in fast moving markets.
Always a bull market: A trade in the Forex market means selling or buying one currency against another. In essence, a bull market or a bear market for a currency is defined in terms of the outlook for value against other currencies. If the outlook is positive, you get a bull market where a trader profits by buying the currency against other currencies. However, if the outlook is negative, we have a bull market for other currencies and a trader profits being forced to selling the currency against other currencies.
In either case, there is always a bull market trading opportunity for a trader.
Inter-bank market: The foundation of the Forex market consists of a global network of dealers that communicate and trade with their clients through electronic networks and telephones. There are no organized exchanges like in futures that are there to serve as a central location to facilitate transactions the way the New York Stock Exchange serves the equity markets.
The Forex market actually works a lot like the way the NASDAQ market in the United States operates, and because of this, it is also referred to as an over the counter or OTC market.
No one can corner the market: The Forex market is so large and has so many participants that no single trader, even a central bank, can control the market price for an extended period of time. Even when interventions are conducted by mighty central banks are getting to be increasingly ineffectual and short-lived. This means that central banks are becoming less and less inclined to intervene to manipulate market prices.
It is Unregulated: The Forex market is seen as an unregulated market although the operations of major dealers like commercial banks in money centers are regulated under the banking laws.
The daily operations of retail Forex brokerages are not regulated under any laws or regulations that are specific to the Forex market, and in fact, many of these types of establishments in the United States do not even report to the Internal Revenue Service.
The currency futures and options that are actually traded on exchanges like Chicago Mercantile Exchange (CME) are under the regulation in the same manner that other exchange-traded derivatives are regulated.
There are many different advantages to trading forex instead of futures or stocks, such as:
1. Lower Margin
Just like futures and stock speculation, a forex trader has the ability to control a large amount of the currency basically by putting up a small amount of margin. However, the margin requirements that are needed for trading futures are usually around 5% of the full value of the holding, or 50% of the total value of the stocks, the margin requirements for forex is about 1%. For example, margin required to trade foreign exchange is $1000 for every $100,000.
What this means is that trading forex, a currency trader's money can play with 5-times as much value of product as a futures trader's, or 50 times more than a stock trader's.
When you are trading on margin, this can be a very profitable way to create an investment strategy, but it's important that you take the
time to understand the risks that are involved as well.
You should make sure that you fully understand how your margin account is going to work. You will want to be sure that you read the margin agreement between you and your clearing firm. You will also want to talk to your account representative if you have any questions.
The positions that you have in your account could be partially or completely liquidated on the chance that the available margin in your account falls below a predetermined amount.
You may not actually get a margin call before your positions are liquidated.
A 24-hour market: A trader has the chance to take advantage of all of the profitable market conditions at any time which means that there is no waiting for the 'opening bell' like the exchange.
Highest liquidity: The Forex market is the most liquid market in the world. That means that a trader can enter or exit the market whenever they want during almost any market condition minimal execution barriers or risk and no daily trading limit.
High leverage: A leverage ratio of up to 400 is normal when compared to a leverage ratio of 2 (50% margin requirement) in the equity markets. Of course, this makes trading in the cash/spot forex market awkward a swell because it makes the risk of the down side loss much higher in the same way that it makes the profit potential on the upside much prettier.
Low transaction cost: The retail transaction cost (the bid/ask spread) is actually less than 0.1% (10 pips) under the normal market conditions. At larger dealers, the spread could be less than 5 pips, and may expand a great deal in fast moving markets.
Always a bull market: A trade in the Forex market means selling or buying one currency against another. In essence, a bull market or a bear market for a currency is defined in terms of the outlook for value against other currencies. If the outlook is positive, you get a bull market where a trader profits by buying the currency against other currencies. However, if the outlook is negative, we have a bull market for other currencies and a trader profits being forced to selling the currency against other currencies.
In either case, there is always a bull market trading opportunity for a trader.
Inter-bank market: The foundation of the Forex market consists of a global network of dealers that communicate and trade with their clients through electronic networks and telephones. There are no organized exchanges like in futures that are there to serve as a central location to facilitate transactions the way the New York Stock Exchange serves the equity markets.
The Forex market actually works a lot like the way the NASDAQ market in the United States operates, and because of this, it is also referred to as an over the counter or OTC market.
No one can corner the market: The Forex market is so large and has so many participants that no single trader, even a central bank, can control the market price for an extended period of time. Even when interventions are conducted by mighty central banks are getting to be increasingly ineffectual and short-lived. This means that central banks are becoming less and less inclined to intervene to manipulate market prices.
It is Unregulated: The Forex market is seen as an unregulated market although the operations of major dealers like commercial banks in money centers are regulated under the banking laws.
The daily operations of retail Forex brokerages are not regulated under any laws or regulations that are specific to the Forex market, and in fact, many of these types of establishments in the United States do not even report to the Internal Revenue Service.
The currency futures and options that are actually traded on exchanges like Chicago Mercantile Exchange (CME) are under the regulation in the same manner that other exchange-traded derivatives are regulated.
There are many different advantages to trading forex instead of futures or stocks, such as:
1. Lower Margin
Just like futures and stock speculation, a forex trader has the ability to control a large amount of the currency basically by putting up a small amount of margin. However, the margin requirements that are needed for trading futures are usually around 5% of the full value of the holding, or 50% of the total value of the stocks, the margin requirements for forex is about 1%. For example, margin required to trade foreign exchange is $1000 for every $100,000.
What this means is that trading forex, a currency trader's money can play with 5-times as much value of product as a futures trader's, or 50 times more than a stock trader's.
When you are trading on margin, this can be a very profitable way to create an investment strategy, but it's important that you take the
time to understand the risks that are involved as well.
You should make sure that you fully understand how your margin account is going to work. You will want to be sure that you read the margin agreement between you and your clearing firm. You will also want to talk to your account representative if you have any questions.
The positions that you have in your account could be partially or completely liquidated on the chance that the available margin in your account falls below a predetermined amount.
You may not actually get a margin call before your positions are liquidated.
"Your Guide to Successful Forex Trading" (part1)
Table of Contents
Introduction
Why Trade Forex?
Getting Started
Brokers that you need to avoid
Basic Forex Strategy
Choosing Your Strategy
Understanding Forex Spreads
Successful Trading Tips
Forex Trading - Rules of Thumb
Dealing with your losses
Summary
Introduction
If you were wondering, Forex trading is nothing more than direct access trading of different types of foreign currencies. In the past, foreign exchange trading was mostly limited to large banks and institutional traders however; recent technological advancements have made it so that small traders can also take advantage of the many benefits of forex trading just by using the various online trading platforms to trade.
The currencies of the world are on a floating exchange rate, and they are always traded in pairs Euro/Dollar, Dollar/Yen, etc. About 85 percent of all daily transactions involve trading of the major currencies.
Four major currency pairs are usually used for investment purposes. They are: Euro against US dollar, US dollar against Japanese yen, British pound against US dollar, and US dollar against Swiss franc. Right now I will show you how they look in the trading market: EUR/USD, USD/JPY, GBP/USD, and USD/CHF. As a note you should know that no dividends are paid on currencies.
If you think one currency will appreciate against another, you may exchange that second currency for the first one and be able to stay in it. In case everything goes as you plan it, eventually you may be able to make the opposite deal in that you may exchange this first currency back for that other and then collect profits from it.
Transactions on the Forex market are performed by dealers at major banks or Forex brokerage companies. Forex is a necessary part of the world wide market, so when you are sleeping in the comfort of your bed, the dealers in Europe are trading currencies with their Japanese counterparts.
Therefore, it is reasonable for you to believe that the Forex market is active 24 hours a day and dealers at major institutions are working 24/7 in three different shifts. Clients may place take-profit and stop-loss orders with brokers for overnight execution.
Price movements on the Forex market are very smooth and without the gaps that you face almost every morning on the stock market. The daily turnover on the Forex market is somewhere around $1.2 trillion, so a new investor can enter and exit positions without any problems.
The fact is that the Forex market never stops, even on September 11, 2001 you could still get your hands on two-side quotes on currencies. The currency market is the largest and oldest financial market in the world. It is also called the foreign exchange market, FX market for short. It is the biggest and most liquid market in the world, and it is traded mostly through the 24 hour-a-day inter-bank currency market.
When you compare them, you will see that the currency futures market is only one per cent as big. Unlike the futures and stock markets, trading currencies is not centered on an exchange. Trading moves from major banking centers of the U.S. to Australia and New Zealand, to the Far East, to Europe and finally back to the U.S. it is truly a full circle trading game.
In the past, the forex inter-bank market was not available to small speculators because of the large minimum transaction sizes and strict financial requirements.
Banks, major currency dealers and sometimes even very large speculator were the principal dealers. Only they were able to take advantage of the currency market's fantastic liquidity and strong trending nature of many of the world's primary currency exchange rates.
Today, foreign exchange market brokers are able to break down the
larger sized inter-bank units, and offer small traders like you and me the opportunity to buy or sell any number of these smaller units. These brokers give any size trader, including individual speculators or smaller companies, the option to trade at the same rates and price movements as the big players who once dominated the market.
As you can see, the foreign exchange market has come a long way. Being successful at it can be intimidating and difficult when you are new to the game. Let this be your comprehensive guide to being successful in the forex market.
Introduction
Why Trade Forex?
Getting Started
Brokers that you need to avoid
Basic Forex Strategy
Choosing Your Strategy
Understanding Forex Spreads
Successful Trading Tips
Forex Trading - Rules of Thumb
Dealing with your losses
Summary
Introduction
If you were wondering, Forex trading is nothing more than direct access trading of different types of foreign currencies. In the past, foreign exchange trading was mostly limited to large banks and institutional traders however; recent technological advancements have made it so that small traders can also take advantage of the many benefits of forex trading just by using the various online trading platforms to trade.
The currencies of the world are on a floating exchange rate, and they are always traded in pairs Euro/Dollar, Dollar/Yen, etc. About 85 percent of all daily transactions involve trading of the major currencies.
Four major currency pairs are usually used for investment purposes. They are: Euro against US dollar, US dollar against Japanese yen, British pound against US dollar, and US dollar against Swiss franc. Right now I will show you how they look in the trading market: EUR/USD, USD/JPY, GBP/USD, and USD/CHF. As a note you should know that no dividends are paid on currencies.
If you think one currency will appreciate against another, you may exchange that second currency for the first one and be able to stay in it. In case everything goes as you plan it, eventually you may be able to make the opposite deal in that you may exchange this first currency back for that other and then collect profits from it.
Transactions on the Forex market are performed by dealers at major banks or Forex brokerage companies. Forex is a necessary part of the world wide market, so when you are sleeping in the comfort of your bed, the dealers in Europe are trading currencies with their Japanese counterparts.
Therefore, it is reasonable for you to believe that the Forex market is active 24 hours a day and dealers at major institutions are working 24/7 in three different shifts. Clients may place take-profit and stop-loss orders with brokers for overnight execution.
Price movements on the Forex market are very smooth and without the gaps that you face almost every morning on the stock market. The daily turnover on the Forex market is somewhere around $1.2 trillion, so a new investor can enter and exit positions without any problems.
The fact is that the Forex market never stops, even on September 11, 2001 you could still get your hands on two-side quotes on currencies. The currency market is the largest and oldest financial market in the world. It is also called the foreign exchange market, FX market for short. It is the biggest and most liquid market in the world, and it is traded mostly through the 24 hour-a-day inter-bank currency market.
When you compare them, you will see that the currency futures market is only one per cent as big. Unlike the futures and stock markets, trading currencies is not centered on an exchange. Trading moves from major banking centers of the U.S. to Australia and New Zealand, to the Far East, to Europe and finally back to the U.S. it is truly a full circle trading game.
In the past, the forex inter-bank market was not available to small speculators because of the large minimum transaction sizes and strict financial requirements.
Banks, major currency dealers and sometimes even very large speculator were the principal dealers. Only they were able to take advantage of the currency market's fantastic liquidity and strong trending nature of many of the world's primary currency exchange rates.
Today, foreign exchange market brokers are able to break down the
larger sized inter-bank units, and offer small traders like you and me the opportunity to buy or sell any number of these smaller units. These brokers give any size trader, including individual speculators or smaller companies, the option to trade at the same rates and price movements as the big players who once dominated the market.
As you can see, the foreign exchange market has come a long way. Being successful at it can be intimidating and difficult when you are new to the game. Let this be your comprehensive guide to being successful in the forex market.
Trading Foreign Exchange the Black Box Way
There’s an ongoing debate among financial experts about the determinants of portfolio returns. Some maintain that asset allocation accounts for up to 90 percent of long-term gains. Others are convinced that low costs are the magic bullet. Probably the best course of action is to keep your eye on both.
What this means is that investors with a high, or even moderate, tolerance for risk might consider allocating a tiny portion of their portfolio to commodities, including foreign exchange, commonly called forex.
Indeed, lackluster returns in the fixed income and equity markets over the past few years have sent investors in search of alternative investments like real estate and commodities. So not surprisingly, experts in foreign exchange trading have stepped up the marketing of their wares to savvy and neophyte investors alike.
Among these experts are forex black box traders. These professionals have a proven track record of success in trading foreign exchange. Their services are especially attractive to people with little knowledge of the vast and idiosyncratic foreign exchange market – those who are comfortable relying on forex trading experts to lead the way.
The black box approach refers to a computerized system that automatically executes trades based on an algorithm or strategy. A forex black box trader develops a proprietary model through historical analysis of trading patterns. The trader then applies the model in real time to a computer program that generates buys and sells 24/7 in the global foreign exchange markets – hopefully at a profit but, of course, there’s no guarantee.
There are three types of black box trading models: fully disclosed, gray and undisclosed. A fully-disclosed model reveals all about the technical indicators that trigger trades and the relationships among various indicators – so investors know exactly what prompted a trade.
The gray box approach discloses only some of the indicators that spark trades. And with undisclosed black box trading, nothing about the model’s logic is known – so either the investor has a lot of confidence in it or so little money at risk that this leap of faith won’t keep him or her awake at night.
It may seem counterintuitive, but there are good reasons for forex black box traders to operate on an undisclosed basis. To do otherwise could invite other traders to replicate the strategy. So for the average investor, the most relevant consideration is the profitability of a particular black box model.
Proponents of black box trading think that this quantitative approach is the only way to make money over the long term – and that taking emotion out of the equation in this way is key. In a volatile market, even seasoned forex traders react emotionally and sometimes change course. Black box trading is probably a good solution for investors who can let go and let the model’s discipline prevail.
Besides removing the human emotional component, there are other practical reasons for developing computer models to capture profits in foreign exchange trading. For one, it’s a 24/7 market – and the computer never sleeps. So whenever the optimal conditions specified in the model present themselves, you’re virtually guaranteed an execution.
And, unlike the equities markets, the forex market is very fragmented. There are scores of banks that make markets in currencies. Combine this with the explosion in available trading data (quotes, bids and offers) and the need to make split-second decisions – and it becomes clear why working with a forex black box expert is a
practical way to participate in this market.
If you’re considering forex black box trading, be sure to use a trading system that features a demo account you can easily download and use without providing a lot of personal information. This will give you a chance to trade on a trial basis before you allocate a larger sum to the foreign exchange portion of your portfolio. Also, make sure the system has a track record of profitability.
Be wary of systems that require significant up-front fees to get started. This could be a red flag that the system is locking in its returns right away – but you may end up struggling to turn a profit. Most reputable systems offer a money-back guarantee if you’re dissatisfied.
The bottom line: If you’re an investor with a medium to high tolerance for risk, foreign exchange black box trading could add a new dimension to your diversified portfolio.
What this means is that investors with a high, or even moderate, tolerance for risk might consider allocating a tiny portion of their portfolio to commodities, including foreign exchange, commonly called forex.
Indeed, lackluster returns in the fixed income and equity markets over the past few years have sent investors in search of alternative investments like real estate and commodities. So not surprisingly, experts in foreign exchange trading have stepped up the marketing of their wares to savvy and neophyte investors alike.
Among these experts are forex black box traders. These professionals have a proven track record of success in trading foreign exchange. Their services are especially attractive to people with little knowledge of the vast and idiosyncratic foreign exchange market – those who are comfortable relying on forex trading experts to lead the way.
The black box approach refers to a computerized system that automatically executes trades based on an algorithm or strategy. A forex black box trader develops a proprietary model through historical analysis of trading patterns. The trader then applies the model in real time to a computer program that generates buys and sells 24/7 in the global foreign exchange markets – hopefully at a profit but, of course, there’s no guarantee.
There are three types of black box trading models: fully disclosed, gray and undisclosed. A fully-disclosed model reveals all about the technical indicators that trigger trades and the relationships among various indicators – so investors know exactly what prompted a trade.
The gray box approach discloses only some of the indicators that spark trades. And with undisclosed black box trading, nothing about the model’s logic is known – so either the investor has a lot of confidence in it or so little money at risk that this leap of faith won’t keep him or her awake at night.
It may seem counterintuitive, but there are good reasons for forex black box traders to operate on an undisclosed basis. To do otherwise could invite other traders to replicate the strategy. So for the average investor, the most relevant consideration is the profitability of a particular black box model.
Proponents of black box trading think that this quantitative approach is the only way to make money over the long term – and that taking emotion out of the equation in this way is key. In a volatile market, even seasoned forex traders react emotionally and sometimes change course. Black box trading is probably a good solution for investors who can let go and let the model’s discipline prevail.
Besides removing the human emotional component, there are other practical reasons for developing computer models to capture profits in foreign exchange trading. For one, it’s a 24/7 market – and the computer never sleeps. So whenever the optimal conditions specified in the model present themselves, you’re virtually guaranteed an execution.
And, unlike the equities markets, the forex market is very fragmented. There are scores of banks that make markets in currencies. Combine this with the explosion in available trading data (quotes, bids and offers) and the need to make split-second decisions – and it becomes clear why working with a forex black box expert is a
practical way to participate in this market.
If you’re considering forex black box trading, be sure to use a trading system that features a demo account you can easily download and use without providing a lot of personal information. This will give you a chance to trade on a trial basis before you allocate a larger sum to the foreign exchange portion of your portfolio. Also, make sure the system has a track record of profitability.
Be wary of systems that require significant up-front fees to get started. This could be a red flag that the system is locking in its returns right away – but you may end up struggling to turn a profit. Most reputable systems offer a money-back guarantee if you’re dissatisfied.
The bottom line: If you’re an investor with a medium to high tolerance for risk, foreign exchange black box trading could add a new dimension to your diversified portfolio.
Forex Signal, Forex Signals Advise
There are lots of Forex signals providers out there. New Forex traders might be thinking of looking for a reliable Forex signals provider. Is there any reliable Forex signals providers available?
Personally, I will say do not pay for Forex signals. Think about it - if a Forex signals provider sells Forex signals for living, you can doubt their Forex trading skills?
Or else if they are pretty good in Forex trading and making lots of profit, I am wondering why do they still bother to sell Forex signals for money. Thus, what would be the value of such Forex signals providers? The answer is ZERO.
There are Forex traders who have been relying on Forex signals arguing those Forex signals providers really help them making money in Forex trading. These Forex traders can even show their Forex trading logs as evidence.
After some though, I came out with the assumption that assuming I am the owner of a Forex signals provider, in order for my business to be in black, obviously I need some satisfying customers. If I have 100 new customers this month, I send out buy signal for the 50 of my new customers while the another half with sell signal. At the end, I will able to have "some satisfying customers".
Finally, free advertising and testimonial will be made available.
If you are really new into Forex trading, its better for you to sign up a demo Forex trading account from any Forex brokers and try some practice trades for a few months. This will give you insight into how the forex market behaves. Then only deposit a small amount of money to get a real feel.
There are great differences between demo trading and real trading due to personal trading psychology.
Final words, if you really wish to buy Forex signals from a Forex signal provider, make sure they have got an audited results and do provide a free trial over a substantial period.
****
Personally, I will say do not pay for Forex signals. Think about it - if a Forex signals provider sells Forex signals for living, you can doubt their Forex trading skills?
Or else if they are pretty good in Forex trading and making lots of profit, I am wondering why do they still bother to sell Forex signals for money. Thus, what would be the value of such Forex signals providers? The answer is ZERO.
There are Forex traders who have been relying on Forex signals arguing those Forex signals providers really help them making money in Forex trading. These Forex traders can even show their Forex trading logs as evidence.
After some though, I came out with the assumption that assuming I am the owner of a Forex signals provider, in order for my business to be in black, obviously I need some satisfying customers. If I have 100 new customers this month, I send out buy signal for the 50 of my new customers while the another half with sell signal. At the end, I will able to have "some satisfying customers".
Finally, free advertising and testimonial will be made available.
If you are really new into Forex trading, its better for you to sign up a demo Forex trading account from any Forex brokers and try some practice trades for a few months. This will give you insight into how the forex market behaves. Then only deposit a small amount of money to get a real feel.
There are great differences between demo trading and real trading due to personal trading psychology.
Final words, if you really wish to buy Forex signals from a Forex signal provider, make sure they have got an audited results and do provide a free trial over a substantial period.
****
Forex Scams: How to Spot Them a Mile Away
In recent years, investors have witnessed increased numbers of investment opportunities and offerings. While the complexity and success of these investment products vary, technological innovation has made the Forex market one of the fastest growth areas.
Many of the leading Forex brokers reported up to 500% rise in the number of new retail customers.
However, the growth of the Forex market has been accompanied by a sharp rise in foreign currency trading scams.
Many of these Forex scams are promoted on the radio, television, newspapers and the Internet. Investors who fall victim to these schemes, often lose all of their money.
As an illustration, lets examine the facts of a recent case involving Forex fraud and its consequences. W learned of a foreign currency trading opportunity through an infomercial on the radio. K, the owner of a Forex asset management firm, spoke during the infomercial, promising viewers significant profits with minimum risk. After seeing the infomercial, W contacted K, and later attended a seminar presented by K and his firm.
The seminar was so convincing that W wrote a check to K for $100,000. Several months later, W received statements (which were false) from K's firm reflecting significant returns on his initial $100,000 investment. Thereafter, W attended another seminar and decided to invest more money. W took a loan and invested another $800,000 in K's Forex trading operation.
A short while after W's second investment, the Securities and Exchange Commission filed a complaint against K and his firm for engaging in a scheme to defraud investors. K's firm's assets were frozen, including the $900,000 invested by W. A receiver was appointed to distribute the remaining assets of K's firm to defrauded investors. The assets were distributed on pro-rata basis with no legal preference given to any of the victims.
Since K's firms assets were not enough to satisfy all of the defrauded investors claims, W received only about $22,000 of the $900,000 he invested.
Since a whole book can be written on the various tactics and methods used by Forex scam artists, in this article, I will focus on the major warning signs that one needs to identify to avoid falling victim to Forex swindlers.
1. Promises of Little or No Risk
If you encounter a Forex firm that claims to have developed a foreign currency trading strategy that carries very little or no risk, stay away. The reason Forex trading can be very profitable is because it also carries a very high risk of loss. The Forex market is very volatile, and, without good money management, an investor can lose most if not all her capital within few days. Thus, individuals and firms who make claims that are far from market realities, as is riskless Forex trading, are really after your money.
2. Guarantees of Large Profits
Beware of firms that guarantee large profits in Forex trading. These so called "guarantees" are mere ploys to entice investors and make them believe that their money is safe and that they will definitely make large profits. Such claims are simply untrue, because even the best professional traders cannot guarantee that they will make a profit any given day. The Forex market, as most financial markets, is very unpredictable. Hence, be suspicious of such claims and those who make them.
3. Employment Ads For Forex Traders
Many Forex trading firms use employment ads to attract individuals with capital to trade using their systems. The employment ads, which often appear in newspapers and on the Internet, state that a foreign currency trading firm is looking for individuals to teach them how to trade the foreign currency market using firm capital. Those who reply to the ad are convinced by the firm that they will make a fortune trading currencies if they participate in the firms training program.
During the training process, which often occurs on a demo system, the novice traders are encouraged and told that their demo trading records show that have made significant profits, that they are ready to make real money and would very successful. Despite the firms assessment of the novice trader as a brilliant newcomer, no firm capital is provided to the trader, instead the excited novice is told to use her own capital to trade using the firms platform. In addition to various fees imposed on traders using the firms platform, the Forex firm makes money as an introducing broker. Each time the novice trader trades through the firms system, a good part of the spread charged by the broker is shared and goes into the firms coffers.
After few months, the novice trader loses all of her capital and leaves. The Forex firm, having made money during the novice traders short stint, moves on to new traders eager to become rich trading foreign currencies.
4. Is the Forex Firm a CFTC or NFA Member?
Before you sign a check and give your capital to a Forex company, make sure you investigate the entity. Check to see whether the Forex firm, with which you want to do business, is registered with the United States Commodity Futures Trading Commission or the National Futures Association.
Many scam artists falsely claim that their firms are registered with the CFTC or the NFA to gain a perspective investors trust.
Do not trust anyone, research the firm and the background of the individuals involved before parting with your hard earned money.
The Internet has paved the way for many new opportunities for retail investors. The Forex market is both exciting and fast paced. Investors who are careful and diligent are likely to avoid the perils of this market, and will profit from the growth and opportunities of foreign currency trading.
****
Many of the leading Forex brokers reported up to 500% rise in the number of new retail customers.
However, the growth of the Forex market has been accompanied by a sharp rise in foreign currency trading scams.
Many of these Forex scams are promoted on the radio, television, newspapers and the Internet. Investors who fall victim to these schemes, often lose all of their money.
As an illustration, lets examine the facts of a recent case involving Forex fraud and its consequences. W learned of a foreign currency trading opportunity through an infomercial on the radio. K, the owner of a Forex asset management firm, spoke during the infomercial, promising viewers significant profits with minimum risk. After seeing the infomercial, W contacted K, and later attended a seminar presented by K and his firm.
The seminar was so convincing that W wrote a check to K for $100,000. Several months later, W received statements (which were false) from K's firm reflecting significant returns on his initial $100,000 investment. Thereafter, W attended another seminar and decided to invest more money. W took a loan and invested another $800,000 in K's Forex trading operation.
A short while after W's second investment, the Securities and Exchange Commission filed a complaint against K and his firm for engaging in a scheme to defraud investors. K's firm's assets were frozen, including the $900,000 invested by W. A receiver was appointed to distribute the remaining assets of K's firm to defrauded investors. The assets were distributed on pro-rata basis with no legal preference given to any of the victims.
Since K's firms assets were not enough to satisfy all of the defrauded investors claims, W received only about $22,000 of the $900,000 he invested.
Since a whole book can be written on the various tactics and methods used by Forex scam artists, in this article, I will focus on the major warning signs that one needs to identify to avoid falling victim to Forex swindlers.
1. Promises of Little or No Risk
If you encounter a Forex firm that claims to have developed a foreign currency trading strategy that carries very little or no risk, stay away. The reason Forex trading can be very profitable is because it also carries a very high risk of loss. The Forex market is very volatile, and, without good money management, an investor can lose most if not all her capital within few days. Thus, individuals and firms who make claims that are far from market realities, as is riskless Forex trading, are really after your money.
2. Guarantees of Large Profits
Beware of firms that guarantee large profits in Forex trading. These so called "guarantees" are mere ploys to entice investors and make them believe that their money is safe and that they will definitely make large profits. Such claims are simply untrue, because even the best professional traders cannot guarantee that they will make a profit any given day. The Forex market, as most financial markets, is very unpredictable. Hence, be suspicious of such claims and those who make them.
3. Employment Ads For Forex Traders
Many Forex trading firms use employment ads to attract individuals with capital to trade using their systems. The employment ads, which often appear in newspapers and on the Internet, state that a foreign currency trading firm is looking for individuals to teach them how to trade the foreign currency market using firm capital. Those who reply to the ad are convinced by the firm that they will make a fortune trading currencies if they participate in the firms training program.
During the training process, which often occurs on a demo system, the novice traders are encouraged and told that their demo trading records show that have made significant profits, that they are ready to make real money and would very successful. Despite the firms assessment of the novice trader as a brilliant newcomer, no firm capital is provided to the trader, instead the excited novice is told to use her own capital to trade using the firms platform. In addition to various fees imposed on traders using the firms platform, the Forex firm makes money as an introducing broker. Each time the novice trader trades through the firms system, a good part of the spread charged by the broker is shared and goes into the firms coffers.
After few months, the novice trader loses all of her capital and leaves. The Forex firm, having made money during the novice traders short stint, moves on to new traders eager to become rich trading foreign currencies.
4. Is the Forex Firm a CFTC or NFA Member?
Before you sign a check and give your capital to a Forex company, make sure you investigate the entity. Check to see whether the Forex firm, with which you want to do business, is registered with the United States Commodity Futures Trading Commission or the National Futures Association.
Many scam artists falsely claim that their firms are registered with the CFTC or the NFA to gain a perspective investors trust.
Do not trust anyone, research the firm and the background of the individuals involved before parting with your hard earned money.
The Internet has paved the way for many new opportunities for retail investors. The Forex market is both exciting and fast paced. Investors who are careful and diligent are likely to avoid the perils of this market, and will profit from the growth and opportunities of foreign currency trading.
****
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