the highest drawdown ive had in a single day is 8%, but typically more like 4% drawdown when that happens.
i win way more trades than losing (like 90% or more) on most days.... i've noticed a pattern of about 3-4 days of profiting for each day of drawdown - a drawdown day typically cuts away about half the previous days profits. the danger i see is i could potentially (maybe?) hit a week of severe drawdown days which would ruin months of progress.
i have cut back my risk - divided up my account into 4 subaccounts. 3 subaccounts to trade very lightly with this method -- with only 2% risk.... ive heard that recommended before, so its probably the smart way to go. the 4th subaccount i'll simply continue my present trading style.
this lets me use only a portion of my profits thus far to test my method longterm. if the method is genuinely successful, it doesn't need much initial funds to magnify real quick into millions. there is no need to use all my accounts funds testing it, and if its successful longterm i'll be one very happy guy. if it fails, oh well.... its no devastation, i just lose some money i already made and learned that low risk methods are the way to go.
okay so today i just calculate my last 24 hours of trading
okay so today i just calculate my last 24 hours of trading and that added a little over 9% to my account total. i have checked and rechecked over my method, anything i can see going wrong..... calculated out unlikely worst case scenarios, like were all trades suddenly flip against me simultaneously or something, to check maximum possible drawdown, and it seems to check out as recoverable..... but i have the feeling that what i am doing can't be good risk management. its just too good.... or have i found a holy grail type killer combination here?
anyone else grid trade, stay active -- always in there kind of heavy (but not too heavy) with a ton of little trades, & maybe use alerts? can it be this lucrative?
i've read even getting 2% daily returns consistently is not really doable....
me thinks this must just be an easy pickings time on the market.... maybe all traders are happy right now....
anyone else grid trade, stay active -- always in there kind of heavy (but not too heavy) with a ton of little trades, & maybe use alerts? can it be this lucrative?
i've read even getting 2% daily returns consistently is not really doable....
me thinks this must just be an easy pickings time on the market.... maybe all traders are happy right now....
its really simple
its really simple, perhaps too simple 
.... i only look at the daily trends, and never try to predict when trend changes - i just follow the movements. if the lines going up, i buy. if the lines going down i sell. if it looks somewhat inbetween, i go off the last major movement.
What i am calling a "movement" perhaps requires a little explanation. I got my way of thinking about trading from old Copernicus writing.... he was talking about lifespan & he says for any observed system, the longer its life is observed to be, the less likely it is to die soon. also, the point of time you observe is most likely to be near the middle of its life cycle. so the moment of observation is unlikely to be a special moment. this law applies to
business, and currency trends too i think. so the more persistent a trend is, the more likely i believe it is too continue. a short-lived trend is probably not really a "trend" and is going to die out soon. does that make sense?
the one indicator i use is bollinger bar, but i barely even refer to it. my order size is very small, just 1000 euros worth (1/20 leverage), stop loss 20 euro, take profit 10 euro, bounds are tight (0.15 euro).
so yeh 5% a day.... wow! seems kind of unreal that i play around with forex only short time, i know almost nothing about it & i am making this much now, so i feel a little scared i must be doing something wrong.
if this keeps up my lifestyle will change dramatically over the next couple years. but if something seems to good to be true, it probably is.....right?
to the experienced traders: does anything here seem wrong? please point out if you see a flaw where this method could cause me trouble in future.
.... i only look at the daily trends, and never try to predict when trend changes - i just follow the movements. if the lines going up, i buy. if the lines going down i sell. if it looks somewhat inbetween, i go off the last major movement.What i am calling a "movement" perhaps requires a little explanation. I got my way of thinking about trading from old Copernicus writing.... he was talking about lifespan & he says for any observed system, the longer its life is observed to be, the less likely it is to die soon. also, the point of time you observe is most likely to be near the middle of its life cycle. so the moment of observation is unlikely to be a special moment. this law applies to
business, and currency trends too i think. so the more persistent a trend is, the more likely i believe it is too continue. a short-lived trend is probably not really a "trend" and is going to die out soon. does that make sense?
the one indicator i use is bollinger bar, but i barely even refer to it. my order size is very small, just 1000 euros worth (1/20 leverage), stop loss 20 euro, take profit 10 euro, bounds are tight (0.15 euro).
so yeh 5% a day.... wow! seems kind of unreal that i play around with forex only short time, i know almost nothing about it & i am making this much now, so i feel a little scared i must be doing something wrong.
if this keeps up my lifestyle will change dramatically over the next couple years. but if something seems to good to be true, it probably is.....right?
to the experienced traders: does anything here seem wrong? please point out if you see a flaw where this method could cause me trouble in future.
Hi all
I am a new trader, I have been trading for only about 2 years now.... after some initial mishaps learning the ropes, I got down a profitable method.
It's been slowly & steadily profitable since february this year - so make that 7 months - seems to be working right? Recently I started using alerts, all it tells me is when trades complete, and I set new trades back up right away - keeping the money more active. With the alerts my earnings shot up quite a lot.... and I calculated it out just today -- that I am now making (on average) 5% profit daily on my total account lately.
I always trade the exact same way - never changing my method one micron.
Initially I feel very happy, but I wonder if this 5% is really just a sign of bad risk management -- that its gonna bite me later. I know even experienced traders aim for 1% a day and feel lucky to get that.
Or maybe I should just expect over a year some sad times that will pull me down to a more reasonable 1% gain or less?
I am nowhere near margin btw... not ever.... and i even worked out that even if i had all trades just above stop loss for some reason i would still not get margin call. i do many small trades, trading near every currency right across the board, over 100 open trades at any given time, 24/7, grid trading i think that is called?
I have tight stop losses, and even tighter profit take, and I take profit almost every time....
But I wonder, I am relatively new still, is there something I could be missing here?
Thought I would ask the experts before I get too excited about my apparent success.
It's been slowly & steadily profitable since february this year - so make that 7 months - seems to be working right? Recently I started using alerts, all it tells me is when trades complete, and I set new trades back up right away - keeping the money more active. With the alerts my earnings shot up quite a lot.... and I calculated it out just today -- that I am now making (on average) 5% profit daily on my total account lately.
I always trade the exact same way - never changing my method one micron.
Initially I feel very happy, but I wonder if this 5% is really just a sign of bad risk management -- that its gonna bite me later. I know even experienced traders aim for 1% a day and feel lucky to get that.
Or maybe I should just expect over a year some sad times that will pull me down to a more reasonable 1% gain or less?
I am nowhere near margin btw... not ever.... and i even worked out that even if i had all trades just above stop loss for some reason i would still not get margin call. i do many small trades, trading near every currency right across the board, over 100 open trades at any given time, 24/7, grid trading i think that is called?
I have tight stop losses, and even tighter profit take, and I take profit almost every time....
But I wonder, I am relatively new still, is there something I could be missing here?
Thought I would ask the experts before I get too excited about my apparent success.
JPY Tumbles on N.Korean Nuclear Test
The foreign exchange market remained confined within a narrow range at the start of the week amid holiday-thinned trading with the US and UK markets closed. The yen fell sharply overnight as a result of heightened geopolitical risk following reports of North Korea testing nuclear weapons, prompting a slide in the yen to the 95.18-level.
The US market re-opens on Tuesday with the economic calendar consisting of the March Case-Shiller home price index, May Richmond Fed manufacturing and the May Conference Board’s consumer confidence survey. The Case-Shiller home price index is estimated to decline by 1.8% in March, compared with a 2.2% fall in the previous month while falling by 18.5% on an annualized basis versus an 18.6% fall a year earlier. The Conference Board’s consumer confidence survey in May is seen improving slightly to 42.0, up from 39.2 in April
The US market re-opens on Tuesday with the economic calendar consisting of the March Case-Shiller home price index, May Richmond Fed manufacturing and the May Conference Board’s consumer confidence survey. The Case-Shiller home price index is estimated to decline by 1.8% in March, compared with a 2.2% fall in the previous month while falling by 18.5% on an annualized basis versus an 18.6% fall a year earlier. The Conference Board’s consumer confidence survey in May is seen improving slightly to 42.0, up from 39.2 in April
Forex Tools: The Trendy and Judicious way of Forex Trading
Forex trading system of the world performs trade of about $2 trillion each day. The enormity of the gigantic financial capacity of the forex trade can be truly grasped if you compare this mammoth amount to the $25 billion that New York Stock Exchange trader's trade per day.
The quintessential qualities of a forex trader are discipline and endeavor. If you are diligent and logical in studying the forex market trends then it wouldn't take you much time to hit the jackpot in Forex trade. However, if you cannot manually manage to analyze all the currency trends yourself then you might take the help of a automatic signal service or a forex trading software which would send you alerts and signals about buying and selling currency after elaborate research and analysis.
If you use one of the automated Forex tools available in the market then you would be able to evaluate the trends of exchange rates and forex market conditions within a few minutes with the help of the data provided by your FX software. As a result you will be able to close your forex deal in less than an hour. Thus an automated forex tool would ensure that you are making optimum use of your trading time.
The global forex trading market is only merely remarkable because of the huge volume of monetary transactions that happens through it but it is also a commendable phenomenon due to its geographical dispersion. With the help of automated FX software you can trade in various local as well as international forex markets within different time zones without personally monitoring those various markets day in and day out.
However, before you decide to buy particular FX software, you need to put in a little effort to search for a forex tool which is easy to use and is ideal for beginners. Glean information about that particular forex tool which you plan to buy and thoroughly read the testimonials for that particular forex trading software before you purchase it. If you really want to test the accuracy of your Forex trading robot then you must try to find forex trading software which has the ability to paper trade too.
The quintessential qualities of a forex trader are discipline and endeavor. If you are diligent and logical in studying the forex market trends then it wouldn't take you much time to hit the jackpot in Forex trade. However, if you cannot manually manage to analyze all the currency trends yourself then you might take the help of a automatic signal service or a forex trading software which would send you alerts and signals about buying and selling currency after elaborate research and analysis.
If you use one of the automated Forex tools available in the market then you would be able to evaluate the trends of exchange rates and forex market conditions within a few minutes with the help of the data provided by your FX software. As a result you will be able to close your forex deal in less than an hour. Thus an automated forex tool would ensure that you are making optimum use of your trading time.
The global forex trading market is only merely remarkable because of the huge volume of monetary transactions that happens through it but it is also a commendable phenomenon due to its geographical dispersion. With the help of automated FX software you can trade in various local as well as international forex markets within different time zones without personally monitoring those various markets day in and day out.
However, before you decide to buy particular FX software, you need to put in a little effort to search for a forex tool which is easy to use and is ideal for beginners. Glean information about that particular forex tool which you plan to buy and thoroughly read the testimonials for that particular forex trading software before you purchase it. If you really want to test the accuracy of your Forex trading robot then you must try to find forex trading software which has the ability to paper trade too.
Technical Indicators In Forex Trading - Understanding Their Limitations
Forex traders often look at indicators such as Bollinger Bands, Pivot Points, MACD, Moving Averages and the such to help them determine where to enter or exit trades. Using technical indicators is fine, however many traders overemphasize their importance or just plain misunderstand them.
Many forex traders think that they can simply download an indicator and then mechanically apply it into their trading and do so profitably. This is just a plain illusion. Successful traders realize that there is a lot more to using indicators than just asking them to generate buy/sell signals or pin-point exact entry points. Technical indicators for them represent just one part of their trading strategy.
Let¡¯s take a look at some of the reasons why you should not put all your faith into those sometimes confusing little indicators.
Take Moving Averages (MA¡¯s) for example. They are "supposed" to show the direction of the trend. The most common and often used are the simple 200day MA, 100day MA, 50day MA, 35day MA and the 21day MA but they are only valid on daily graphs. Some forex day traders say that a good signal is when the 50day MA is crossed by the 13day MA and that when this occurs you should trade in the direction of the cross.
The problem with this (apart from the fact that it only works on daily graphs) is that these types of ¡°crosses¡± do not occur often enough for traders to exploit them. This can often lead to a situation where traders are seeing what they thought was a cross now reverse and uncross. Even worse, it can lead to a situation where day traders are "chasing" and trying to anticipate a cross. If you are doing this, you are distancing yourself from the market which you are trying to trade. Not only are you trying to guess what the price is going to do next but you are guessing what the indicator, based on the prices, is going to do next.
Other problems with technical indicators involve issues with the quotes and prices given to you by your broker. Forex brokers are market makers and as such different brokers will give you different quotes and prices at a specific point in time. Naturally, a different price could lead to a situation where different traders, trading the same market have the same indicators giving them different responses. That¡¯s how arbitrary technical indicators can be.
Finally, a lot of these technical indicators were developed by people trading the stock market. With the growth of computers and software packages that incorporate these indicators, technical analysis has become very popular and spread to other markets such as the forex market. What currency traders should be aware of however, is that as these indicators were developed in a time where real time information did not exist. As such, the limitations of technical analysis becomes even more exaggerated in forex trading ¨C not only is technical analysis an interpretation of historical events but it becomes even more so in the forex market, a market moved by real time events.
Conclusion:
Successful forex traders understand the limitations of technical indicators and realize that technical analysis should incorporate just one part of their trading strategy. In a recent international Forex market event visited by the major banks and institutions - the main players that influence the foreign currency market ¨C a survey was done to better understand what analysis they use. The results might be surprising to some tarders. The survey showed that a mere 26% use technical analysis and indicators compared to 41% who said they use fundamental analysis.
Many forex traders think that they can simply download an indicator and then mechanically apply it into their trading and do so profitably. This is just a plain illusion. Successful traders realize that there is a lot more to using indicators than just asking them to generate buy/sell signals or pin-point exact entry points. Technical indicators for them represent just one part of their trading strategy.
Let¡¯s take a look at some of the reasons why you should not put all your faith into those sometimes confusing little indicators.
Take Moving Averages (MA¡¯s) for example. They are "supposed" to show the direction of the trend. The most common and often used are the simple 200day MA, 100day MA, 50day MA, 35day MA and the 21day MA but they are only valid on daily graphs. Some forex day traders say that a good signal is when the 50day MA is crossed by the 13day MA and that when this occurs you should trade in the direction of the cross.
The problem with this (apart from the fact that it only works on daily graphs) is that these types of ¡°crosses¡± do not occur often enough for traders to exploit them. This can often lead to a situation where traders are seeing what they thought was a cross now reverse and uncross. Even worse, it can lead to a situation where day traders are "chasing" and trying to anticipate a cross. If you are doing this, you are distancing yourself from the market which you are trying to trade. Not only are you trying to guess what the price is going to do next but you are guessing what the indicator, based on the prices, is going to do next.
Other problems with technical indicators involve issues with the quotes and prices given to you by your broker. Forex brokers are market makers and as such different brokers will give you different quotes and prices at a specific point in time. Naturally, a different price could lead to a situation where different traders, trading the same market have the same indicators giving them different responses. That¡¯s how arbitrary technical indicators can be.
Finally, a lot of these technical indicators were developed by people trading the stock market. With the growth of computers and software packages that incorporate these indicators, technical analysis has become very popular and spread to other markets such as the forex market. What currency traders should be aware of however, is that as these indicators were developed in a time where real time information did not exist. As such, the limitations of technical analysis becomes even more exaggerated in forex trading ¨C not only is technical analysis an interpretation of historical events but it becomes even more so in the forex market, a market moved by real time events.
Conclusion:
Successful forex traders understand the limitations of technical indicators and realize that technical analysis should incorporate just one part of their trading strategy. In a recent international Forex market event visited by the major banks and institutions - the main players that influence the foreign currency market ¨C a survey was done to better understand what analysis they use. The results might be surprising to some tarders. The survey showed that a mere 26% use technical analysis and indicators compared to 41% who said they use fundamental analysis.
Forex Charts - Make Bigger Profits by Following These Key Points
Forex charts are a great, time efficient and proven way to make bigger profits but most traders don't use them correctly and here we will give you some key points to help you make bigger profits...
Let's look at some key points for more profitable technical analysis with forex charts.
If you look at any forex chart you will see big trends that can last for many months and trend following these can be very profitable and if you want to make money out of them you must understand this key fact:
Most big trends start and continue from breakouts to new highs and lows on the chart and you must go with these breaks - most traders don't. They want to wait for the pullback and of course it never comes and they are left behind. While it appears like you have missed the first part of the move, the odds of continuation are high so go with them.
Always be patient when using forex charts. You don't get rewarded for your efforts or how many times you trade but being right with your trading signal. I know traders who trade just a few times a month yet make triple digit gains - so wait for the right opportunities.
When you have a trend you want to hit always check price momentum is on your side and make sure that you use momentum indicators that show price acceleration in the direction you wish to trade. Two great ones, you can learn, in about 30 minutes are - the stochastic and RSI. These two combined will increase your odds of success by getting the odds more on your side.
Never believe anyone who tells you there is a mathematical formula for market movement - there isn't. If of course there was, we would all know the price in advance and there would be no market. So forget trying to predict and only trade the reality of price.
Its probabilities that you need to understand and like a successful poker player, you won't win every hand - but if you keep trading the odds, you will win long term. When using forex charts, the simpler your forex trading method the better, as simple systems tend to be very robust and have fewer elements to break, than complicated ones.
I have used a simple breakout method which uses trend lines, RSI and the stochastic and made money with it for over 20 years sure, it's simple but it works. Forex charts give you the reality of price before your eyes and you can spot areas of over valuation and under valuation. Humans create trends and they also (due to their emotions) push trends to far up or down in either direction.
You can of course ride trends - but you will also see big price spikes and history tells you they don't last long and taking trades contrary to the majority can be very profitable. Charting is an art not a science and you need to practice your art. The successful captain of a ship uses charts to navigate safely, but he also knows that use them wrongly and he will drown and it's a very similar situation in forex.
The Good News
You can learn forex charting in around 2 weeks and soon be piling up big profits in around 30 minutes a day spotting and hitting high odds trades and enjoying great profits. The good news is forex trading and using technical analysis is a learned skill and one you can master with a little practice.
Let's look at some key points for more profitable technical analysis with forex charts.
If you look at any forex chart you will see big trends that can last for many months and trend following these can be very profitable and if you want to make money out of them you must understand this key fact:
Most big trends start and continue from breakouts to new highs and lows on the chart and you must go with these breaks - most traders don't. They want to wait for the pullback and of course it never comes and they are left behind. While it appears like you have missed the first part of the move, the odds of continuation are high so go with them.
Always be patient when using forex charts. You don't get rewarded for your efforts or how many times you trade but being right with your trading signal. I know traders who trade just a few times a month yet make triple digit gains - so wait for the right opportunities.
When you have a trend you want to hit always check price momentum is on your side and make sure that you use momentum indicators that show price acceleration in the direction you wish to trade. Two great ones, you can learn, in about 30 minutes are - the stochastic and RSI. These two combined will increase your odds of success by getting the odds more on your side.
Never believe anyone who tells you there is a mathematical formula for market movement - there isn't. If of course there was, we would all know the price in advance and there would be no market. So forget trying to predict and only trade the reality of price.
Its probabilities that you need to understand and like a successful poker player, you won't win every hand - but if you keep trading the odds, you will win long term. When using forex charts, the simpler your forex trading method the better, as simple systems tend to be very robust and have fewer elements to break, than complicated ones.
I have used a simple breakout method which uses trend lines, RSI and the stochastic and made money with it for over 20 years sure, it's simple but it works. Forex charts give you the reality of price before your eyes and you can spot areas of over valuation and under valuation. Humans create trends and they also (due to their emotions) push trends to far up or down in either direction.
You can of course ride trends - but you will also see big price spikes and history tells you they don't last long and taking trades contrary to the majority can be very profitable. Charting is an art not a science and you need to practice your art. The successful captain of a ship uses charts to navigate safely, but he also knows that use them wrongly and he will drown and it's a very similar situation in forex.
The Good News
You can learn forex charting in around 2 weeks and soon be piling up big profits in around 30 minutes a day spotting and hitting high odds trades and enjoying great profits. The good news is forex trading and using technical analysis is a learned skill and one you can master with a little practice.
Money Management Principles
One of the worst blunders that forex traders can make is attempting to trade without sufficient capital.
The trader with limited capital not only will be a worried trader, always looking to minimize losses beyond the point of realistic trading, but he will also frequently be taken out of the trading game before he can realize any sense of success trading the method(s) or patterns.
Exercise Discipline
Discipline is probably one of the most overused words in forex trading education. However, despite the clich¨¦, discipline continues to be the most important behaviour one can master to become a profitable trader. Discipline is the ability to plan your work and work your plan.
It¡¯s the ability to give your trade the time to develop without hastily taking yourself out of the market simply because you are uncomfortable with risk. Discipline is also the ability to continue to trade the methods and patterns even after you¡¯ve suffered losses. Do your best to cultivate the degree of discipline required to be a world-class trader.
Employ Risk-to-Reward Ratios
The following shows you possible risk-to reward ratios, and the win ratios required to break even in a trading system.
Risk-to-Reward Ratio (in pips)and Win Ratio Required to Break Even(%)
40/20 (2 to 1) = 67%, 40/40 (1 to1) = 50%, 40/60 (1 to 1.5) = 40%,
40/80 (1 to 2) = 33.5%,
60/20 (3 to 1) = 75%,
60/60 (1 to 1) = 50%,
60 /90 (1 to 1.5) = 40%,
60/120 (1 to 2) = 33.5%
Important Note
Never risk more pips on a trade then you plan to make. It doesn¡¯t make sense to risk 100 pips in order to make only 10. Why? See below example.
Profit taking level (pips): 10
Stop used or pips at risk: 100
You win 10 times which makes 100 winning pips. You ONLY lose once and have to give back all profits!!!
This type of trading makes no sense and you will lose on the long term guaranteed!
The trader with limited capital not only will be a worried trader, always looking to minimize losses beyond the point of realistic trading, but he will also frequently be taken out of the trading game before he can realize any sense of success trading the method(s) or patterns.
Exercise Discipline
Discipline is probably one of the most overused words in forex trading education. However, despite the clich¨¦, discipline continues to be the most important behaviour one can master to become a profitable trader. Discipline is the ability to plan your work and work your plan.
It¡¯s the ability to give your trade the time to develop without hastily taking yourself out of the market simply because you are uncomfortable with risk. Discipline is also the ability to continue to trade the methods and patterns even after you¡¯ve suffered losses. Do your best to cultivate the degree of discipline required to be a world-class trader.
Employ Risk-to-Reward Ratios
The following shows you possible risk-to reward ratios, and the win ratios required to break even in a trading system.
Risk-to-Reward Ratio (in pips)and Win Ratio Required to Break Even(%)
40/20 (2 to 1) = 67%, 40/40 (1 to1) = 50%, 40/60 (1 to 1.5) = 40%,
40/80 (1 to 2) = 33.5%,
60/20 (3 to 1) = 75%,
60/60 (1 to 1) = 50%,
60 /90 (1 to 1.5) = 40%,
60/120 (1 to 2) = 33.5%
Important Note
Never risk more pips on a trade then you plan to make. It doesn¡¯t make sense to risk 100 pips in order to make only 10. Why? See below example.
Profit taking level (pips): 10
Stop used or pips at risk: 100
You win 10 times which makes 100 winning pips. You ONLY lose once and have to give back all profits!!!
This type of trading makes no sense and you will lose on the long term guaranteed!
Forex Money Management - The Foundation For Huge Gains and Forex Trading Success
ost traders use solid Forex trading systems but they fail to poor money management and really poor money management is the reason most traders lose lets take a look at in more detail...
If you watch any good football team it will have a strong defence it keeps the team in the game, until the offence gets an opportunity. If a team falls to far behind it doesn't matter how good the attack is, the team will lose and it's the same in Forex trading you need to defend what you have and keep your losses small until you get good high odds opportunities.
In Forex trading lose 50% of your account and you have to make a 100% to get back to profit and that's hard!
In Forex trading picking trend direction is easy but getting in at the best risk to reward is hard. So what tips can I give you?
The first is to cut leverage sure most brokers give you 200:1 but 10:1 is really plenty for most traders. Leverage up to far and you will have to have your stop to tight and will get taken out by the market noise so cut back leverage.
Next don't put stops to close!
This isn't being rash but you need to have stops outside of random volatility, so you don't get clipped out. Even more important is never jack your stop up to far to lock in profit - leave it back and accept short term dips in equity, to make a longer term gain.
Most traders either use to much leverage or think by having stops close, they reduce their risk but they don't, all they do is increase the probability of being stopped out to 100%. Many traders calculate their risk reward as - their target minus their stop but this is just an opinion! It does not take into account the probability if the trade.
To Win You Need to Deal with Volatility
When I ask traders I teach, do they know anything about standard deviation of price?
They look at me with a blank look yet; this should be essential knowledge for any Forex trader's essential education - why?
Because it gives you the volatility of the market and allows you to place stops more effectively. If you don't know what it is, make it part of your essential Forex education and look up our other articles.
Here are some simple money management tips.
- Always assume the worst when you enter a trade and things can only get better, there is no sure fire winner!
- Never place stops inside random volatility
- Never leverage up to hilt, keep leverage low
- Never trail a stop to quickly give the market room to breathe
- Never trade in random time periods so no day trading or scalping!
- Be patient and wait for high odds trades
- Don't place mental stops, they affect discipline and you may let a loss run
- Risk reward is NOT Your target minus your stop! Don't fall into this common trap
- If in doubt get out - any doubts liquidate
In forex trading your only trading the odds, you need to preserve your equity above all else fall too far behind and you will never recover. Forex money management is the key to this and always keep in mind the old gamblers saying:
To bet and win you need to be at the table but you can't bet if you lose your chips!
Obvious really - but very true. The foundation of your success is sound Forex money management SO pay attention and make it part of your essential Forex education or lose.
If you watch any good football team it will have a strong defence it keeps the team in the game, until the offence gets an opportunity. If a team falls to far behind it doesn't matter how good the attack is, the team will lose and it's the same in Forex trading you need to defend what you have and keep your losses small until you get good high odds opportunities.
In Forex trading lose 50% of your account and you have to make a 100% to get back to profit and that's hard!
In Forex trading picking trend direction is easy but getting in at the best risk to reward is hard. So what tips can I give you?
The first is to cut leverage sure most brokers give you 200:1 but 10:1 is really plenty for most traders. Leverage up to far and you will have to have your stop to tight and will get taken out by the market noise so cut back leverage.
Next don't put stops to close!
This isn't being rash but you need to have stops outside of random volatility, so you don't get clipped out. Even more important is never jack your stop up to far to lock in profit - leave it back and accept short term dips in equity, to make a longer term gain.
Most traders either use to much leverage or think by having stops close, they reduce their risk but they don't, all they do is increase the probability of being stopped out to 100%. Many traders calculate their risk reward as - their target minus their stop but this is just an opinion! It does not take into account the probability if the trade.
To Win You Need to Deal with Volatility
When I ask traders I teach, do they know anything about standard deviation of price?
They look at me with a blank look yet; this should be essential knowledge for any Forex trader's essential education - why?
Because it gives you the volatility of the market and allows you to place stops more effectively. If you don't know what it is, make it part of your essential Forex education and look up our other articles.
Here are some simple money management tips.
- Always assume the worst when you enter a trade and things can only get better, there is no sure fire winner!
- Never place stops inside random volatility
- Never leverage up to hilt, keep leverage low
- Never trail a stop to quickly give the market room to breathe
- Never trade in random time periods so no day trading or scalping!
- Be patient and wait for high odds trades
- Don't place mental stops, they affect discipline and you may let a loss run
- Risk reward is NOT Your target minus your stop! Don't fall into this common trap
- If in doubt get out - any doubts liquidate
In forex trading your only trading the odds, you need to preserve your equity above all else fall too far behind and you will never recover. Forex money management is the key to this and always keep in mind the old gamblers saying:
To bet and win you need to be at the table but you can't bet if you lose your chips!
Obvious really - but very true. The foundation of your success is sound Forex money management SO pay attention and make it part of your essential Forex education or lose.
Global Forex Trading
Forex is one of the greatest hommy work opportunity to make money. It gives an opportunity to make money from the comfort of your home and spending the time with family at the same time.
It is also an opportunity which you can do along with your existing day job. Forex means foreign exchange and Forex trading means is the trading between foreign exchanges.
Forex trading requires some knowledge about the way the Forex market runs. You have to learn about he factors both local and the global which affects the market.
If you want to succeed in this particular trading you must have the knowledge about the basics and facts.
Global Forex Trading offers the chance to deal in real time online currency trading that makes millions of forex brokers become more rich every day.
Global Forex Trading has less publicity that stock and commodities market and even the futures, even more than $2 trillion of currencies are transacted every day on the global forex market.
Compared to stocks and shares or commodity markets that have specific opening and ending trading times. At the same tim, Forex markets are available for trading anytime with price of currencies changes and fluctuates everytime.
Forex trading has become an extremely popular way to trade the global market, the largest and most liquid market in the world.
The Forex Trading market is open 24 hours a day. Forex trading also gives free commission and available on more than 60 currencies worldwide.
Global forex trading boasts that they provide the only forex trading platform that is suitable for both beginners and professionals.
Forex Trading has no restrictions of getting profits no matter what the market condition.
Nowday, the Global Forex Trading is available not only for the large investors but the smaller one can take a part too.
Leverage is the main key and powerful tool to Forex Trading wealth. You should have a good education in Forex trading to reach gain and profits consistently.
In Forex trading, you can get a leverage of 20 to 50 times commonly up to 100% margin in some special cases. In stocks or shares, you may be able to get it of 50 - 70% of your stocks or shares.
Leverage is the main key and powerful tool to Forex Trading wealth. You should have a good education in Forex trading to reach gain and profits consistently.
With that leverage comparison, you may be able become a millionaire fastest in Forex trading.
All things you need to know and learn it up in Forex trading ; knowing risk level - how much you are willing to lose, understanding the different forex trading systems as technical and fundamental and research the trading systems which you can be familiar with how they work.
Also learning the trading trends, price history, support and resistance lines, familiar with the fundamental economic factors and its issues that effect to the Forex market.
Global forex trading is something not many people consider for investment - because of less information - but worldwide forex trading continues and become more and more popular recently.
Individuals all over the world are investing in the Forex market and gaining thousands of dollars every day.
It is also an opportunity which you can do along with your existing day job. Forex means foreign exchange and Forex trading means is the trading between foreign exchanges.
Forex trading requires some knowledge about the way the Forex market runs. You have to learn about he factors both local and the global which affects the market.
If you want to succeed in this particular trading you must have the knowledge about the basics and facts.
Global Forex Trading offers the chance to deal in real time online currency trading that makes millions of forex brokers become more rich every day.
Global Forex Trading has less publicity that stock and commodities market and even the futures, even more than $2 trillion of currencies are transacted every day on the global forex market.
Compared to stocks and shares or commodity markets that have specific opening and ending trading times. At the same tim, Forex markets are available for trading anytime with price of currencies changes and fluctuates everytime.
Forex trading has become an extremely popular way to trade the global market, the largest and most liquid market in the world.
The Forex Trading market is open 24 hours a day. Forex trading also gives free commission and available on more than 60 currencies worldwide.
Global forex trading boasts that they provide the only forex trading platform that is suitable for both beginners and professionals.
Forex Trading has no restrictions of getting profits no matter what the market condition.
Nowday, the Global Forex Trading is available not only for the large investors but the smaller one can take a part too.
Leverage is the main key and powerful tool to Forex Trading wealth. You should have a good education in Forex trading to reach gain and profits consistently.
In Forex trading, you can get a leverage of 20 to 50 times commonly up to 100% margin in some special cases. In stocks or shares, you may be able to get it of 50 - 70% of your stocks or shares.
Leverage is the main key and powerful tool to Forex Trading wealth. You should have a good education in Forex trading to reach gain and profits consistently.
With that leverage comparison, you may be able become a millionaire fastest in Forex trading.
All things you need to know and learn it up in Forex trading ; knowing risk level - how much you are willing to lose, understanding the different forex trading systems as technical and fundamental and research the trading systems which you can be familiar with how they work.
Also learning the trading trends, price history, support and resistance lines, familiar with the fundamental economic factors and its issues that effect to the Forex market.
Global forex trading is something not many people consider for investment - because of less information - but worldwide forex trading continues and become more and more popular recently.
Individuals all over the world are investing in the Forex market and gaining thousands of dollars every day.
How to Trade Foreign Currencies With Market Participants
In the financial sector, the business of how to trade foreign currency has become one of the most promising and much sought after money-making endeavor. This is mostly because the business can give you immediate results depending on how much time you devote on it and what types of networks you have.
But getting into the foreign currency trading business requires you some thorough knowledge first before you get right down to it. You should first understand what it is and why there is a need to conduct such business. Foreign currency trading happens primarily because countries around the world have differing monetary values. If you look at it closely, you will realize that currency trading is really just as the name suggests-you swap your currency with that of another.
The world of foreign currency trading is very dynamic and involves different market participants. These participants are the people who are vital to making the entire business of foreign currency trading work. They involve all crucial aspects from both the private and public side. Each of these entities has a say in how currencies are exchanged and priced based from current market values:
1. Centralized Banks - These institutions are often tied up with the government. Some are even the main financial institutions in a particular country. Although they do not often directly buy or sell the currencies, they are still known to actively participate in the market. The main purpose of central banks is to provide a practical influence over the course of the trade. You can use these institutions to refer your current values and take advantage of low-priced currency trades as soon as they hit their values.
2. Actual Customers - These are directly the people who would most likely need the aid of new currencies. Aside from considering individuals who might need immediate currencies in exchange for what they have, you should also direct your attention to big businesses involved in the financial services industry. You can also try targeting those who are publicly listed companies which are known to be heavily involved in making stock investments.
3. Foreign Currency Trading Brokers - These are people who live and breathe the market. They are key persons because they are the go-to professionals when you want all the help you need to make fast and big currency transactions. They are more than just your average currency trader. They also make use of a combination of many other foreign currency trading methods such as scalping the market, day trading, to name a few. However, if you choose to work with them you must be prepared to let them in on the profits you make as they mostly require a certain amount of commission in every sell.
Getting along with these market participants is pretty easy to do. You just need to learn about their ways and read about them as much as you can. These market participants can also have a big impact on how your currency trading business will profit.
But getting into the foreign currency trading business requires you some thorough knowledge first before you get right down to it. You should first understand what it is and why there is a need to conduct such business. Foreign currency trading happens primarily because countries around the world have differing monetary values. If you look at it closely, you will realize that currency trading is really just as the name suggests-you swap your currency with that of another.
The world of foreign currency trading is very dynamic and involves different market participants. These participants are the people who are vital to making the entire business of foreign currency trading work. They involve all crucial aspects from both the private and public side. Each of these entities has a say in how currencies are exchanged and priced based from current market values:
1. Centralized Banks - These institutions are often tied up with the government. Some are even the main financial institutions in a particular country. Although they do not often directly buy or sell the currencies, they are still known to actively participate in the market. The main purpose of central banks is to provide a practical influence over the course of the trade. You can use these institutions to refer your current values and take advantage of low-priced currency trades as soon as they hit their values.
2. Actual Customers - These are directly the people who would most likely need the aid of new currencies. Aside from considering individuals who might need immediate currencies in exchange for what they have, you should also direct your attention to big businesses involved in the financial services industry. You can also try targeting those who are publicly listed companies which are known to be heavily involved in making stock investments.
3. Foreign Currency Trading Brokers - These are people who live and breathe the market. They are key persons because they are the go-to professionals when you want all the help you need to make fast and big currency transactions. They are more than just your average currency trader. They also make use of a combination of many other foreign currency trading methods such as scalping the market, day trading, to name a few. However, if you choose to work with them you must be prepared to let them in on the profits you make as they mostly require a certain amount of commission in every sell.
Getting along with these market participants is pretty easy to do. You just need to learn about their ways and read about them as much as you can. These market participants can also have a big impact on how your currency trading business will profit.
Online Forex Trading - These Two Simple Equations Can Lead You to Huge Gains
Enclosed you will find two equations which most traders don't understand and that's why most traders lose however if you understand them and incorporate them in your Forex trading strategy you could be on the road to huge gains...
Let's first of all start with the equation which relates to how and why markets really move and it's this:
Supply and Demand Fundamentals + Human Perception of them = Price
Simple?
Yes it is but most traders fail to see its signifcance which is:
It's not the facts that are important, its how humans perceive them that is; always remember humans are creatures of emotion and don't conform to some scientific theory which means all the commonly perceived views below about trading Forex are wrong:
- You can predict market movements in advance
- You can trade breaking news and the facts
- Markets move to some mathematical theory
- You can make money from short term moves i.e. scalping or day trading.
Its clear that markets move to probabilities not certainties. So using complex theories or mathematical theories is doomed to failure; its also impossible to work out what millions upon millions of traders will do within a day, as all short term moves are random and breaking news stories and facts cannot be traded, as the facts by themselves not important, its how there perceived that determines what happens next.
So how do you trade online Forex markets and win?
In an odds based market, simple systems works best and you should simply trade the reality of price change on a Forex Chart. Most traders make Forex trading more complicated than it really is. Having a successful trading system though is not enough next, you now need to understand another simple equation to succeed.
A Simple Robust Forex Trading System + Disciplined Execution = Forex Profits
The key to winning long term at Forex is disciplined execution of a system. If you can't execute your trading system signals with discipline, you have no system and don't be deceived, trading with discipline is very hard.
The reason discipline is so hard is you are going to have losing periods ( all traders have them) and you are going to have to keep going while the market takes your money and wrong foots you and makes you feel a fool. When this is happening, you need to keep your losses small and stay on course until you hit a home run and this is hard.
Most traders think they will never lose and believe the rubbish that vendors of "sure fire" systems tell them which is - losing periods don't occur or are very short.
When they hit a period of losses, they simply cannot cope with them and throw in the towel. if you understand that you have to lose to win and can trade with discipline, you can enjoy currency trading success.
Most traders don't really understand how markets really move and lack the mindset to win. Above we have shown you what it takes to win at online Forex trading and the rest is now up to you - good luck!
Let's first of all start with the equation which relates to how and why markets really move and it's this:
Supply and Demand Fundamentals + Human Perception of them = Price
Simple?
Yes it is but most traders fail to see its signifcance which is:
It's not the facts that are important, its how humans perceive them that is; always remember humans are creatures of emotion and don't conform to some scientific theory which means all the commonly perceived views below about trading Forex are wrong:
- You can predict market movements in advance
- You can trade breaking news and the facts
- Markets move to some mathematical theory
- You can make money from short term moves i.e. scalping or day trading.
Its clear that markets move to probabilities not certainties. So using complex theories or mathematical theories is doomed to failure; its also impossible to work out what millions upon millions of traders will do within a day, as all short term moves are random and breaking news stories and facts cannot be traded, as the facts by themselves not important, its how there perceived that determines what happens next.
So how do you trade online Forex markets and win?
In an odds based market, simple systems works best and you should simply trade the reality of price change on a Forex Chart. Most traders make Forex trading more complicated than it really is. Having a successful trading system though is not enough next, you now need to understand another simple equation to succeed.
A Simple Robust Forex Trading System + Disciplined Execution = Forex Profits
The key to winning long term at Forex is disciplined execution of a system. If you can't execute your trading system signals with discipline, you have no system and don't be deceived, trading with discipline is very hard.
The reason discipline is so hard is you are going to have losing periods ( all traders have them) and you are going to have to keep going while the market takes your money and wrong foots you and makes you feel a fool. When this is happening, you need to keep your losses small and stay on course until you hit a home run and this is hard.
Most traders think they will never lose and believe the rubbish that vendors of "sure fire" systems tell them which is - losing periods don't occur or are very short.
When they hit a period of losses, they simply cannot cope with them and throw in the towel. if you understand that you have to lose to win and can trade with discipline, you can enjoy currency trading success.
Most traders don't really understand how markets really move and lack the mindset to win. Above we have shown you what it takes to win at online Forex trading and the rest is now up to you - good luck!
Forex Trading - A Simple Tip to Increase Your Profits and Reduce Your Effort Instantly!
I have been a Forex broker, taught Forex and been in contact with several thousand traders. The enclosed tip is simple one the vast majority of traders I have come into contact with don't understand - but if they did, the tip would increase their profits dramatically.
The tip is based on the 80 - 20 rule which is used in a wide variety of areas of life for example, in business it says 80% of your profits will normally come from just 20% of your clients. In Forex terms it means - 80% of your overall profits will come from just 20% of your trades.
The reality is that most Forex traders take far too many trades, if they cut back on their trading frequency and only hit high odds trades their profits will increase dramatically.
They hold the following beliefs which are simply not true
- They can make money by scalping or day trading
These short term trades are low odds trades in fact - the odds are you will lose, as you are trading the market noise.
- They need to be in the market just in case they miss a move
If course this is rubbish, you can spot a move and enter when the time is right!
- The harder the work and the more trades they make the more money they will make
The work ethic doesn't apply in Forex; many people think with effort they can force money from the market and they lose.
Be Smart and Aim for 100% Annual Profits
I know traders that trade less than once a month yet still turn in triple digit annual profits! There not interested in working hard or trading all the time, their interested in making money and that means hitting the high odds trades and milking them for all their worth. These traders make a lot of money, not by working hard but working smart.
Less is More Hit the Big Trends
The high odds trades don't come around every day and you need to wait for them but when they do, they will give you high odds set ups, greater chances of success with less work and that is something all Forex traders want!
The tip is based on the 80 - 20 rule which is used in a wide variety of areas of life for example, in business it says 80% of your profits will normally come from just 20% of your clients. In Forex terms it means - 80% of your overall profits will come from just 20% of your trades.
The reality is that most Forex traders take far too many trades, if they cut back on their trading frequency and only hit high odds trades their profits will increase dramatically.
They hold the following beliefs which are simply not true
- They can make money by scalping or day trading
These short term trades are low odds trades in fact - the odds are you will lose, as you are trading the market noise.
- They need to be in the market just in case they miss a move
If course this is rubbish, you can spot a move and enter when the time is right!
- The harder the work and the more trades they make the more money they will make
The work ethic doesn't apply in Forex; many people think with effort they can force money from the market and they lose.
Be Smart and Aim for 100% Annual Profits
I know traders that trade less than once a month yet still turn in triple digit annual profits! There not interested in working hard or trading all the time, their interested in making money and that means hitting the high odds trades and milking them for all their worth. These traders make a lot of money, not by working hard but working smart.
Less is More Hit the Big Trends
The high odds trades don't come around every day and you need to wait for them but when they do, they will give you high odds set ups, greater chances of success with less work and that is something all Forex traders want!
Choosing the Best Professional Forex Brokers
If you are thinking of getting in touch with USA forex brokers, there are some important factors you need to consider. It's actually not that tough to find one considering there are lots of these professionals out in the market today. The real challenge however is finding someone who can really bring you results and assure that you are going to get quality services out of your investment. Bear in mind that forex brokers' rates vary accordingly and they may turn out to be a bit pricey.
The reason why it is important to hire a forex broker that specifically trades in the US dollar currency is that it gives you exposure to experiential and technical aspects. The US currency is one of the most widely used trading money in the market today. It's like the base where other currencies peg their rates at so when the US dollar fluctuates, it tends to change the course of the trading market as well. Liquidity is something that you must expect when it comes to the trading game.
Here are some important points you might need to consider when it comes to choosing among USA forex brokers.
1. Is the forex broker duly regulated? - The US bank and its related financial agencies have a say on the players in the forex market. Therefore it is important that you get in touch with these types of people. The great thing about using forex brokers who are regulated is that they are quite meticulous with their process. They need to do this because aside from liaising with you and their business spread partners, they also need to submit their financial standing and reports to regulating authorities. This way, you are assured that you are getting in touch with reliable people with a solid reputation.
2. Be the one to specify your trading platform - Although forex brokers are known to employ their own trading platforms, it would still be best if you are the one who will be giving directions for this system. Your trading platform should depend on the amount of time you can devote on the project and your work system. There are many different kinds of trading systems which you can use. You can either choose to have your trading run on autopilot, you may want to purchase a licensed trading software, or simply log online to an open source trading network. If you are not yet familiar with these things then you can also ask the expertise of forex brokers to help you choose the platform that would suit you best.
3. Trading methods used - Aside from the trading platform being used, you should also delve deeper into the specifics of the trading methods being used by your preferred forex broker. Here is where things such as spread, funds safety, and fractional trading would come into picture. All of these key ingredients to facilitate your forex business.
Do not let yourself be overwhelmed with having plenty of choices for USA forex brokers. Make sure you trim them down to qualified individuals whom you feel comfortable to work with.
The reason why it is important to hire a forex broker that specifically trades in the US dollar currency is that it gives you exposure to experiential and technical aspects. The US currency is one of the most widely used trading money in the market today. It's like the base where other currencies peg their rates at so when the US dollar fluctuates, it tends to change the course of the trading market as well. Liquidity is something that you must expect when it comes to the trading game.
Here are some important points you might need to consider when it comes to choosing among USA forex brokers.
1. Is the forex broker duly regulated? - The US bank and its related financial agencies have a say on the players in the forex market. Therefore it is important that you get in touch with these types of people. The great thing about using forex brokers who are regulated is that they are quite meticulous with their process. They need to do this because aside from liaising with you and their business spread partners, they also need to submit their financial standing and reports to regulating authorities. This way, you are assured that you are getting in touch with reliable people with a solid reputation.
2. Be the one to specify your trading platform - Although forex brokers are known to employ their own trading platforms, it would still be best if you are the one who will be giving directions for this system. Your trading platform should depend on the amount of time you can devote on the project and your work system. There are many different kinds of trading systems which you can use. You can either choose to have your trading run on autopilot, you may want to purchase a licensed trading software, or simply log online to an open source trading network. If you are not yet familiar with these things then you can also ask the expertise of forex brokers to help you choose the platform that would suit you best.
3. Trading methods used - Aside from the trading platform being used, you should also delve deeper into the specifics of the trading methods being used by your preferred forex broker. Here is where things such as spread, funds safety, and fractional trading would come into picture. All of these key ingredients to facilitate your forex business.
Do not let yourself be overwhelmed with having plenty of choices for USA forex brokers. Make sure you trim them down to qualified individuals whom you feel comfortable to work with.
Forex Books for Beginners
Here you will find the Forex e-books that provide the basic information on Forex trading. You can learn basic concepts of the Forex market, the technical and fundamental analysis. While all these e-books are recommended for every new Forex trader, they won't be very useful to the very experienced traders.
Almost all Forex e-books are in .pdf format. You'll need Adobe Acrobat Reader to open these e-books. Some of the e-books (those that are in parts) are zipped.
If you are the copyright owner of any of these e-books and don't want me to share them, please, contact me and I will gladly remove them.
Candlesticks For Support And Resistance — The basics of trading with candlesticks charts by John H. Forman.
Online Trading Courses — Course #1 lesson #1 by Jake Bernstein.
Commodity Futures Trading for Beginners — by Bruce Babcock.
Hidden Divergence — by Barbara Star, Ph.D.
Peaks and Troughs — by Martin J. Pring.
Reverse Divergences And Momentum — by Martin J. Pring.
Strategy:10 — Low-risk, high-return forex trading by W. R. Booker & Co.
The NYSE Tick Index And Candlesticks — by Tim Ord.
Trend Determination — A quick, accurate and effective methodology by John Hayden.
The Original Turtle Trading Rules — by OrignalTurtles.org.
Introduction to Forex — by 1st Forex Trading Academy. This trading course intends to provide to all of the students analytical tools on the trading system and methodologies. In this respect, the purpose of the course is to provide an overview of the many strategies that are being used in Forex market and to discuss the steps and tools that are needed in order to use these strategies successfully.
The Six Forces of Forex — by Scott Owens. A small e-book covering the basic and the main problems of Forex trading.
Study Book for Successful Foreign Exchange Dealing — by Royal Forex.
Forex. On-Line Manual for Successful Trading — an introduction into every aspect of the Forex trading including detailed descriptions of the technical and fundamental analysis techniques, by unknown author.
18 Trading Champions Share Their Keys to Top Trading Profits — as the name suggests, the book shares the secrets of the 18 prominent traders with the Forex beginners, by FWN.
The Way to Trade Forex — a 1st chapter of the book that will show you not only Forex basics but also some unusual techniques and strategies that can work for the newbie traders, by Jay Lakhani.
The Truth About Fibonacci Trading — the basic facts and information about Fibonacci levels and their application to the Forex trading, by Bill Poulos.
From www.earnforex.com/forex_e-books/beginner_forex_trading/
Forex Trading Psychology
While learning a lot about market analysis and money management is an obvious and necessary step to be a successful Forex traders, you also need to master your emotions to keep your trading performance under strict control of mind and intuition. Controlling your emotions in Forex trading is often a balancing between greed and cautiousness. Almost any known psychology practices and techniques can work for Forex traders to help them keep to their trading strategies rather to their spontaneous emotions. Problems you'll have to deal while being a professional Forex trader:
- Your greed
- Overtrading
- Lack of discipline
- Lack of confidence
- Blind following others' forecasts
These are very professional books on psychology written specially for financial traders:
- Calming The Mind So That Body Can Perform
- Emotion Free Trading
- The Miracle of Discipline
Forex Brokerage
Every Forex trader like any other professional needs tools to trade. One of these tools, which is vital to be in market, is a Forex broker and specifically for Internet - on-line Forex broker - a company which will provide real-time market information to trader and bring his orders to Forex market. While choosing a right Forex broker things to look for are the following:
- Being a professional company you can trust
- Provide you with real-time quotes
- Execute your orders fast and accurately
- Don't take a lot of commissions
- Support the withdraw/deposit methods that you can use
For beginning Forex traders I recommend these four brokerage companies that are probably the best Forex brokers to start with:
- FXOpen — one of the most popular and progressive brokers with MetaTrader platform and comfortable trading conditions for all kind of traders.
- InstaForex — a reputable MetaTrader 4 brokers, allows Islamic Forex trading accounts, while you can deposit and withdraw money via WebMoney.
- FXcast — good because you can start trading Forex with as little as 10$, use MetaTrader 4 platform and the dozoen of various deposit and withdraw methods, including WebMoney, e-Bullion and wire transfer.
- LiteForex — broker that supports MetaTrader 4 Forex trading platform and doesn't require a lot of money to start with.
Forex for Dummies
Forex Basics
If you've already read the "What is Forex?" section then you should know what Forex market is and what it is all about. If not, please, do it. There are five essential aspects of foreign currency market a beginner trader (and an old one as well) should be aware of:
- Forex Fundamental Analysis
- Forex Technical Analysis
- Money Management
- Forex Trading Psychology
- Forex Brokerage
Understanding and mastering these sides of trading are crucial to organize your Forex trading experience.
Forex Fundamental Analysis
Fundamental analysis is the process of market analysis which is done regarding only "real" events and macroeconomic data which is related to the traded currencies. Fundamental analysis is used not only in Forex but can be a part of any financial planning or forecasting. Concepts that are part of Forex fundamental analysis: overnight interest rates, central banks meetings and decisions, any macroeconomic news, global industrial, economical, political and weather news. Fundamental analysis is the most natural way of making Forex market forecasts. In theory, it alone should work perfectly, but in practice it is often used in pair with technical analysis. Recommended e-books on Forex fundamental analysis:
- Reminiscences of a Stock Operator
- What Moves the Currency Market?
Forex Technical Analysis
Technical analysis is the process of market analysis that relies only on market data numbers - quotes, charts, simple and complex indicators, volume of supply and demand, past market data, etc. The main idea behind Forex technical analysis is the postulate of functional dependence of the future market technical data on the past market technical data. As well as with fundamental analysis, technical analysis is believed to be self-sufficient and you can use only it to successfully trade Forex. In practice, both analysis methods are used. Recommended e-books on Forex fundamental analysis are:
- The Law Of Charts
- Candlesticks For Support And Resistance
- Trend Determination
Money Management in Forex
Even if you master every possible method of market analysis and will make very accurate predictions for future Forex market behavior, you won't make any money without a proper money management strategy. Money management in Forex (as well as in other financial markets) is a complex set of rules which you develop to fit your own trading style and amount of money you have for trading. Money management play very important role in getting profits out of Forex; do not underestimate it. To get more information on money management you can read these books:
- Risk Control and Money Management
- Money Management (A chapter from The Mathematics of Gambling)
Technical trading considerations
- As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns.
Algorithmic trading in foreign exchange
Electronic trading is growing in the FX market, and algorithmic trading is becoming much more common. According to financial consultancy Celent estimates, by 2008 up to 25% of all trades by volume will be executed using algorithm, up from about 18% in 2005.[citation needed]
An algorithmic trader needs to be mindful of potential fraud by the broker. Part of the weekly algorithm should include a check to see if the amount of transaction errors when the trader is losing money occurs in the same proportion as when the trader would have made money.
Financial instruments
Spot
A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira and Russian Ruble, which settle the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction. The data for this study come from the spot market. Spot transactions has the second largest turnover by volume after Swap transactions among all FX transactions in the Global FX market. NNM
Forward
See also: forward contract
One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be a one day, a few days, months or years. Usually the date is decided by both parties.
Future
Foreign currency futures are exchange traded forward transactions with standard contract sizes and maturity dates — for example, $1000 for next November at an agreed rate [4],[5]. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.
Swap
The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange.
Political conditions
Internal, regional, and international political conditions and events can have a profound effect on currency markets.
All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. For example, destabilization of coalition governments in India, Pakistan and Thailand can negatively affect the value of their currencies. Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.
Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:
- Flights to quality
- Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The Swiss franc has been a traditional safe haven during times of political or economic uncertainty.[12]
- Long-term trends
- Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends. [13]
- "Buy the rumor, sell the fact"
- This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[14] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.
- Economic numbers
- While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.
Economic factors
These include: (a)economic policy, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators.
- Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
- Economic conditions include:
- Government budget deficits or surpluses
- The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
- Balance of trade levels and trends
- The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
- Inflation levels and trends
- Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising [. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.
- Economic growth and health
- Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.
- Productivity of an economy
- Increasing productivity in an economy should positively influence the value of its currency. It affects are more prominent if the increase is in the traded sector [3].
Determinants of FX Rates
The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In a fixed exchange rate regime, FX rates are decided by its government):
(a) International parity conditions viz; purchasing power parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world.
(b) Balance of payments model (see exchange rate). This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit.
(c) Asset market model (see exchange rate) views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by people’s willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.”
None of the models developed so far succeed to explain FX rates levels and volatility in the longer time frames. For shorter time frames (less than a few days) algorithm can be devised to predict prices. Large and small institutions and professional individual traders have made consistent profits from it. It is understood from above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.
Non-bank Foreign Exchange Companies
Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments. I.e., there is usually a physical delivery of currency to a bank account.
It is estimated that in the UK, 14% of currency transfers/payments[10] are made via Foreign Exchange Companies.[11] These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.
Money Transfer/Remittance Companies
Money transfer/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally.
Trading characteristics
| Rank | Currency | ISO 4217 code (Symbol) | % daily share (April 2007) |
|---|---|---|---|
| 1 |  United States dollar | USD ($) | 86.3% |
| 2 |  Euro | EUR (€) | 37.0% |
| 3 |  Japanese yen | JPY (¥) | 17.0% |
| 4 |  Pound sterling | GBP (£) | 15.0% |
| 5 |  Swiss franc | CHF (Fr) | 6.8% |
| 6 |  Australian dollar | AUD ($) | 6.7% |
| 7 |  Canadian dollar | CAD ($) | 4.2% |
| 8-9 |  Swedish krona | SEK (kr) | 2.8% |
| 8-9 |  Hong Kong dollar | HKD ($) | 2.8% |
| 10 |  Norwegian krone | NOK (kr) | 2.2% |
| 11 |  New Zealand dollar | NZD ($) | 1.9% |
| 12 |  Mexican peso | MXN ($) | 1.3% |
| 13 |  Singapore dollar | SGD ($) | 1.2% |
| 14 |  South Korean won | KRW (₩) | 1.1% |
| Other | 14.5% | ||
| Total | 200% | ||
There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called Fxmarketspace opened in 2007 and aspired but failed to the role of a central market clearing mechanism.
The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.
The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.
On the spot market, according to the BIS study, the most heavily traded products were:
-
- EUR/USD: 27%
- USD/JPY: 13%
- GBP/USD (also called sterling or cable): 12%
and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (17.0%), and sterling (15.0%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the buyers.
Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EUR/USD and USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.
Market participants
Unlike a stock market, where all participants have access to the same prices, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. The difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX-metal market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the foreign exchange market to align currencies to their economic needs.
[edit] Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high—that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[7] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.
Hedge funds as speculators
About 70% to 90% of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.
Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.
Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.
Retail foreign exchange brokers
There are two types of retail brokers offering the opportunity for speculative trading: retail foreign exchange brokers and market makers. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated by the CFTC and NFA might be subject to foreign exchange scams.[8][9] At present, the NFA and CFTC are imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone. It is not widely understood that retail brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. A move toward NDD (No Dealing Desk) and STP (Straight Through Processing) has helped to resolve some of these concerns and restore trader confidence, but caution is still advised in ensuring that all is as it is presented.
Foreign exchange market
The foreign exchange market (currency, forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. [1]FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when worldover countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.
Presently, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements.[2] Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.[3]
The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, etc., and the need for trading in such currencies.
Brief history of Forex trading
Initially, the value of goods was expressed in terms of other goods, i.e. an economy based on barter between individual market participants. The obvious limitations of such a system encouraged establishing more generally accepted means of exchange at a fairly early stage in history, to set a common benchmark of value. In different economies, everything from teeth to feathers to pretty stones has served this purpose, but soon metals, in particular gold and silver, established themselves as an accepted means of payment as well as a reliable storage of value.
Originally, coins were simply minted from the preferred metal, but in stable political regimes the introduction of a paper form of governmental IOUs (I owe you) gained acceptance during the Middle Ages. Such IOUs, often introduced more successfully through force than persuasion were the basis of modern currencies.
Before World War I, most central banks supported their currencies with convertibility to gold. Although paper money could always be exchanged for gold, in reality this did not occur often, fostering the sometimes disastrous notion that there was not necessarily a need for full cover in the central reserves of the government.
At times, the ballooning supply of paper money without gold cover led to devastating inflation and resulting political instability. To protect local national interests, foreign exchange controls were increasingly introduced to prevent market forces from punishing monetary irresponsibility.
In the latter stages of World War II, the Bretton Woods agreement was reached on the initiative of the USA in July 1944. The Bretton Woods Conference rejected John Maynard Keynes suggestion for a new world reserve currency in favour of a system built on the US dollar. Other international institutions such as the IMF, the World Bank and GATT (General Agreement on Tariffs and Trade) were created in the same period as the emerging victors of WW2 searched for a way to avoid the destabilising monetary crises which led to the war. The Bretton Woods agreement resulted in a system of fixed exchange rates that partly reinstated the gold standard, fixing the US dollar at USD35/oz and fixing the other main currencies to the dollar - and was intended to be permanent.
The Bretton Woods system came under increasing pressure as national economies moved in different directions during the sixties. A number of realignments kept the system alive for a long time, but eventually Bretton Woods collapsed in the early seventies following president Nixon's suspension of the gold convertibility in August 1971. The dollar was no longer suitable as the sole international currency at a time when it was under severe pressure from increasing US budget and trade deficits.
The following decades have seen foreign exchange trading develop into the largest global market by far. Restrictions on capital flows have been removed in most countries, leaving the market forces free to adjust foreign exchange rates according to their perceived values.
But the idea of fixed exchange rates has by no means died. The EEC (European Economic Community) introduced a new system of fixed exchange rates in 1979, the European Monetary System. This attempt to fix exchange rates met with near extinction in 1992-93, when pent-up economic pressures forced devaluations of a number of weak European currencies. Nevertheless, the quest for currency stability has continued in Europe with the renewed attempt to not only fix currencies but actually replace many of them with the Euro in 2001.
The lack of sustainability in fixed foreign exchange rates gained new relevance with the events in South East Asia in the latter part of 1997, where currency after currency was devalued against the US dollar, leaving other fixed exchange rates, in particular in South America, looking very vulnerable.
But while commercial companies have had to face a much more volatile currency environment in recent years, investors and financial institutions have found a new playground. The size of foreign exchange markets now dwarfs any other investment market by a large factor. It is estimated that more than USD 3,000 billion is traded every day, far more than the world's stock and bond markets combined.
Forex trading examples
Example 1
An investor has a margin deposit with Saxo Bank of USD 100,000.
The investor expects the US dollar to rise against the Swiss franc and therefore decides to buy USD 2,000,000 - 2% of his maximum possible exposure at a 1% margin Forex gearing.
The Saxo Bank dealer quotes him 1.5515-20. The investor buys USD at 1.5520.
Day 1: Buy USD 2,000,000 vs. CHF 1.5520 = Sell CHF 3,104,000.
Four days later, the dollar has actually risen to CHF 1.5745 and the investor decides to take his profit.
Upon his request, the Saxo Bank dealer quotes him 1.5745-50. The investor sells at 1.5745.
Day 5: Sell USD 2,000,000 vs. CHF 1.5745 = Buy CHF 3,149,000.
As the dollar side of the transaction involves a credit and a debit of USD 2,000,000, the investor's USD account will show no change. The CHF account will show a debit of CHF 3,104,000 and a credit of CHF 3,149,000. Due to the simplicity of the example and the short time horizon of the trade, we have disregarded the interest rate swap that would marginally alter the profit calculation.
This results in a profit of CHF 45,000 = approx. USD 28,600 = 28.6% profit on the deposit of USD 100,000.
Example 2:
The investor follows the cross rate between the EUR and the Japanese yen. He believes that this market is headed for a fall. As he is not quite confident of this trade, he uses less of the leverage available on his deposit. He chooses to ask the dealer for a quote in EUR 1,000,000. This requires a margin of EUR 1,000,000 x 5% = EUR 10,000 = approx. USD 52,500 (EUR /USD 1.05).
The dealer quotes 112.05-10. The investor sells EUR at 112.05.
Day 1: Sell EUR 1,000,000 vs. JPY 112.05 = Buy JPY 112,050,000.
He protects his position with a stop-loss order to buy back the EUR at 112.60. Two days later, this stop is triggered as the EUR o strengthens short term in spite of the investor's expectations.
Day 3: Buy EUR 1,000,000 vs. JPY 112.60 = Sell JPY 112,600,000.
The EUR side involves a credit and a debit of EUR 1,000,000. Therefore, the EUR account shows no change. The JPY account is credited JPY 112.05m and debited JPY 112.6m for a loss of JPY 0.55m. Due to the simplicity of the example and the short time horizon of the trade, we have disregarded the interest rate swap that would marginally alter the loss calculation.
This results in a loss of JPY 0.55m = approx. USD 5,300 (USD/JPY 105) = 5.3% loss on the original deposit of USD 100,000.
Example 3
The investor believes the Canadian dollar will strengthen against the US dollar. It is a long term view, so he takes a small position to allow for wider swings in the rate:
He asks Saxo Bank for a quote in USD 1,000,000 against the Canadian dollar. The dealer quotes 1.5390-95 and the investor sells USD at 1.5390. Selling USD is the equivalent of buying the Canadian dollar.
Day 1: Sell USD 1,000,000 vs. CAD 1.5390. He swaps the position out for two months receiving a forward rate of CAD 1.5357 = Buy CAD 1,535,700 for Day 61 due to the interest rate differential.
After a month, the desired move has occurred. The investor buys back the US dollars at 1.4880. He has to swap the position forward for a month to match the original sale. The forward rate is agreed at 1.4865.
Day 31: Buy USD 1,000,000 vs. CAD 1.4865 = Sell CAD 1,486,500 for Day 61.
Day 61: The two trades are settled and the trades go off the books. The profit secured on Day 31 can be used for margin purposes before Day 61.
The USD account receives a credit and debit of USD 1,000,000 and shows no change on the account. The CAD account is credited CAD 1,535,700 and debited CAD 1,486,500 for a profit of CAD 49,200 = approx. USD 33,100 = profit of 33.1% on the original deposit of USD 100,000.
Introduction
Foreign Exchange
This short introduction explains the basics of trading Forex online, a brief explanation of the markets and the major benefits of trading Forex online. There are also two scenarios describing the implications of trading in a bear as well as a bull market to better acquaint you with some of the risks and opportunities of the largest and most liquid market in the world.
As an additional aid for those who are new to Forex, there is also a glossary at the bottom of this text which explains some of the terms used in connection with currency trading.
Overview
Foreign exchange, Forex or just FX are all terms used to describe the trading of the world's many currencies. The Forex market is the largest market in the world, with trades amounting to more than USD 3 trillion every day. Most Forex trading is speculative, with only a low percentage of market activity representing governments' and companies' fundamental currency conversion needs.Unlike trading on the stock market, the Forex market is not conducted by a central exchange, but on the “interbank” market, which is thought of as an OTC (over the counter) market. Trading takes place directly between the two counterparts necessary to make a trade, whether over the telephone or on electronic networks all over the world. The main centres for trading are Sydney, Tokyo, London, Frankfurt and New York. This worldwide distribution of trading centres means that the Forex market is a 24-hour market.
Trading Forex
A currency trade is the simultaneous buying of one currency and selling of another one. The currency combination used in the trade is called a cross (for example, the euro/US dollar, or the GB pound/Japanese yen.). The most commonly traded currencies are the so-called “majors” – EURUSD, USDJPY, USDCHF and GBPUSD.
The most important Forex market is the spot market as it has the largest volume. The market is called the spot market because trades are settled immediately, or “on the spot”. In practice this means two banking days.
Forward Outrights
For forward outrights, settlement on the value date selected in the trade means that even though the trade itself is carried out immediately, there is a small interest rate calculation left. The interest rate differential doesn't usually affect trade considerations unless you plan on holding a position with a large differential for a long period of time. The interest rate differential varies according to the cross you are trading. On the USDCHF, for example, the interest rate differential is quite small, whereas the differential on NOKJPY is large. This is because if you trade e.g. NOKJPY, you get almost 7% (annual) interest in Norway and close to 0% in Japan. So, if you borrow money in Japan, to finance the trade and buying NOK, you have a positive interest rate differential. This differential has to be calculated and added to your account. You can have both a positive and a negative interest rate differential, so it may work for or against you when you make a trade.Trading on Margin
Trading on margin means that you can buy and sell assets that represent more value than the capital in your account. Forex trading is usually conducted with relatively small margin deposits. This is useful since it permits investors to exploit currency exchange rate fluctuations which tend to be very small. A margin of 1.0% means you can trade up to USD 1,000,000 even though you only have USD 10,000 in your account. A margin of 1% corresponds to a 100:1 leverage (or “gearing”). (Because USD 10,000 is 1% of USD 1,000,000.) Using this much leverage enables you to make profits very quickly, but there is also a greater risk of incurring large losses and even being completely wiped out. Therefore, it is inadvisable to maximise your leveraging as the risks can be very high. For more information on the trading conditions of Saxo Bank, go to the Account Summary on your SaxoTrader and open the section entitled “Trading Conditions” found in the top right-hand corner of the Account Summary.Why Trade Forex?
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24 hour trading
One of the major advantages of trading Forex is the opportunity to trade 24 hours a day from Sunday evening (20:00 GMT) to Friday evening (22:00 GMT). This gives you a unique opportunity to react instantly to breaking news that is affecting the markets. -
Superior liquidity
The Forex market is so liquid that there are always buyers and sellers to trade with. The liquidity of this market, especially that of the major currencies, helps ensure price stability and narrow spreads. The liquidity comes mainly from banks that provide liquidity to investors, companies, institutions and other currency market players. -
No commissions
The fact that Forex is often traded without commissions makes it very attractive as an investment opportunity for investors who want to deal on a frequent basis.
Trading the “majors” is also cheaper than trading other cross because of the high level of liquidity. For more information on the trading conditions of Saxo Bank, go to the Account Summary on your SaxoTrader and open the section entitled “Trading Conditions” found in the top right-hand corner of the Account Summary. -
100:1 Leverage
Leverage (gearing) enables you to hold a position worth up to 100 times more than your margin deposit. For example, a USD 10,000 deposit can command positions of up to USD 1,000,000 through leverage. You can leverage the first USD 25,000 of your investment up to 100 times and additional collateral up to 50 times. -
Profit potential in falling markets
Since the market is constantly moving, there are always trading opportunities, whether a currency is strengthening or weakening in relation to another currency. When you trade currencies, they literally work against each other. If the EURUSD declines, for example, it is because the US dollar gets stronger against the euro and vice versa. So, if you think the EURUSD will decline (that is, that the euro will weaken versus the dollar), you would sell EUR now and then later you buy euro back at a lower price. In case that the EURUSD indeed declines, then you can take your profit. The opposite trading scenario would occur if the EURUSD appreciates.
Important Forex Trading Terms
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Spread
The spread is the difference between the price that you can sell currency at (Bid) and the price you can buy currency at (Ask). The spread on majors is usually 3 pips under normal market conditions. For more information on the trading conditions at Saxo Bank, go to the Account Summary on your Client Station and open the section entitled “Trading Conditions” found in the top right-hand corner of the Account Summary. -
Pips
A pip is the smallest unit by which a cross price quote changes. When trading Forex you will often hear that there is a 3-pip spread when you trade the majors. This spread is revealed when you compare the bid and the ask price, for example EURUSD is quoted at a bid price of 0.9875 and an ask price of 0.9878. The difference is USD 0.0003, which is equal to 3 “pips”.
On a contract or position, the value of a pip can easily be calculated. You know that the EURUSD is quoted with four decimals, so all you have to do is cancel out the four zeros on the amount you trade and you will have the value of one pip. Thus, on a EURUSD 100,000 contract, one pip is USD 10. On a USDJPY 100,000 contract, one pip is equal to 1000 yen, because USDJPY is quoted with only two decimals.
Trading Scenario – Trading Rising Prices
If you believe that the euro will strengthen against the dollar you'll want to buy euro now and sell it back later at a higher price.
| • You buy euro | | We quote EURUSD at Bid 0.9875 and Ask 0.9878, which means that you can sell 1 euro for 0.9875 USD or buy 1 euro for 0.9878 USD. In this example you buy euro 100,000, at the quote price of 0.9878 (ask price) per euro. |
| • The market moves in your favor | | Later the market turns in favour of the euro and the EURUSD is now quoted at Bid 0.9894 and Ask 0.9896. |
| • Now you sell your euro and get the profit | | You sell euro at a Bid price of 0.9894. |
| • The profit is calculated as follows | | Sell price-buy price x size of trade (0.9894 minus 0.9878) multiplied by 100.000 = USD 140 Profit (Note that the profit or loss is always expressed in the secondary currency) |
Trading Scenario – Trading Falling Prices
If, on the other hand, you believe that the euro will weaken against the dollar, you'll want to sell EURUSD. | • You sell euro | | We quote EURUSD at a Bid price of 0.9875 and Ask price of 0.9880 and you decide to sell euro 100,000 at a Bid price of 0.9875. |
| • The market moves in your favour | | The euro weakens against the dollar and the EURUSD is now quoted at bid 0.9744 and ask 0.9749. |
| • Now you buy back your euro | | You buy EUR at an ask price of 0.9749. |
| • Your profit/loss is then | | Sell price-buy price x size of trade (0.9875 minus 0.9749) multiplied by 100.000 = USD 1260 Profit |
Remember that trading EUR 100,000 as we have done in our examples, does not mean that you have to put up euro 100,000 yourself. On a 2% margin means that you have to deposit 2.0% of euro 100,000, which is euro 2,000 on margin as a guarantee for the future performance of your position.Further Reading
To see how you can trade the Forex market and benefit from our toolbox of information and live quotes, please proceed to the Forex Quick Start found under the Trading menu of SaxoTrader.Glossary
| • Appreciation |  | An increase in the value of a currency. |
| • Ask | | The price requested by the trader. This usually indicates the lowest price a seller will accept. |
| • Base currency | | The currency that the investor buys or sells (i.e. EUR in EURUSD). |
| • Bear | | Someone who believes prices are heading down. A bear market is one in which there has been a sustained fall in prices and which does not look like it will recover quickly. |
| • Bid | | The price offered by the trader. This usually indicates the highest price a purchaser will pay. |
| • Bid/Ask | | The Bid rate is the rate at which you can sell. The Ask (or offer) rate is the rate at which you can buy. |
| • Bull | | Someone who is optimistic about the market. A bull market is characterised by enthusiastic and sustained buying. |
| • cross | | When trading with currencies, the investor buys one currency with another. These two currencies form the cross: for example, EURUSD. |
| • Cross rate | | An exchange rate that is calculated from two other exchange rates. |
| • Depreciation/decline | | A fall in the value of a currency. |
| • EURUSD | | Means that you trade EUR against dollars. If you buy euro you pay in dollars and if you sell euro you receive dollars. |
| • FX, Forex, Foreign Exchange | | All names for the transaction of one currency for another, e.g. you buy GBP 100.00 with USD 150.25 or sell USD 150.25 for GBP 100.00. |
| • Interbank | | Short-term (often overnight) borrowing and lending between banks, as distinct from a banks business with their corporate clients or other financial institutions. |
| • Interest rate differential | | The yield spread between two otherwise comparable debt instruments denominated in different currencies. |
| • Leverage (gearing) | | The investor only funds part of the amount traded. |
| • Long | | To buy. |
| • Long position | | A position that increases its value if market prices increase. |
| • Margin | | The deposit required when entering into a position as well as to hold an open position. Your margin status can be monitored in the Account Summary. |
| • NYSE | | The New York Stock Exchange. |
| • Pips | | A pip is the smallest unit by which a Forex cross price quote changes. So if EURUSD bid is now quoted at 0.9767 and it moves up 2 pips, it will be quoted at 0.9769. |
| • Secondary currency (variable currency or counter currency) | | The currency that the investor trades the base currency against (i.e. USD in EURUSD). |
| • Short position | | A position that benefits from a decline in market prices. |
| • Short | | To sell. |
| • Speculative | | Buying and selling in the hope of making a profit, rather than doing so for some fundamental business-related need. |
| • Spot | | A Spot rate is the current market price of an asset. |
| • Spread | | The difference between the bid and the ask rate. |
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