Posts Tagged ‘Central Banks’

Day Trading Foreign Currency

April 18th, 2010 No Comments

Foreign currency trading is a high risk and high reward business. You need to devise strategies to make profits in the market on a sustained basis. Always remember that day trading in foreign currency is not the ideal way if you really want to have a long term perspective.

Day trading in foreign currency exchange is the same concept as day trading in securities markets. You take a short term bet on the price movements of various currencies in your portfolio. Thus you gain or lose depending upon the intra day fluctuations in prices of these currencies. Whether you are long or short at a particular point of time in a day depends upon your assessment of the likelihood movement of prices later on during the day. Let us explain by a simple example. Suppose you are short on Yen in the morning session of trading (meaning that you have sold yen at a price). It means that you expect Yen to decline further in the day so that you would be able to buy back Yen at a lower price and make a profit in the process. Here you are taking a bearish outlook of the market.

On the contrary, if you are long on Yen (meaning that you have bought Yen at a price), it means that you are bullish on Yen and expect it to rise further so that you will be able to sell it at a higher price and make money. Day trading foreign currency thus means taking a very short term view of the market and is fraught with risks and possibility of huge capital losses.

It is always advisable to have a long term outlook especially in the highly volatile foreign currency market. This way, you are not dependant on the vagaries of intra day shocks and expect your capital to build over a period of time. Have an assessment of economy, performance on inflation front, policies of central banks of the country and then take an informed decision, without worrying about short terms movements. A large number of traders have lost heavily while betting on day trading foreign currency. There is still no fool proof strategy which can shield you from losses if you are having an extremely short horizon.

If you really want to start in day trading, take smaller bets, just to have a feel of the market. Keep your stakes on a limited scale and close out as soon as you get a chance. Do not forget to place a stop loss position if you want to avoid carnage and scalp out at an opportune time. It is a high risk proposition and there are better ways to make money than day trading foreign currency.

When you get enamored by so called success stories of day trading foreign currency, remember that Rome was not built in a day. It takes time to build your fortune. Never allow greed to overcome reason.

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Forex Trading And Pricing Explained

April 13th, 2010 No Comments

I received the following question from one of my list members today:

“… you referred to the currency exchange cash market and the fact that this is basically a market between banks across countries. Does this mean that, for example, the EURO/USD exchange rate is set between the Federal Reserve and the ECB? Is that how a price is established without the benefit of any trading on any listed exchange anywhere else? Thanks for the brief education on this particular point.” – Stan Z.

The forex spot market is primarily an “interbank” market. That means the majority of the trading volume is done bank-to-bank such as between Citibank and Goldman Sachs, for example. This trading is generally done on behalf of banking customers such as multinational corporations, though the banks also trade with each other both to hedge their currency exposure and to take on trading positions.

This sort of market structure is the same as the one for most cash market government debt trading, such as that for US Treasury Bonds and the like. You can think of it like the over-the-counter market for stocks. Those trades don’t go through an exchange, but are done directly broker-to-broker.

In both forex and fixed income there are big players like hedge funds that take part along with the commercial and investment banks. The world’s central banks are also major participants at this level in their attempts to influence exchange rates (forex) and/or interest rates (fixed income).

The transaction sizes in the interbank market are large – generally $5 million and up. Obviously, the average individual trader is not going to be trading anywhere near that big. That’s where the online brokers and forex dealers come in to play. They allow small traders to do transactions in significantly lower amounts. In fact, there is at least one which will do trades as small as $1.

Here is where some folks get a bit nervous. Many of these forex dealers actually act as market makers with their clientele. By that I mean they take the other side of the trades that are done by their customers. This is something which can sometimes happen in the stock market as well, especially with OTC stocks. The concern that folks have with this is the implied conflict of interest in terms of price execution that creates. Is a dealer who will be taking the other side of your trade going to be acting in your best interest when you put on a trade?

While it may be true that some unscrupulous dealers may take advantage of their customers in that way, I am quite confident that most of them are not acting against their customers. They simply provide liquidity to the market and earn the spread to do so. When they have an excessive exposure to any particular currency, they offset it by hedging in the interbank market or with another dealer. That’s basically the same as a floor trader on any exchange.

Getting to the question of how prices get set, the market does that, not the central banks. Each individual bank and dealer is actually setting its own price. That might sound a bit strange in that it would create different rates all over the place. The fact of the matter is, however, that prices between dealers and banks are almost always going to be very, very close. There are services such as Reuters where dealer prices are aggregated and presented in data feeds, allowing everyone to know the current (and historical) market rates. Arbitrage trading keeps dealers from quoting prices too far away from each other.

There is also trading in the futures market, and the relatively new currency exchange traded funds (ETFs). The activity there, while only a small fraction of the global market volume, also contributes to keeping prices in line across the board.

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Forex Trading: Do You Have It In You

March 28th, 2010 No Comments

Forex is short for Foreign Exchange, where money from one country is exchanged for that of another or the simultaneous buying of one currency and selling of another.

When one deals in forex trading the profit or loss, he incurs is the increased or decreased value of an investment caused solely by currency movements. For example, if an investor thought that the US dollar was weak, he might purchase German Mark. The investor’s, the real profit or loss could then be in how the Mark moves against the US$.

Being the largest financial market in the world, the Forex market has a volume of more than $1.5 trillion daily. Also the Forex market, unlike other financial markets, has no permanent location, no central exchange and just happens Over the Counter. It operates through an electronic network of large banks, central banks, currency speculators, multinational corporations, governments and other financial markets and institutions. Retail traders are individuals who are a small part of this market. They participate indirectly through brokers or banks.

The foreign exchange market is unique because of its trading volume, the extreme liquidity, the large number and variety of traders in the market, its geographical dispersion, its long trading hours i.e. 24 hours a day and a host of factors that affect exchange rates etc.

Currencies are traded against one another. Each pair of currencies are traditionally noted as XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For example, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.

73 % of the forex trading is done by 10 top international banks. These large banks continually provide the market with both bid or buy and ask or sell prices. The difference between the price at which a bank or broker will sell and the price at which a broker will buy from a wholesale customer is called the spread. This spread is very less for actively traded pairs of currencies, usually only 1-3 pips. One pip is the smallest unit of price move used in forex trading. For example, if the currency pair EUR/USD is currently trading at 1.4000 and then the exchange rate changes to 1.4010, the pair did a 10 pips move. The pip is the smallest unit regardless of the fractional representation of the currency exchange rate. Thus, 1.3000 to 1.3010 is the same move in pips terms as 110.00 to 110.10 For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $1,000,000.

Whew! What a market!

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Forex Currency Trading – Frequently Asked Questions

March 5th, 2010 No Comments

What is FOREX?

FOREX stands for the FOReign EXchange market, which is an international financial market where currencies are traded. The foreign exchange market began in the 1970s and is now the largest financial market in the world, with an average daily turnover of US$1.9 trillion. That’s thirty times the amount of daily activity on all of the US stock exchanges.

Each Forex trade involves simultaneously buying one currency and selling another. For example, if you think that the Euro will rise relative to the dollar, you would place a Euro/Dollar trade. The forex system would then buy the Euro and sell an equivalent amount of the Dollar. Then, when you want to close your position, you would place a Dollar/Euro trade. This would buy the Dollar and sell the Euro. If the Euro had risen against the Dollar, you would make a profit, but if it had fallen relative to the Dollar you would make a loss.

What currencies are traded?

Most of the world’s currencies are available to trade, but the majority of market action involves a group of major currencies, including the US Dollar, the Euro, the Yen, the Swiss Franc and Sterling.

Where is the Forex market located?

Unlike most financial markets around the world, Forex is not centralized on an exchange. Instead it operates on a basis known as the interbank market or Over the Counter (OTC). As each Forex trade involves two reciprocal trades (buy one currency and sell another), these are conducted electronically with any broker who is willing to accept the trade.

Who can trade in the Forex market?

Traditionally, access to currency trading was restricted to banking organisations, including central banks, commercial banks and investment banks. That’s the reason it operates on a system known as the interbank market.

However, the number of non bank participants in the Forex market, which includes multinational companies, money managers, money brokers and private speculators, is growing rapidly. And thanks to the relatively small amount of capital required to open a trading account (often $500) Forex is opening up to more and more people all the time. If you’re over 18, have internet access the enough money to open a trading account, the world of Forex is open to you.

When is the Forex market open for trading?

As Forex doesn’t exist within a traditional exchange, it’s the only 24 hour financial market in the world. Forex trading begins every day in Sydney and then moves around the globe as the major international financial markets in Tokyo, London and New York open.

In other words, there are always traders somewhere in the world who are actively trading foreign currencies. This means you can make trades and respond to major social, economic and political events day or night. However, there is a short rest period from close of trading on the American financial market on Friday until trading begins in Australia on Monday morning. However, due to the time differences around the globe, this period only lasts for approximately 48 hours.

What is a trading margin?

Forex trades are made in lots of $100,000. If you had to provide that amount of money to cover your position before you could trade, the market would once again be restricted to banks and other institutional investors. So brokers have established the principle of margin trading. In effect they allow people to trade $100,000 blocks of currency if they can provide an element of security against potential losses.

For example, they may allow people to trade on a margin of 1% (in comparison, traditional stock brokers often require a 50% margin). This means that they can trade $100,000 blocks, provided their account contains at least $100,000 x 1% = $1000. One thousand dollars will protect the broker against any potential losses that their client makes (currency values rarely fluctuate by more than 1% in a single day). If a client’s account is reduced by losses (i.e. reducing the broker’s security below acceptable levels), the broker will close all trades and require an additional deposit before further trades can be made.

Trading margin allows people to control vast amounts of currency wiith relatively small amounts of capital (often 50, 100 or even 200 times the amount of capital that they have invested). This can lead to massive gains, but increases the risk of losing most or all of your investment capital.

How much does it cost?

Thanks to the trading margin offered by most Forex brokers, it’s possible to open an account and get started trading with a relatively small amount of capital.

Forex trades are made in lots of $100,000. However, most Forexs brokes will provide you with a leverage ratio of up to 100:1, which means that you have the ability to control a $100,000 trade with as little as $1000 in your account. Some brokers will provide leverage of 200:1 or even 400:1, which allows you to start with as little as $500 or $250 in your account.

However, please remember that although greater leverage allows you to maximize your profit potential, it also increases the risk factor. The higher the leverage ratio, the smaller trading fluctuation that will be required to wipe out your trading capital. So choose the amount of leverage that you use wisely.
For new traders, it may be safer to begin with leverage of 20:1 or 50:1. This will increase the amount that you need to open an account, but it will reduce the risk of seeing all your trading capital disappear due to a small shift in the value of a currency.

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Day Trading Forexmight Be A Bad Idea!

January 26th, 2010 No Comments

The Forex market has understandably become one of the most attractive and popular financial markets in the world. Operating around the clock via a decentralized network of central banks, investment institutions, hedge funds, and similar institutions, the Forex market allows traders to speculate on the movement of currency exchange rates. Players of the Forex tend to like these features most:

Round the clock actionthe Forex market constantly adjusts and is open 24 hours per day between Sunday and Friday afternoon.

Less problems with gap down (when price starts out lower than its previous ending price due to factors that occurred when the markets were closed)

Huge leverage (can get 1:100 margins)

High volume

Live trading (most traders are connected to the Forex market via an Internet platform that provides them with real time exchange rates)

Commission-free trades (but most brokers tend to get the difference between bid and ask price which tends to equal 3 to 5 tenths of a penny on most transactions)

While all of these are very attractive characteristics for any investor, the truth is that there are a lot of people who find themselves on the wrong side of a trend and suddenly in trouble because they try using day trading as an investment strategy. Day trading essentially boils down to making a series of short, small trades in hopes of making a quick profit. A rich idea with often a poor outcome.

People can and do make very good money trading on the Forex market but the most common trait of successful investors is the use of a proven investment strategy, patience, and using pre-determined stops after making certain to do your homework. The ability to understand the emergence and direction of trends through analysis is a common trait in successful Forex traders.

Because day trading often involves multiple transactions made in rapid succession in order to make a profit, it is very hard to properly analyze the days events and your charts. Day traders are more prone to fear-basic panic selling and other decisions that lose money and lower profitability.

Day trading is also not a good idea with the Forex market because transactions are almost always conducted at the very limit of the margins (typically 1/100, or $1,000 is all most investors have in a given Forex transaction of $100,000, or one lot of currency). Because of this, even small fluctuations in the wrong direction can and often do spell disaster for day traders.

Indeed, there are day traders out there claiming to make a good living trading Forex and they no doubt existbut they are rare. The volatile nature of the market, the lack of information, and the extensive use of margins in Forex all combine and make day trading possibly a bad investment strategyperiod.

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Automated Forex Trading

January 5th, 2010 No Comments

Long gone is the time when only banks and private institutions could trade the Forex market. Now, individuals have access to trade their own money, and lots of it. The exchange of foreign currencies has since been open to private investors, central banks like Bank of America, and several countries. But now with the introduction of the Expert Advisor trading systems, the smaller trader can now automate their trades like the big companies do.

The systems allow the user to set their own parameters and trading guidelines. The program consists of software that has been develeoped for a specific type of trading style, not everyone trades the same. Some spot trade, some trade big, some hedge and so on and so forth. The developers of these types of software take into consideration any nuances of Forex trading as well as being aware that the market is trading 24 hours a day, even during weekends.

Without these types of systems in place, the trader would have to monitor the pair that is being trades on a constant basis along with monitoring opening and closing times which is almost impossible to keep up with. By using the Expert advisors a trader can setup trading signals to make life a bit easier such as a type of order, stop loss, trade entry, news tickers etc.

Some of the key benefits of using an automated trading system is that it gives the trader full control, but cuts out the emotional bond a trader has with his money…making the temptation to trade on a whim a lot less likely. This takes the guesswork out of trading if the trader implements the right trading signals for this trading style.

The EA is a mathematical algorythm and it performs solely on formulas, so if the EA doesnt perform like it should it can be changed, augmented and tweaked until the trader finds the recipe for success that they are looking for. Then, this process is repeated constantly to achieve a money making strategy.

Trading also involves the trends of the market, be it long-term or short-term. These trends play a big role in the amount of trades that a trader is involved in. The EA, if setup correctly, will take these trends in-stride and make the trades accordingly, minimizing the drawdown or losing trades. Using historical data, traders can analyze and test their trading theories and strategies, some EA’s have a built-in function to record such data.

Almost every expert advisor system being developed now is made using the MetaTrader 4 platform since it provides reliable historical data that you can download from their site or any other, multilanguage support, solid and user-friendly interface.

Automated expert advisors are becoming the tool of choice for many traders and companies around the glode, most are free, but the ones that really rake in the money you have to pay for. You get what you pay for.

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A Short Explanation Of Buying and Selling In Forex

December 24th, 2009 No Comments

A Short Explanation Of Buying and Selling In Forex Trading.

These days everyone is talking about a new profitable activity called Forex trading and the great opportunity this activity represents for people willing to brake free from the corporate world and start working from home or any where else without losing their current lifestyle and even improving it.

Most experienced traders consider that the best and most profitable of the capital markets is the Forex market. For many years Forex trading was the sole domain of major banks, large financial institutions and countries central banks; for example the U.S. Federal Reserve Bank. But these days, thanks to the internet the market has been opened to everyone willing to learn the best techniques in forex trading and with the intention of making substantial profits as the institutions mentioned above that annually and consistently make pretty high profits from trading in the Foreign Exchange market.

You have many advantages when trading the forex markets, for example; you don’t have to worry about fees you may have to pay to your broker; there are also none of the usual fees to which futures and equity traders are accustomed to pay always; no exchange or clearing fees, no NFA or SEC fees.

The forex market has five major currencies: US Dollar, Japanese Yen, British Pound, Euro and the Swiss Franc. It is due to their great popularity in world’s commerce transactions and its high activity that these five currencies account for over 70% of North American trading. Of course there are other tradable currencies; they include the Canadian, Australian and New Zealand Dollars. These minor currencies account for 4% – 7% of the total market volume. Together, all this five majors and minors currencies constitute the backbone of the Forex market.

The concept of Buying in Forex refers to the acquisition of a particular currency pair to open a trade and Selling short refers to the selling of a particular currency to open a trade, i.e, just the opposite. When you Buy, you are expecting the price of the currency pair to increase with time, i.e., you buy cheap to sell high; which is easy to understand. In the case of Selling short, it looks a bit more complicated. Here the way to make money is to initially sell a currency pair that you think will lose value in a given period of time and then, once it happened, you will buy it back at the new price but now you can sell it at the previous greater price the currency had when you opened the trade, so you earn the difference in prices. It may seem kind of tricky when you are starting, but once you are in front of your trading station it will look much simpler.

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A Guide To Choosing The Right Forex Trading Software

December 20th, 2009 No Comments

Foreign exchange trading, in the way that we know now it, would not exist if it were not for the rapid development of forex trading software. These software packages allow forex traders to work from their own personal computers and to interact with the large trading platforms that actually oversee and place forex trades. In addition to being the tool that traders use to complete their deals, many of these software packages also contain multiple sources of information that investors will find very useful. Everything from current pricing to performance history can be looked up in short order using forex trading software.

Quick fact : The Forex market is by far the largest financial market in the world, and includes trading between large banks,central banks, currency speculators,multinational corporations, governments, and other financial markets and institutions.

One site that offers their own version of forex trading software when you open an account with them is forex. com. This custom designed software is widely used and has a high rate of customer satisfaction. The site’s customer service center is open 24 hours a day Monday through Friday (basically when the worldwide forex markets are open) so that you can address any issues that you may have immediately. Experienced forex traders know just how costly down time can be, so it’s important to have someone to turn to immediately should any problems occur.

Did you know that the average daily trade in the global forex markets currently exceeds US$ 2-2.5 trillion !

Another great website that offers free downloadable forex trading software when you open an account is gftforex. com. The software they make available to their clients is called Dealbook360. This state of the art trading software is simple enough to allow even beginning forex traders to feel comfortable but powerful and comprehensive enough to keep even the most demanding foreign exchange traders happy and satisfied . In addition, Dealbook 360 monitors some of the tightest bid/buy spreads available, thus increasing your profit margins.

One web site that you may find exceedingly helpful is fxstreet. com. The creators of this page have made a running list of all of the major trading platforms and the banks that support them. Additionally, the software packages utilized by each company are listed here. This information will allow you to choose your institution based on software if you feel more comfortable with one program than another does. This site also provides information on which sites offer the best customer support. Whether it’s online support, phone support, or even live support, you can find out what is available as fxstreet. com.

You will find that most forex trading software is similar in design and function. The features that separate good from bad are the support features that each forex trading company offers with its trading software. Before you choose a foreign exchange trading company to use, make sure that you do plenty of research on all of the companies that you are interested in. Take advantage of the investment simulators that each offers on its site and get a feel for how the forex trading software works in real time. Read consumer reviews to see other forex trader’s opinions and experiences with a given company. Check to make sure that their customer service record is reliable and prompt.

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6 Advantages Of Trading Forex

December 18th, 2009 No Comments

Forex is the popular term for foreign exchange markets. The banks and brokerage firms are linked via electronic network to do business in the stock markets. The network allows them to convert currencies worldwide.

It became the chief and largest liquefied financial market around the globe. Take for instance, the volume of dollar currencies can rapidly increase in trillions of dollars within a day in currency markets. It even goes beyond the total volume of the total equities in the U.S. as well as future markets.

Forex trading is dominated often by commercial banks, investment banks, and government central banks. This is the main reason why many private investors are dealing on currency exchanges. They find it easier to access the market through technological innovations such as the internet.

It also provides the needed information in the stocks market regarding trading forex. The currencies which are widely traded include British Pound, US Dollar, Japanese Yen, Swiss Franc, Australian Dollar, and Canadian Dollar. Forex trading is done 5 days within a week and the traders can have constant access to various dealers all around the world. The trading does not mainly focus on any exchange or physical location and the transaction happens between two persons via electronic network or a phone line.

Forex trading has grown rapidly on the global market. The restrictions on the flow of capital have even been put off in various countries. This factor leads to market independence settling the forex rates on its perceived values. There are different reasons why forex trading is very popular. It include utmost liquidity, available leverage, lower trading costs.

There are different advantages of forex trading in the stock markets. Traders are making bigger sums of money by selling and buying foreign currencies. However, some people might ask of its advantages on the stock market.

1. Liquidity. Forex market can handle transactions even if it reaches 1.5 trillion dollars every day. Take note, this is a very large volume. It only denotes that sellers and buyers are always available regardless of the currency types. So, if the trader wanted to buy, there is always an available seller, and if the trader wanted to sell, there is always an available buyer.

2. There is no insider in the trading systems. Remember, constant value fluctuations of several currencies are caused by economic change. Some traders may obtain the information before others get it. So, they can sell or buy it within the stock markets. However, the nations economy is accessible to every trader so nobody can take an inside advantage to anyone.

3. It has accessibility. It is operational for five days within a week and accessible for twenty four hours. Trading can be made during this period.

4. It has more predictability. It always follow the market trends even the trends that are well established.

5. It can allow smaller investments. The potential traders can open mini accounts even for a few bucks of dollars. Forex trading has high leverage which is around 100:1. It only signifies that your assets can be controlled 100 times over your invested money.

6. It has no commissions. The forex trading brokers can earn money through setting their spreads where they weigh the process between selling and buying currencies.

Forex trading can be one of the best systems in day trading. Since it deals with currency trades, it can have the largest volumes of trading. Although it can be labeled as high risks trading systems, it can bring the traders higher returns within minutes.

However traders should be aware that forex trading needs a thorough research before starting it. Never confine yourself with only one source. Always make it a part of your plan to research first before engaging yourself in the real forex trading. It is not enough to know its advantages. As a trader, you need to clearly understand the systems involved in forex trading. It is helpful if you read the latest forums posted in the community boards.

It is also important to find the best forex trading systems. In this manner, you can incorporate a course, software, or method developed by forex trading experts. Take note, there are various system types that are available. It is important to find the right system that will fit in your goals in the industry of trading forex to achieve success.

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