sn world forex

Technical analysis

2009-08-29T13:48:00.000-07:00

About Technical Analysis

The aim of technical analysis is to forecast price trends in future basing on the historical data along with the one of the volume. Technical analysts are sure that any fundamentals and even expectations have affection to exchange rates changing being the factors of the market. Any private investor can have an access to the technical analysis tools in order to compute his or her trading decisions. Though, we can not state that these tools figure out unreliable estimations. Technical analysis has been in use for centuries, that's why its premises are based on the experience, prolonged observation and can be considered quite reliable. Japan traders started using the technique of candlestick which is still popular in the 18th century, so, it is thought as the oldest one.

The end of the 19th century gave birth to the Dow Theory that used the writings of Charles Dow, who was an editor and co-founder of Dow Jones. Recent decades gave a number of new tools along with the amelioration of the old ones that was caused by the development of computer-based technologies.

There are three suppositions laying at the basis of technical analysis:

Everything should be considered at the market movement;

Price movement has a purpose;

History is to repeat its occasions;

Relying on these statements, technical analysis can be described as the mathematical analyzing of historical data and carrying out price forecasts.

The technical analysis is aimed at the fact that there is a certain direction or a chart pattern for the price movement, but not at finding out the reasons of such movements, like complicated business environment, low earnings and level of management and other fundamental factors. Anyone can gain the profit by posing himself in the trend direction, from the point of view of technical analyst. In the uptrend situation you should consider a buy decision, whether if the downtrend occurs you should try to sell. Technical analysts use different patterns in order to create the a price chart that will suit the future market and the price would follow the pattern.

Forex Trader should consider technical analysis as a key factor for success. Technical analysis basic overview is historical market prices analysis for the purpose of predicting price trends or having an adequate picture of prices movement in future. The concept of Forex Technical Analysis is made up of mathematical equations along with other technical applied towards Forex prices. Deep knowledge of the Forex Technical Analysis techniques is required for profitable dealing with Online Forex Market. The traders using technical analysis invest their money thoughtfully and monitor the daily prices movement precisely that lets them reach the profit. You can choose some basic technical indicators offered at our Forex Technical indicators page among lots of other ones. You should keep in mind that theoretical knowledge added to the thoughtful strategy gives the key to good results and positive trading. You shouldn't ever use the methods you understand not clearly. There is always a choice from a number of methods offered, so you can use the one you are good at and invest adequately for successful Forex trading.

Rate of change (ROC)

2009-08-29T13:39:00.000-07:00

Rate of change (ROC)

The margin between the present price and the one that existed n-time periods ago is indicated by the oscillator called theRate of Change. ROC increases when the prices trend up whether it declines when they trend down. The scale of the prices changes calls the corresponding ROC change.

Overbought or oversold at the short- and long-term periods are perfectly shown by the 10-day ROC. The more security is supposed the higher the ROC is though the ROC decline shows the approaching rally. This indicator should be monitored during the trade in order to find out the start of the market changes. The current trend may go on in case the overbought or oversold indicators take dramatic values and the overbought market may keep its trend for a while as well.

The ROC (Rate of Change) Indicator is a difference between the price of the current period and the price of the previous period, which is located n periods back from the current one:

ROC = P_i - P_i-n,

P_i - the price of the current period,

P_i-n - the price of the period, which is located n periods back from the current one.

As usual, they use the relative (in percentage) value of the velocity of the ROC:

ROC% = 100% * (P_i - P_i-n) / P_i-n

A 10-day ROC tends to oscillate in a fairly regular cycle. Often, price changes can be anticipated by studying past cycles of the ROC and applying the predicted pattern to the current market.

To construct a 10 day rate of change oscillator, the latest closing price is divided by the close 10 days ago:

ROC = [ (Close-Close 10 periods ago) / (Close 10 periods ago) ] * 100

Taking into consideration the fact whether the As Percent parameter is chosen the Rate of Change can be equal either to the Change in Value function or to the Percent Change in Value function. Despite these variations, the function gives the information of the data volume changes that have happened during the certain period. The easier graphing of the Percent Rate of Change value is reached by its multiplying by 100.

The margin between the present price and the one that existed n-time periods ago is indicated by the Price Rate-of-Change. It's values can be represented in points as well as in percents. The same data, though incarnated as a ratio, is shown by the Momentum indicator.

The sinusoidal motion of the security prices first rising and then declining is a common fact. The bulls' and bears' resistance causes the expectations changes that are the reason for the wave-like pricing.

The ROC measures changes in prices amount during the certain time and represents it as an oscillator showing the cyclical movement. The ROC increases along with the prices uptrending and it decreases when the prices go down. High prices changing gives the according significant ROC changing.

Various periods of time are applied for the ROC calculation. They are from the daily volatile chart that is taken of 1 day to the long period lasting up to 200 days and even more. 12-day ROC as well as a 25-day one are the widest spread for trading at short and medium periods. Gerald Appel along with Fred Hitschler have offered these periods in their book, Stock Market Trading Systems.

Short- and medium-term oversold or overbought are perfectly shown by the 12-day ROC. The security is supposed to be highly overbought if the ROC is high, whether a rally is expected in case the ROC is low. Though waiting until the market turning up or down is not always the best way out as far as an overbought market keeps its trend for a while. Moreover, high overbought or oversold figures mostly show the present trend to keep its positions.

The back and forth cycles are quite common for the 12-day ROC. That's why the prices can be forecasted by analyzing recent cycle movements.

Forex article

2009-08-27T17:07:00.000-07:00

What is Rate of Change (ROC) and How To Compute It?

Rate of Change or ROC is a technical indicator that measures the changes between the percentage compared to the most recent price and the price "n" periods in the past. It is also said that it monitors the momentum of the market. It estimates the market’s rate of change comparative to the previous trading intervals. In the highest level, the indicator might say a market is quite overbought. Valleys or troughs also points out an oversold market situation.

It can also stand alone as an essential indicator used by many technicians interested in market momentum. It has a horizontal median called equilibrium. It is this median that tells us everything we need to know about this type of rate. A few technicians in the market often use a very simple approach for the Rate of Change learning. It is concern with buy and sells signals based upon the zero line or the midpoint. This presumes oversold or overbought market conditions which pave the way of crossover. You may sell when the rate of change line go across from above to below on the other hand you may buy when the indicator intersect from below to above.

It trades with price changing amount during the exact time and match to it as an oscillator that shows the cyclical movement. It goes up along with the prices up-trending and it decreases when the prices go down. If prices go high, changes gives the according significant rate changing.

Mostly, it is best to use this indicator as an antecedent to change in market direction. One good thing to do is to establish extreme zones for the study, much like the Relative Strength Index or Stochastic. However, a good technical analyst must know how to tolerate the study in extreme bull and bear markets. It can generate many sham signals under those market conditions. In addition, the indicator is parallel to an oscillator when it comes to the market accelerating or decelerating.

To compute it, here’s a good example:

Period (10) - the number of bars, or interval, used to calculate the study using the value you specify, it may be computed as the change from the current price relative to the price from the number of specified intervals prior to the current price.

The general formula is as follows:

ROCt = (Pricet / Pricen) * 10000

ROCt is the rate value for the current period. Pricet is the current price. Pricen is the price you specify for the nth interval (open, high, low, close, midpoint or average).

Take the example below which use current price of 7485 and a 7440 price n intervals ago:

ROC = (7485 / 7440) * 10000 = 1.006 * 10000 = 10006

There is a tendency to loss in futures trading. Past results on the other hand are not analytical of future results.

It may also be calculated by using the following formula:

(Closing Price Today - Closing Price "n" Periods Ago) / Closing Price "n" Periods Ago.

Forex article

2009-08-27T17:03:00.001-07:00

The Value of Trade Balance to Local Economy

The balance of trade also referred as trade balance, which sometimes is symbolized as NX, is the difference of the monetary value of imports and exports in one economy in a given period of time. The balance of trade is considered the biggest part of a country’s balance of payments.

Imports, domestic spending, foreign aid, and investment abroad are called debit items while credit items includes exports, foreign investments in domestic economy and foreign spending in domestic economy.

A trade surplus is a positive balance of trade which is consists of more exporting than importing. A trade deficit is the negative balance of trade or sometimes called a trade gap. The trade balance can sometimes be divided as services balance and goods balance just like in the United Kingdom which they use the terms invisible and visible balance.

The balance of trade is a part of current account which includes transactions that includes income derived from international investment and international aid. Thus, if the current account comes as a surplus then the nation’s international net asset increases also while deficit will decrease the international net asset.

A good trade surplus is achieved when a country exports products more than buying imported goods. A trade deficit is eventually experience as a result of the opposite of a trade surplus. The trade balance is alike to the difference of a country's output and the domestic demand. These factors may affect the trade balance: prices of goods manufactured, taxes and tariffs, trade agreements, business cycle (home or abroad), and exchange rates.

The trade balance is different in many business cycles. For instance, export growth like oil and industrial goods which improves when there is economic expansion.

In developed countries like; Japan, China and Germany usually run at trade surpluses in which they experience a higher savings rate. Around the world there are different natural resources which a country may have for instance, countries from the coastal regions are major producers of fish, Canada can be a major producer of lumber because of its huge forests while in the Middle East, has the most oil reserves.

International trade is important so in order to sustain the balance of trade. A country should be totally self sufficient without international trade. Through international trades, each country will have the opportunity to produce specialize goods efficiently. In relation, when a nation specializes in producing these goods, the total production increases instead of trying to be self sufficient. Nations will benefit from international trades and also meets their needs. Generally, nations will trade to other nations when they gain from the trade. But the gains are not usually equal in terms of benefits and profit

Forex article

2009-08-27T16:59:00.001-07:00

What is a Transaction Cost and How to Calculate It?

In economics, transaction costs are the rate acquired when making an economic exchange. This costs incurred when buying or selling securities or stocks. This is also referred as transaction fees. Transaction costs also comprise of brokers’ commissions ad spreads (difference between the price that the dealer paid for a security and the price it may be sold. This is what the broker or bank produce for being a middleman in a transaction.

For instance, most people when buying or selling a security or stock, pays a commission to their broker and that commission can be considered as the fee or transaction cost for doing that stock deal. When evaluating a potential transaction, it is crucial to think about these costs that might prove significant. Mostly, in financial markets, the initial cost for these transactions is commission which is paid to brokers upon trade execution. This costs becomes increasingly important the shorter the holding time of an investment.

Many market models disregard transactional costs, presumptuous instead those markets are non resistant. While this thought is invalid, for many applications such costs are low enough that they can be disregarded. The lesser the cost for a transaction, the more effective and competent a market is said to be. The Foreign exchange market and stock market have lower costs for such transactions of any major asset class.

It is considered to be much more cost- efficient to trade in Forex in terms of both commissions and transaction fees. An online website for example charges no fees or commissions and at the same time offer traders an access to all relevant market information and trading tools. On the contrary, online stock trade commission ranges from $7.95 - $ 29.95 per trade and up to $100 or more per trade with full service brokers.

Another thing to consider, which is an important point is the width of the bid / ask spread. Regardless of the deal size, foreign exchange dealing spreads are normally or common in 3-4 pips (anyway a pip is .0001 US cents) in the major currencies. Generally, the width of the spread in a foreign exchange market transaction is less than one tenth (1/10) that of a stock transaction, which could contain a .125 or one eight (1/8) wide spread.

Since transaction costs are paid via bid/ask spread, there has to be no charges to trade or hidden fees. There are instances that there would be extra charges asked by good brokers for some non compulsory services or access to particular reports. A smaller spread is visibly better. Since brokers are taking the other side of all the customer trades, brokers gain profit by making the spread between the bid and offer prices. You may find that find spreads vary by broker.

In order to be successful in trading on the foreign exchange market, you have to find a good broker.

Forex trading article

2009-08-27T16:51:00.000-07:00

How Interest Rates Play a Role in the Currency Markets

Interest rates play the foremost important role in moving the prices of currencies in the Forex market. As the institutions that set interest rates, central banks are therefore the most influential factors. Interest rates dictate flows of investment. Since the currencies are representations of a country’s economy, differences in interest rates affect the relative worth of currencies in relation to one another. When central banks change interest rates they cause the Forex market to experience movement and volatility. In the realm of Forex trading, accurate speculation of central banks’ actions can enhance the trader's chances for a successful trade.

An increase in interest rates encourages traders to invest within that market and causes the demand for the currency to rise. As demand rises, the currency becomes scarcer and consequently more valuable. Investors are drawn to the currency, causing it to appreciate, because they will gain a higher yield on their investments, as in the Jane example. In order to purchase the country's assets (stocks or bonds), Jane will have to convert her domestic currency to the target country's currency also increasing demand. Conversely, a fall in interest rates discourage investors from purchasing assets in that particular economy, as the return on their investment is now smaller. The economy's currency will depreciate as a result of the weaker demand.

Forex guide

2009-08-27T16:00:00.000-07:00

Guide to the Best Forex Resources
Forex market is the biggest financial market in the world. Moreover, currency trading is one of the fastest growing forms of investing.
Here’s how to find information and resources to deepen your knowledge about the fast and exciting world of foreign exchange and how to use it for trading purposes.
Internet has changed the way people view forex markets. No longer are the best currency analyst reports unavailable to the public, live real-time data too expensive for common investors, or capital requirements too high.
In fact, many companies have introduced mini forex accounts, with starting capital requirements for selected accounts in some brokerages under $1000. These smaller accounts have made currency trading available to everyone, increasing the need to be educated on forex and currency trading.
Ways to Learn About Forex Markets
There are many ways you can learn about forex markets. If you’re a business student, many universities have classes in foreign exchange operations and macroeconomic mechanisms that affect currency fluctuations.
Outside of the formal education field, you can learn about forex and currency trading from traders, salespeople, and analysts. Moreover, you can learn foreign exchange operations from educators through specifically arranged seminars, courses, and mentoring.
And don’t leave out forex magazines and books for background information and latest news to keep you ahead of the curve.
Forex Trading Systems and Solutions
Once you’ve covered the basics of foreign exchange operations, you might also want to know the ways currency trading is done, through brokerages, forex trading systems, and with different currency trading systems.
The tools and services you’ll need for you own forex trading or operations will depend on your particular approach to forex.
In fact, many corporations do not want to take any risks with forex fluctuations and will hedge their positions. Others, traders and speculators, seek to profit from the fluctuation with their systems and views.
From this site, you’ll find information on resources that will help you understand better the complex world of investments for forex markets and currency trading.

Pound Moves up Cautiously as Risk Aversion Declines

2009-08-27T15:23:00.001-07:00

Pound Moves up Cautiously as Risk Aversion Declines

Since touching a fresh 24-year low in the beginning of March, the British Pound has recovered strongly, rising 5% against the USD in a matter of days. Analysts are at a loss to explain the sudden strength of the Pound, outside the confines of the safe-haven hypothesis: “The risk premium that sterling has taken on works both ways, and you can see sterling outperforming whenever risk appetite picks up.”

As another analyst points out, however, ascertaining the role of risk aversion in the markets has become somewhat circular: “Observers…draw this assessment purely from price action. Rising equities means the market is less risk averse. And the way we know there is less risk adversity is that the stocks have rallied.” Applying this argument to forex, softening risk aversion is contributing to a stronger Pound. At the same time, observers point to the rising Pound as a signal that risk aversion has softened. In short, the safe-haven trade is surely not the most convincing explanation.

In fact, by all accounts, the Pound should be falling. The latest data shows thatretail sales plunged by 1.9% on a monthly basis. GDP is projected to fall to such an extent that “in 2009 Britain will slip to 12th place (from 7th in 2007) among the 15 ‘old’ members of the European Union, behind all except Spain, Greece and Portugal.” Meanwhile, the Central Bank of the UK has warned that Britain’s government finances have become so fragile that the government will have difficulty carrying out new spending plans. Investors have taken note, and demand for the latest auction of UK government bonds is believed to be the “lowest in history.”

Given all the bad news, perhaps the Pound’s recent rise can be best attributed totechnical factors. “The $1.45 level represents so-called resistance on a descending trend line connecting the January high of $1.5373 and the February peak of $1.4986.” Given that the Pound has since sunk back below $1.45, it can be reasonably discerned that a cluster of sell orders were executed at this level.

Over the longer-term, the prognoses for the UK economy generally, and the Pound specifically, are not good. Thanks to a low exchange rate, inflation is actually rising. It is perhaps a welcome development, since it indicates that the UK was (temporarily) averted deflation, but it could also be a product of the quantitative easing plan announced earlier this month, whereby the Bank of England will flood the banking system with newly minted money. “Such a tactic can dilute the currency, and the perception that such dilution is about to occur is dragging the Pound down right now.”

A Guide to Forex Leverage, and Employing it Safely

2009-08-27T15:12:00.000-07:00

A Guide to Forex Leverage, and Employing it Safely

You have probably seen the advertisements - “Trade Forex with 400:1 Leverage” - without being entirely clear as to what exactly these brokers are offering and/or wondering why someone would want to leverage trades to such an extent.

Simply put, forex leverage (also referred to as margin) “is a loan that is provided to an investor by the broker that is handling his or her forex account.” With leverage, you can effectively increase your purchasing power, and buy securities in excess of what you would otherwise be able to afford, with the goal of maximizing relative returns. For example, if you achieve a 25% return on a $2000 trade/investment that was carried out with 2:1 leverage, you actually achieved a 50% return on the $1000 of capital that you personally invested; the other half, by implication, was provided in the form of a loan by the broker. Of course, the inverse also holds, such that a 25% loss would be magnified into a 50% loss, under the same parameters. See the table below for further understand this “multiplier effect.”

While traders can theoretically use margin to trade any kind of financial instrument/security, leverage is especially common in forex. The reason is that currencies are typically bought and sold in units of 50,000 - 100,000, which is more than retail traders can afford, or are willing to commit. Moreover, currencies are not as volatile (outside of the credit crisis, that is) as other securities, and typically don’t fluctuate more than 1% in a given day. Changes are often so minuscule that 1/10000 of a unit (one Pip) has become the benchmark for measuring fluctuations. Accordingly, “currency transactions must be carried out in big amounts, allowing these minute price movements to be translated into decent profits when magnified through the use of leverage.”

Leverage allows traders to put up only a fraction of the capital required to make a given-sized trade ; with 200:1 leverage, for example, $500 would be enough to fund a $100,000 trade. Unfortunately, leverage always favors the broker, much the same way that casinos benefit on average from extending credit to gamblers. According to one especially cynical commentator: “The game basically works this way: The broker is the shark. The retail trader is the shark food. If you want to make money currency trading, give yourself a fair chance and our advice is not to go more than 10x.”

A browsing of forex chat rooms and message boards reveals a surplus of disaster stories involving leverage, such that one can safely conclude that excessive leverage almost invariably leads to excessive losses. This lesson even seems to apply to institutional investors, despite the perception that they have an edge when trading forex, and hence would seem to represent excellent candidates for making leveraged trades. In the context of the current economic quagmire, “Investment banks were trading with 40:1 leverage in some cases. The banking crisis in the US was caused by banks not buying based on solid fundamentals and using insane leverage to buy securities.”

When trading a strategy that is based on technical analysis, “Even though you find one with 80-90% successful system on the paper, when you trade it usually come down 60%. So if we are losing at 40% of the time it is essential that we control risk.” Accordingly, putting more than 3% of your capital at risk on a given trade would seem suicidal. Applying more than 20:1 leverage (which seems trivial compared to 400:1) is very dangerous when you consider that a relatively benign 25 pip decline would result in a 5% loss. You can use the matrix below to calculate a “worst-case” scenario and figure out how much leverage you can get away with in the event that your trading strategy fails on consecutive occasions. It is surely much lower than you expected!

To give you an idea as to how excessive forex leverage has become, consider that the Financial Industry Regulatory Authority (FINRA) recently submitted a proposalthat would prevent retail forex brokers from offering customers more than 1.5:1 leverage. While it’s possible that “The FINRA proposal sadly appeals to the lowest common denominator: the people who over-leverage positions with inappropriate stop-losses,” it nonetheless serves as a testament both to the danger of excessive leverage and to the importance of adequate risk management.

Is Gold a Hedge Against Inflation and Currency Weakness?

2009-08-27T15:10:00.001-07:00

Is Gold a Hedge Against Inflation and Currency Weakness?

Until the Fed announced an expansion of its quantitative easing program two weeks ago, gold had begun to fade into relative obscurity. Sure, gold had risen in value from a low of $710/ounce back up to $900/ounce, but prices were still off 10% from the highs reached in 2008. Meanwhile, risk aversion had begun to decline and the stock market had begun to rise, such that pundits were talking more about stocks and less about gold.

Since the Fed’s announcement, however, gold has been thrust back into the spotlight. The same trading session that saw a record fall in the Dollar and a record rise in Treasury prices, also witnessed a 7% spike in gold futures prices. ” ‘Money is being pushed into the system and that’s creating the inflationary threats that the markets are contemplating…Commodities are a decent way to hedge against that potential threat,’ ” observed one trader.

Other analysts, however, caution that rising gold prices are a sign of the fear/crisis mentality, not inflation. “There are just not a lot of alternatives for global investors. You will see more and more investors moving into gold as a safe haven, and you will see more institutions putting money into commodities indexes.” In other words, gold is being driven by the safe-haven trade, which is evidenced by an increasing correlation with Treasury bonds. One commentator calls it a hedge against uncertainty: “The demand for gold is for gold coins, a massive flurry of bullion buying by ETF’s (and investors), and the institutions and traders buying the hell out of it. The reason is simple… pure fear.”

With the exception of the perennial gold bulls and conspiracy theorists, the short-term consensus is that due to “massive spare capacity now opening up in the global economy, soaring unemployment and a dysfunctional banking system – it would be very hard for central banks to generate a surge in inflation even if they wanted to.” This analyst further argues that the Fed is undertaking the expansionary program under the implicit assumption that it will have to siphon this money out of the financial system, if and when the economy recovers.

Of course, there is not even a consensus that gold is a good hedge against inflation.Mike Mish points out that the correlation between the

money supply and the price of gold is not very robust. When examined relative to a basket of currencies (rather than the Dollar), however, the relationship suddenly becomes much stronger. Especially when you filter out fluctuations in the value of the Dollar (which is affected by many factors unrelated to inflation), “gold is doing a reasonably good job of maintaining purchasing power parity on a worldwide basis.” This can be seen in the following chart:
Ascertaining a relationship ultimately depends on the time period of analysis, and the currency(s) in which prices are being tracked. Given also gold’s notorious volatility, it probably makes sense to use special inflation protected securities, rather than gold, as an inflation hedge.

Investors Wade Cautiously Back into the Carry Trade

2009-08-27T15:02:00.000-07:00

Investors Wade Cautiously Back into the Carry Trade

Yesterday’s post on the resurgence of the Australian Dollar largely ignored a broader trend in forex markets: the return of the carry trade. This strategy, which involves borrowing in low-yielding currencies, and selling them in favor of higher-yielding ones (such as the Aussie) is making a comeback, as risk aversion ebbs and investors resume the search for yield. As Bloomberg News outlined in an excellent piece on the subject, “Stimulus plans and near-zero interest rates in developed economies are boosting investor confidence in emerging markets and commodity-rich nations with interest rates as much as 12.9 percentage points higher.” [Chart below courtesy of the WSJ.]

Technically, the change in investor sentiment has already been manifesting itself (in the form of higher asset prices) for a couple months. In reality, it wasn’t until Goldman Sachs published a report entitled “Time to Reconsider Carry” on April 8 that analysts began to specifically focus on the decline of risk aversion in forex markets.In the report, GS argued that “There are increasing signs that FX volatility has peaked” and “The conditions are about to fall in place to make carry strategies attractive again.”

The point is well-taken when you consider the paltry yields offered by the Euro, Dollar, and Yen, for example, combined with the fact that these currencies are now expensive, relative to a few years ago. “Borrowing U.S. dollars at the three-month London interbank offered rate of 1.13 percent and using the proceeds to buy real and earn Brazil’s three-month deposit rate of 10.51 percent rate would net an annualized 9.38 percent,” according to Bloomberg.

Investors could theoretically choose between any of these currencies, as well as the Swiss Franc, Canadian Dollar, and British Pound, all of which are backed by benchmark interest rates less than or equal to 1.25%. Ironically, the New Zealand and Australian Dollars- which could still be considered candidates for the long side of a carry trade - now feature interest rates well below those of the US and EU when they were at that their peak in 2008. This gives you an idea just how far rates have fallen since the inception of the credit crisis. It looks like the Yen has emerged as the favorite among the spectrum of funding currencies. The Yen makes a good choice because inflation and interest rates are extremely likely to remain close to zero for the foreseeable future.

The hard part is choosing which currency to go long. A summary of interest rates for actively-traded currencies reveals several yielding more than 10%. “Goldman Sachs recommended on April 3 that investors…buy Mexican pesos, real, rupiah, rand and rubles from Russia.” Bloomberg meanwhile pointed out that “An equally weighted basket of currencies consisting of Turkish lira, Brazilian real, Hungarian forint, Indonesian rupiah, South African rand and Australian and New Zealand dollars — bought with yen, dollars and euros — earned an annualized 196 percent from March 2 to April 10.” Standard Chartered Bank, meanwhile, recommends the Indonesian rupiah, the Indian rupee and the Philippine peso. Investors not wanting to trade forex directly can buy the iPath Optimized Carry Trade Fund (ICI), an ETN which trades on the NYSE Arca exchange.

During the run-up in asset prices that preceded the current downturn, investors could count on stability, maybe even appreciation in riskier currencies that constituted the long end of their trades. This time around, such an assumption is not wise. One analyst warns investors not to be “caught short on the unwind.”

Risks also need to be evaluated specifically to the currencies on the short and long ends of the trade. In analyzing the worth of the Brazilian Real as a long currency, one analyst notes that, “Lower commodity prices, a sudden dive back to safe haven currencies and fluctuation in inflation numbers all have the potential to squeeze the spread on carrying the real.” On the flip side, there is a risk that rates will increase for the funding currencies, although probably not for at least the next 12 month, if not longer.

Volume Surges as All Eyes Turn to Forex

2009-08-27T15:01:00.000-07:00

Volume Surges as All Eyes Turn to Forex

Everyone has heard the cliche that currency markets are the most viable because there’s no such thing as a bear market; a decline in one currency must necessarily be offset by a rise in at least one other currency. This truism has taken on a new significance in the context of the credit crisis, where sell-offs in virtually every other asset class has sent investors scrambling in search of yield. Despite even the current rally in stocks and commodities, forex volume is surging.

Aggregate forex data is essentially nonexistent, and also unreliable since its based on surveys rather than actual numbers. But anecdotal evidence from the major players in forex suggests that interest has exploded. “Volumes on dbFX, the online retail trading platform from Deutsche Bank, increased 37% in the first quarter of 2009 from the same period a year earlier. ….particularly impressive given sharp volume gains in October, at the height of market fears, when retail investor interest spiked due to intensified volatility.”

Ironically, the increase in retail forex trading has coincided with a relative decline in institutional trading, as banks collectively make an effort to get back to their roots of providing financial services and move away from position-taking. “The crisis has also led many houses to disable algorithmic trading models, which had been big volume drivers.”

Japanese retirees were probably the first, or at least the most famous, mainstream group to trade in the currency markets. They famously used the carry trade to bet against the Yen. When this strategy imploded, it was left to investors from other countries to pick up the slack. “Contracts for Difference (CFD) providers [in Australia] are noticing the shift. Many newcomers to CFDs, they say, are overlooking margin trading over shares for the prospect of trading currencies instead.”

Equity traders are also starting to pay attention to forex. The Dollar’s recent volatility has effected significant changes in corporate profitability. For companies that are export-oriented and/or are net buyers of commodities, the strong Dollar has provided a windfall. One analyst added, “Travel and leisure companies will also benefit from the weak dollar as this means that travel is now more affordable for foreigners.” If and when the Dollar recovers, companies that do business overseas are poised to reap the benefit.

For novice forex traders, the most important decision involves choosing a trading approach; “The type of forex trader you are will determine how frequently you trade, the type of currency pairs you choose to trade, the charts you use, and even the strategies that you employ to make money on the markets.” Generally speaking, day traders churn their portfolios daily, and hence stick to the most volatile currency pairs. Swing traders typically hold positions from one day to several weeks, and rely on a combination of technical and fundamental analysis.

Position traders, in contrast, don’t worry about “short-term market movements like the day trader or swing trader, but about long-term trends spanning weeks or months.” These types of traders, as well as those who aren’t ready to take the plunge directly into forex, should also consider currency ETFs, currency options, and currency CDs. As one instructor summarized, “The upside to these is that you can get started in currencies right through the same stock brokerage account that you would buy IBM, GE or Google.”

South Africa Hikes Rates, but Interest Rate Differential is Preserved

2009-08-27T14:55:00.000-07:00

South Africa Hikes Rates, but Interest Rate Differential is Preserved

The South African Reserve Bank (SARB) lowered its benchmark interest rate by 100 basis points to 8.5%. Since December, the Central Bank has now cut rates by 3.5%, from a high of 12%. [As an aside, the SARB uses a repo rate to conduct policy, as opposed to a discount rate. In theory, a repo rate is slightly unique in that it reflects the rate at which the Central Bank will repurchase government securities from commercial banks. The Federal Funds Rate, in contrast, "is the interest rate at which private depository institutions (mostly banks) lend balances (federal funds) at the Federal Reserve to other depository institutions." In practice, both rates function as modulators of liquidity in the financial system.

“The outlook for domestic economic growth remains subdued, with no indications of a quick recovery,” offered the SARB as a rationale for the rate cuts. Activity in manufacturing and mining, two of the cornerstones of the South African economy, have plummeted since the inception of the credit crisis, along with exports and retail sales. As a result, “Central bank Governor Tito Mboweni said April 7 he would ‘not be surprised‘ if the nation’s economy shrank for a second consecutive quarter in the three months through March, following a 1.8 percent contraction in the fourth quarter.” Meanwhile, South Africa’s producer price index (PPI) has declined for seven consecutive months. Coupled with a moderation in food and energy prices, inflation is no longer perceived as a serious problem.

The South African Rand actually rose on the news of the rate cut, as part of a trend that has seen the currency rise nearly 40% since touching a low of 11.7 Rand/Dollar in October. In April alone, “South Africa’s rand, the laggard of 27 major world and emerging-market currencies

last year, rallied 12 percent against the dollar.” This reversal of fortune is due largely to the recovery of risk appetite and consequent return of investors to the carry trade.

South Africa is especially poised to benefit from this trend for a couple reasons. Primarily, the Rand’s advantage lies in in interest rate differentials. Even if the SARB hews to economists’ predictions and cuts its repo rate by another 100 basis points, the differential will still be tremendous, as virtually every industrialized country has lowered rates close to zero. In addition, South Africa is perceived as a relatively safe place to invest, especially relative to interest rate levels. According to one trader, “We’re seeing a re-assessment of the rand’s relative value because of the fact that South Africa’s economy and financial system are relatively more sound than is the case in many other countries.”

As Bloomberg News summarized, you can’t stand in front of a freight train: “Emerging-market stocks are poised for their best month in 20 years as evidence the global recession is easing spurs investor demand for higher-yielding assets.”

In the end, you can’t fool the markets and carry traders ignore fundamentals at their peril. The recent election of Jacob Zuma as South African Prime Minister “hardly adds to confidence in the South African economy.” In addition, South Africa continues to maintain a sizable current account imbalance, “at 7.4 percent of gross domestic product last year.” Despite declines in February and March, the deficit touched a “record 17.380 billion rand deficit in January” and the markets are “expecting large deficits to persist this year as exports come under pressure.”

Australian, New Zealand Currencies Benefit from Risk Aversion

2009-08-27T14:50:00.001-07:00

Australian,

New Zealand

Currencies Benefit from Risk Aversion

Against each other, the New Zealand Kiwi and Australian Dollar have traded in a pretty tight range for the last year (except for a “blip” in the fall of 2008). This makes sense, as both currencies rise and fall in accordance with exports and interest rates.

Against other currencies, meanwhile, both have torn upwards in the last couple months. Despite steep interest rate cuts, both currencies have maintained their interest rate advantages against other industrialized currencies. This has not gone unnoticed, and the return of the carry trade has been kind. “The current improvement in sentiment is providing an underpinning of support and while that remains the case - and that may be until midyear - the New Zealand dollar is going to remain well-supported,” said one economist.

The correlation between the New Zealand Kiwi, specifically, with the US stock market has become remarkably cut-and-dried of late, which you can see from the chart below. For carry traders, therefore, it probably makes more sense to follow stock market commentary than to track New Zealand economic data. The same economist, for example, warned “that the equities rally, which has seen the broad U.S. Standard & Poor’s 500 index climb 36% from its March low after rising another 3.4% Monday to its highest since Jan. 8, may be dissipating.”

Besides, given the deteriorating economics in both countries, lower interest rates are probably inevitable: “We think this case for further cuts will be made in the second half of this year…we think it will be very difficult, no matter what the global economy is doing, for the RBA to ignore rapidly rising unemployment,” offered one analyst who predicted that rates would be cut to a “trough of 2%.” In such a scenario, the interest rate spread would still remain healthy, but perhaps not enough to offset the additional risk.

Australian home prices are falling at a rapid clip, the labor market is sagging. In New Zealand, meanwhile, a decline in sentiment and consumer spending has corresponded with a 1% contraction in GDP in the quarter ended March 31. Tourism is down, although net exports are increasing. The current account deficit continues to expand, but this is mostly a product of an investment balance - perhaps related to the carry trade.

For now, forex traders remain optimistic, albeit slightly less so than before: “The difference in the number of wagers by hedge funds and other large speculators on an advance in the Australian dollar compared with those on a drop — so-called net longs— was 16,692 on April 28, compared with net longs of 17,250 a week earlier.”

WisdomTree Unveils New Multi-Currency ETF

2009-08-27T14:36:00.000-07:00

WisdomTree Unveils New Multi-Currency ETF

The latest addition the Wisdom Tree family of currency ETFs officially debuted, and in its first two days of trading, the Emerging Currency Fund (CEW) returned an impressive 2.2%. It’s not worth annualizing this figure, but suffice it to say that its performance is already turning heads.

According to the prospectus, CEW “is an actively managed exchange-traded fund that seeks to provide the investor with a liquid, broad-based exposure to money market rates and currency movements within emerging market countries.” Investors will gain exposure both to the currencies themselves and to their respective short-term interest rates, via “short-term U.S. money market securities and forward currency contracts and swaps of the constituent currencies…designed to create a position economically similar to a money market security denominated in each of the selected currencies.”

Chosen from three regions (Latin America, Africa/Europe/Middle East, and Asia), the inaugural 11 currencies are as follows: Brazilian real, Chinese yuan, Chilean peso, Indian rupee, Israeli shekel, Mexican peso, Polish zloty, South African rand, South Korean won, Taiwanese dollar and Turkish new lira. According to WisdomTree, these currencies were selected not necessarily for economic reasons, but rather because of their relatively high liquidity and low correlation with each other. In addition, “The selected currencies are equally weighted in terms of dollar value at each currency assessment date and after each quarterly re-balancing,” to reflect fluctuations in exchange rates. Naturally, WisdomTree reserves the right to rejigger the portfolio in terms of constituent makeup, but this would probably only be effected to improve overall liquidity, rather to replace an under-performing currency.

The advantage of CEW lies in its automatic diversification, such that investors gain access to a variety of currencies but only have to transact in the fund itself. WisdomTree also points out that, “Emerging market currencies often move independently of domestic stock, bond and money market investments…[and] exhibit low correlations to other alternative asset classes, such as commodities and gold.” The chart below [courtesy of CEW promotional materials] makes this point indirectly, and it probably comes as a surprise that US stocks are collectively more volatile than individual emerging market currencies. “Incorporating a 10% allocation of emerging currency into balanced port folio mixes of the domestic stocks and domestic bonds over the last ten years…raised annual returns by an average of 0.66%, while lowering overall portfolio volatility” in a hypothetical exercise.

“In terms of taxation, WisdomTree says normal capital gains rules will apply to the sales of fund shares. However, income from the portion of the fund invested in U.S. money market securities usually will be taxed as ordinary income, while the tax treatment of the local currency forward contracts could vary with the situation.” The fund’s expense ratio, meanwhile, is .55%.

If the preceding paragraphs read like a sales pitch, I apologize, as that was not my intention. At the same time, I’m personally quite positive about CEW (as well as ETFS in general, for that matter), since it provides quick and easy exposure to a bunch of quality currencies, eliminating the need to buy them separately. Not to mention that this fund is debuting right when both the carry trade and emerging markets (and their currencies) are coming back in vogue.

I’m not sure if the timing was deliberate, but it could certainly have been worse. It’s tough to say whether the market rally of the last two months is sustainable, but if the decline in risk aversion that ignited the rally continues to obtain, it will be good for CEW.

The Sucker’s Rally and the Dollar

2009-08-27T14:33:00.000-07:00

The Sucker’s Rally and the Dollar

“The Dow Jones Industrial Average has bounced an astounding 30% from its March 9 low of 6547. Is this the dawn of a new era? Are we off to the races again?” Asks Andy Kessler provocatively in a recent Op-Ed for the Wall Street Journal.

This is an important question not only for stock market investors, but also for forex traders. By no coincidence, the stock market rally has coincided with a steady decline in the Dollar, which recently broke through a key level of resistance and touched a four-month low against a basket of currencies, and is similarly nearing a four-month low against its chief rival, the Euro. ”

Experts” point to a decline in risk aversion as the chief driver of the rally; when investors become more comfortable with risk, they buy stocks, which in turn causes investors to become even more complacent with risk. Hence, a 30% rally only six months after stocks recorded their worst day and worst week ever.

In this case, however, the experts are not in complete agreement. Economic fundamentals, for example, remain relatively weak, and corporate profits are still anemic. Andy Kessler blames the Fed for distorting “asset allocation formulas” by dropping yields to zero and for its quantitative easing program, which “gets money into the economy the fastest — basically by cranking the handle of the printing press and flooding the market with dollars (in reality, with additional bank credit). Since these dollars are not going into home building, coal-fired electric plants or auto factories, they end up in the stock market.”

Sure enough, trading data suggests that in fact this rally is being driven by retail investors, as opposed to institutions. Says Lou Ritholz, ” ‘The ‘dumb’ retail money is leading the gains. ‘In this type of environment, the market is guilty until proven innocent. We have to assume this remains a bear market until we see a more normalized economy.’ ” In short, it looks like analysts have confused the chicken with egg, by emphasizing the decline in risk aversion, rather than the self-fulfilling nature of the rally.

If the rally does end, it will almost certainly be good news for the Dollar, at least in the short-term. There has emerged a strong correlation between global stock prices and emerging market currencies, for example, which virtually ensures an outflow of capital from emerging markets. One professional idiot- err investor- Jim Rogers has prognosticated an end both to the stock market rally and the Dollar rally. Credit Rogers for his long-term thinking, but he seems to have impugned a direct relationship, when recent trends suggest it is actually inverse.

I agree with Kessler, and abide by the same maxim “Only a fool predicts the stock market…” My point here is not to convince you that the market rally is unsustainable, but rather to emphasize the importance of knowing where you stand. I’m personally quite bearish on the Dollar in the long-term (food for a future post), but a damper in the stock rally would almost certainly be positive for the Dollar.

Imminent Crisis in Forex Markets?

2009-08-27T14:26:00.000-07:00

Imminent Crisis in Forex Markets?

The only thing predictable about currencies these days is that they will remain unpredictable. Forgive me for speaking in cliches, but when you consider that the last twelve months have seen both record rises and record falls, I think a cliche might be justified in this case. We’ve seen the Dollar soar, only to collapse again. On the other side, we’ve seen the bottom fall out from emerging market currencies, before rising 20-30% in a matter of weeks.

Volatility levels have certainly declined (see Chart below) from the record highs of October 2008, when Lehman Brothers collapsed. At the same time, the oft-cited VIX index remains well above its average over the last decade. This suggests that while investors may have been lulled into a relative sense of security, serious doubts remain.If the current rally is to be seen as “legitimate,” then perhaps the worst of the 2008-2009 recession is truly behind us, and the global financial system has been given a reprieve from a meltdown. The concern going forward then will naturally shift past the steps that governments and Central Banks are taking to fight the crisis, towards the long-term economic impact of those measures.

Jim Rogers, a famous and perennially outspoken investor, is now sounding alarm bells over the possibility of “meltdown” in currency markets, due to inflation and currency debasement that he views as an inherent byproduct of quantitative easing and deficit spending.

Most of the attention is being focused on the US, whose stimulus and monetary programs are probably larger than all other economies in the world, combined. Offers one analyst, “We keep very low U.S. Dollar exposures because we think a further devaluation of the greenback is imminent, and we see a structural weakness for at least a number of years.” Meanwhile, there is speculation that the US could soon receive a ratings downgrade, following a similar threat by S&P directed towards Britain. But this remains highly unlikely.

The problem that Rogers (and all other investors who are worried about currency debasement) faces is how to construct a viable strategy to protect yourself and/or exploit such an outcome. Rogers himself has admitted, “At the moment I have virtually no hedges…I’m trying to figure out what to do there.” The difficulty can be found in the inherent nature of currencies, whose values are derived relative to other currencies. While you can short the entire stock market or the entire bond market (via market indexes), you can’t short all currencies simultaneously- at least not yet.

Instead, you can pick one currency or a basket of currencies, that you believed is best protected from currency collapse and buy it against threatened currencies. But how do you deal with an environment when all currencies appears equally questionable- when all governments all loosening monetary policy and risking inflation? Really, the only answer is to invest in commodities that you think represent good stores of value, such as oil or gold, or the currencies that benefit when prices of such commodities are high. Naturally, the relationship between commodities and currencies is not cut-and-dried, and if the currency system were indeed beset by meltdown, it’s not clear to me that commodities would hold their value. But that’s fodder for another post…

A Tax on Forex Trading?

2009-08-27T14:16:00.000-07:00

A Tax on Forex Trading?

The Forex Blog reported that Brazil is considering a forex tax on capital inflows as a way of discourage the inflow of speculative capital that is causing the Real to appreciate. It turns out that Brazil is not alone; England and France, among others, are also mulling taxes on forex transactions. Their goal is not necessarily to discourage capital inflows, but rather to raise money to fund projects that would otherwise not be viable under current budgetary conditions. The UK “levy would raise $30bn-$50bn a year - enough to double spending on health in low-income countries.” The French plan, meanwhile, would “involve taking 0.005% of the proceeds of currency transactions, perhaps on a voluntary basis, to benefit global aid projects.”

While Brazil and England/France appear to be pursuing different ends, together their plans capture the idea behind the “Tobin Tax.” Originally proposed by Nobel Laureate James Tobin after President Nixon declared the end of the gold standard, the tax would be levied on all forex transactions with the proceeds deposited in forex stability funds. One of the most popular versions would only impose the tax during periods of volatility (i.e. speculation) so as not to punish those exchanging currency for “mundane” reasons.

While still a fringe idea, the tax initially gained momentum following the 1997 Southeast Asian economic crisis, and has found new followers in the wake of the ongoing credit crisis. Consider the unprecedented volatility in currency markets of late, manifested in wild daily fluctuations.

Even the US Dollar, the world’s reserve currency, has been on a veritable roller coaster of late, rising and falling by 10% in a matter of months. Prior to the rise of forex speculation (already a $1 Quadrillion/year market!), it was rare for a currency to move that much in a year. Given that such speculation probably accounts for 90% of daily turnover, it seems obvious as to who is causing this volatility.

Don’t get me wrong; there’s a role for speculation in the forex markets, just like there’s a role for speculation in all securities markets. When markets function efficiently and players act rationally, currences should and will reflect economic fundamentals and act to minimize global imbalances. Due to the rise of the carry trade and the herd mentality, however, the oppose often obtains in practice. This can cause currency runs and or artificially inflated currencies that compel Central Banks to act counter to the way they otherwise would (i.e. by raising interest rates rapidly to deter capital flight, crimping economic growth.)

A Tobin tax would work both to minimize speculation in the short-term (by taxing trades) and promote stability in the long-term (by providing Central Banks with funds that they can use to fight speculative “attacks.” Besides, given that forex traders already enjoy favorable tax treatment - i.e. taxed below the short-term speculative rate - it wouldn’t be the end of forex trading as we know it.

Currency Correlation with Stock Market Remains Intact

2009-08-27T14:15:00.001-07:00

Currency Correlation with Stock Market Remains Intact

In my experience, currency markets (and most other securities) markets tend to be governed by trends. There are short-term trends, long-term trends, and medium-term trends. Granted, this is an oversimplification, but generally speaking, if you were to chart a given currency pair, you could characterize its fluctuations in accordance with this paradigm.

Short-term trends are typically the focus of technical analysts, who ignore the broader forces affecting a given currency pair and instead try to discern slight trading patterns. Long-term trends, on the other hand, are the purview of economists, and reflect interest rate and growth differentials. Medium-term trends, meanwhile, unfold over a period of months (sometimes shorter, sometimes longer) and require a combination of technical and fundamental analysis to discern and trade successfully. With this post, I want to focus on the current medium-term trend, which is that of declining risk aversion.

I would not use the expression “old” news to describe the stock market (and accompanying) rallies that have taken hold broadly since the beginning of March, since it’s still be unfolding. Given that hindsight is 20/20, it now appears that the (perceived) stabilization of the US financial sector provided the impetus for the rally. In the weeks that followed, investors pulled an about-face and piled back into risky sectors and trades. The US stock market rapidly reversed course and is now trading around the level following the Lehman Brothers collapse last October.

The rally in March marked the end of one medium-term trend and the beginning of a diametrically opposed, but conceptually similar medium term-trend. Sorry to make it sound complicated, since it’s actually quite simple; in an overnight switch, investors went from being bearish and risk-averse to bullish and risk-seeking. These mindsets (and the switch between) is also reflected in currency markets. You can see from the chart below how the Australian Dollar, British Pound, and Down Jones Industrial Average have tracked each other closely over the last year, and moved in lockstep since March 3.

I suppose you could say that the correlation between US stocks and currencies represents one continuous long-term trend, and based on this chart, you would be making an accurate assessment. However, it’s equally important to unveil the underlying mindset that is driving both stocks and currencies, and is causing them to move in tandem. This is a nuanced distinction, and an important one to understand. There is a difference between a change in sentiment that causes investors to simultaneously pour money into risky investments (stocks and currencies, etc.) and a change in sentiment that causes a stock market rally and consequently, a currency rally. In the first scenario, both currency traders and stock market investors are in tacit agreement over risk-seeking, while in the second scenario, currency traders are uncertain, and hence taking their cues from the stock market.

Part of what makes a good currency trader is discerning which of these scenarios accurately describes the current reality in forex markets, so that a viable forecast and trading strategy can be implemented. Scenario 1 suggests that if the stock market rally falters, risky currencies will also decline. Scenario 2, meanwhile, suggests that currency traders would maintain their positions even in the event of stock weakness, which would cause the correlation between forex and the S&P to break down.

Retail FX Trading Continues to Surge

2009-08-27T14:09:00.000-07:00

Retail FX Trading Continues to Surge

Pretty much every brochure advertising forex trading highlights the fact there is no such a thing as a bear market in forex. Stocks, bonds, and commodities can all lose value simultaneously (as happened when Lehman Brothers declared bankruptcy in October 2008) but it’s impossible for all currencies to decline simultaneously. A bear market in the Euro might be offset by a bull market in the Dollar; or Swiss Franc; or Brazilian Real. Regardless, you don’t have to search far to find currencies that are outperforming, whereas a stock picker would certainly have his work cut out for him during an economic recession.

I remind you of this cliche because in the current market environment, it has apparently taken on new significance. Anecdotal reports of investors frustrated with stocks, or having been burned by China, or disappointed by the collapse in oil, are flocking to forex by the thousands. Angry about suspended trading rules on stock markets? This could never happen in forex (at least not under current rules), since currencies are traded on multiple exchanges linked through a decentralized system.

Here are the stats: at Forex.com, “New accounts have increased about 30 percent a month in the last six months from pre-September levels, while the number of trades per day has risen almost 50 percent. GFT Forex said trading volume rose 187 percent from late 2007 to late 2008….By the end of 2006 [the last year apparently for which this type of data is available], average daily trade volume reached over $60 billion, a 500 percent increase from 2001…Trading volume generated by ‘retail aggregators’ — electronic trading platforms that cater to individual retail traders — rose almost 43 percent from 2007 to 2008.” This dwarfs both overall growth in forex, as well as retail growth in the bread-and-butter securities markets.

One trend worth drawing attention to is that new investors are focusing on the most popular currency pairs. [See Chart below, courtesy of Wikipedia]. It has been proposed that this is because of widening spreads (i.e. more PIPs) on less liquid pairs, but it is just as likely being caused by investors applying the stock market logic of “buy what you know” to forex. It is understandable that those new to the game would want to get their feet wet by dabbling in the Euro/Dollar/Yen, rather than diving right in to niche currencies such as the Mexican Peso or even Korean Won, whose movements are both more volatile and more difficult for the average trader to understand.

As always, all investors are advised to be on the lookout for scams. In the last few months, it seems hundreds of low-profile forex ponzi schemes have been discovered, which means there are doubtless hundreds of more still flying below the radar of the authorities. If you are suspicious, check out the National Futures Association registry.

Currency Hedging: Is it Worthwhile?

2009-08-27T14:00:00.000-07:00

Currency Hedging: Is it Worthwhile?

While volatility in the financial markets has certainly declined from the record highs of October, a spike in the last week means that it is still problematic, and hence relevant. With this post, I will examine one theoretical method that has the potential both to limit volatility and to improve returns: currency hedging.

Generally speaking, there are a few situations in which currency hedging is useful: international equity/bond investing, currency investing/trading, and inflation hedging. The latter typically involves using commodities/metals to hedge against inflation, which is typically proxied by the Dollar. In other words, inflation hawks might buy gold/oil to offset a declining Dollar. This dynamic is currently on display in commodities markets, where “Speculative money has increased oil’s sensitivity to dollar movements, and if the dollar continues to strengthen, this will weigh on prices.” This type of hedging, however, is probably the most nuanced, and I will set it aside it for another post.

Hedging indirect exposure to currencies (from overseas investments) involves the separation of currency risk from credit/equity risk. In other words, if you are an American invested in a European stock, you may wish to hedge against fluctuations in the Euro (which impact you insofar as the stock is priced in and pays dividends in Euros, but your account is denominated in Dollar), so that you are exposed only to fluctuations in the stock, itself. Simply, this would involve selling Euros simultaneously with buying the stock; the amount of Euros that you sell depends on what level of exposure to currency risk you are comfortable with. If you buy $100 worth of stock in a European company and buy $100 USD/EUR, then you are fully hedged.

Hedging direct exposure to currencies is inherently more sophisticated. For example, if you sold $100 EUR/USD, you can’t hedge your position by simply buying EUR/USD, or you will negate any return without changing the level of risk. Instead, you can use financial derivatives (options, forwards, futures, swaps), which if executed properly, are tantamount to buying insurance on your portfolio. For example, if you are long the Dollar, you can buy put options in order to protect yourself from significant downside. Likewise, if you are short the Dollar, you can buy calls to achieve the same end.

The advantage of options is that strategies can be as complex as you want; likewise, they can be as simple as buying calls or selling puts. Other derivatives, however, have another component: carried interest. Since forwards/futures/swaps are all contracts (an option represents a right, other derivatives represent obligations), they are priced to take short-term interest rate differentials into account. Simply put, “For currencies with high short-term interest rates, there is a positive “carry” associated with hedging, while for currencies with low short-term interest rates, the “carry” is negative.”

I pulled that snippet from a study on currency hedging that I read recently. According to this report, “For most base currencies, over most periods, hedging seems to have reduced the volatility of international equity portfolios.” [See chart below]. However, while hedging seems to reduce risk, it doesn’t necessarily boost return. “Again, given one man’s meat is another’s poison, one would expect the results to be distributed evenly around the horizontal axis, and that is in fact the case.” In other words, one currency’s gain is inherently another’s loss. Still, if you could maintain the same returns but limit volatility, why wouldn’t you?

General Uncertainity Pushes Dollar Upwards

2009-08-27T13:55:00.000-07:00

General Uncertainity Pushes Dollar Upwards

Over the last month, the US Dollar has steadily reversed its downward fall against the Euro. While it might still be premature to pronounce an end to the amalgam of intertwined trends that sent equities, commodities, and emerging market currencies (i.e. anything risky) up and the Dollar down, it’s worth examining this possibility in greater detail.

My philosophy of forex has always been to focus on the medium and long-term trends. Over the last two two-three months, the medium-term narrative was one of increased risk-taking. Generally, investors had become both more complacent with risk and more optimistic about the global economy’s prospects for avoiding economic depression. The US financial sector was shored up (or at least “vouched for”) by the US government, and a Fed-driven flood of liquidity poured money into the riskier sectors of the global financial markets.

The sideways trending of the USD/EUR doesn’t necessarily imply that this trend has run its course. Instead, I think it suggests that investors are looking for guidance as to what kind of narrative will predominate over the next few months- whether a continuation of the risk-aversion story, or a brand-new story. Investors tend to make their own reality, such that a pattern will inevitably emerge, and investors will find cause to affirm that pattern or negate that pattern. Simply, right now, there is no consensus on what that pattern is.

There is good reason for caution. The global economy (and forex markets) stand at a crossroads. Investors (want to) believe that the worst of the recession is behind us. But there is still good reason to believe that this is not the case. Unemployment is still rising, the housing market is falling, and GDP is still declining. Stock market investors may finally have taken notice of this contradiction, as the stock market rally has stalled of late.

Meanwhile, long-term rates have begun to tick up, but short-term rates remain frozen at record lows. Some analysts believe that the Fed will tighten monetary policy before the year is out, but the wide daily swings in interest rate futures contracts, imply a complete lack of consensus on this as well. The same goes for inflation, which is near 0% at the moment, but could easily explode as a result of rising recovering prices, record budget deficits, and the Fed’s own quantitative easing program.

Summer Could Provide a Boost to the Dollar

2009-08-27T13:50:00.000-07:00

Summer Could Provide a Boost to the Dollar

There is a pattern in the following smattering of forex soundbites: “It feels like we’re already in the summer doldrums;” “[We] are moving into summer trading;” “We are in a summer period.” From three different analysts, three identical conclusions- summer has arrived. Granted, summer officially began on June 21, but given all that’s transpired since last summer, I think we can excuse investors from delaying their summer vacations this time around by a few weeks, until the kickoff of second quarter earnings season.

Summer usually means a couple things for the financial markets: less liquidity/volume and less fluctuations. The decline in volume is largely self-explanatory, due to what can best be summarized as more play and less work. The decline in volatility is due to a different, but related cause, which is a delay in important investment decisions until the fall, when traders return to their desks and resume monitoring the markets full-time. Both phenomena tend to cause asset prices to move sideways.

This is especially true for forex markets. “Traders noted major currency pairs remain largely range-bound…Markets for now are hung up by uncertainty over the shape of any future economic recovery, he said. Economic data at this point ‘can be spun either way,’ likely leaving currency markets next week to key off of any earnings surprises from U.S. companies,” observed one analyst. As far as the decline in volume is concerned, “Emerging markets are becoming particularly volatile as liquidity declines over the summer period,” and “Bid-offer spreads are quite wide.”

Kathy Lien, of Forex 360, has observed another summer trend: “Over the past 10 years, the Canadian, Australian and New Zealand dollars have seen their steepest slides in the month of July. In addition, we have seen the U.S. dollar outperform the Canadian and New Zealand dollars 8 out of the past 10 years during this month.” This could be a byproduct of delayed allocation, as investors shift capital out of risky markets/positions/currencies. The lesson might be to stick to the majors.

Based on all current indications, this summer will be no exception to this rule. While investors have certainly grown more complacent about risk over the last few months, there is a lingering uncertainty. “Economic data at this point ‘can be spun either way,’ likely leaving currency markets next week to key off of any earnings surprises from U.S. companies.” Even with across-the-board positive earnings results, investors will likely remain wary and could hold off on taking any risky (overseas) positions until the fall.

Japanese Yen: Exports Versus Carry

2009-08-27T13:36:00.000-07:00

Japanese Yen: Exports Versus Carry

Plot the Japanese Yen against almost any “major” currency over the last few months (or few weeks for that matter) and you get a pretty consistent picture. Moreover, when you graph most Yen currency pairs against the S&P 500 (I like the AUD/JPY), the correlation is uncanny! Sure enough, it was reported recently that “Japan’s currency also fell the most in a week against the euro as futures on the Standard & Poor’s 500 Index rose 0.5 percent.”

This suggests that the main driver for the Yen is proximally, the demand for US equities, and ultimately, appetite for risk. “We’re seeing high-yielding currencies still rallying along with stock markets…The market is reverting to business as usual. That’s just spurring risk currencies forward,” explains one analyst. In other words, the carry trade is back, and investors are borrowing in the world’s cheapest currency (Japanese overnight interest rates are only .1%) and investing in higher-yielding alternatives. “There’s strong momentum behind this risk taking. You cannot keep your money in cash for zero returns unless you believe in deflation,” added a trader.

Experts on both sides of the Pacific Ocean are now encouraging their clients to short the Yen. “Japanese financial institutions are encouraging investors to put money into mutual funds focused on assets denominated in currencies such as the Turkish lira, South African rand and Brazilian real…Japanese investors were net buyers of 709.4 billion yen of overseas assets in the week ended July 11…” Goldman Sachs, meanwhile, has declared that the Yen is still overvalued, and “recommended investors use three-month forward contracts to sell the yen.”

There’s certainly some second-guessing taking place, especially with earnings season upon us. “Risk aversion is likely to stay prominent, given earnings announcements by companies including CIT. The bias is for haven currencies such as the yen to be bought,” insisted one analyst. In addition, Central Bank diversification has created some demand for the Yen and the Euro, but this is more of a Dollar-negative story than a Yen-positive story.

There are also signs that the Japanese economy is recovering, thanks to a pickup in exports. The fact that its economy remains so dependent on exports to drive growth certainly exacerbated the impact of the credit crisis. On the other hand, it could also magnify any recovery. “Japan’s merchandise trade surplus widened in June…to 508 billion yen ($5.42 billion) from 104.1 billion yen a year earlier. The nation’s trade performance appears to be improving, as the surplus was bigger than May’s 299.8 billion yen figure.”

Still, prices in

Japan

are falling (by 1.1% at last count), and there are strong concerns among economic officials that deflation could take hold. Accordingly, carry traders borrowing in Yen can rest easy, knowing that

Japan

is probably the least likely of any industrialized country to raise interest rates in the near-term.

Forex Glossary

2009-08-27T13:27:00.000-07:00

Forex Glossary

We have recently published what we believe is the largest glossary/dictionary in the forex market.

Please let us know what you think of our forex glossary, and if there is any definition we missed. And if you think we did a good job please show us some love on your blogs, Twitter, etc.

Yen Carry Trade is Back, but for How Long?

2009-08-27T12:47:00.000-07:00

Yen Carry Trade is Back, but for How Long?

“Mrs. Watanabe, the market’s metaphor for

Japan

’s housewife yen speculators, has come back to life.” In other words, the Yen carry trade is back. Precise data remains elusive, as always, but several recent papers/articles have nonetheless succeeded in bringing some clarity to this growing, but murky, type of trading strategy. According to one source, “Monthly capital and financial account outflow rose to a nine-year high of ¥3.75 trillion in March, up from ¥1.93tn in February, according to

Japan

’s Ministry of Finance. Similarly,

Japan

’s Investment Trusts Association reported last week that Japanese investment trust holdings of foreign assets surged by ¥1.77tn ($15bn) in April to ¥32.3tn and are now up ¥4.57tn year-to-date. This is the biggest monthly increase since the monthly data began in 1989.”

If it’s not already clear, allow me to spell it out. Japanese investors are collectively shorting their own currency, based on the expectation that it will neither appreciate suddenly nor fluctuate wildly so that they can earn profits from investing in higher-yielding alternatives. Research has showed (backed by common sense) that volatility is the main enemy of the carry trade. “When the carry-to-volatility ratio (i.e., the ratio of the interest rate differentials to the volatility in the two currencies) increased through summer 2008 — in other words, when investors were able to make returns from the interest rate differentials under the low FX rate risk — they increased their positions to a remarkable degree.” On the flipside, “The reaction of the Japanese retail investors to the increase in financial market volatility (the VIX index measure of US equity market volatility is used as a proxy) was particularly apparent in October 2008 when investor positions were wound back sharply.”

A pickup in risk appetite over the last few months, however, has brought about a decline in volatility. “Implied volatility on seven major currencies has fallen to 13.8 percent from a peak of 26.6 percent in October…from an average of 15.4 percent over the past year.” As a result, Japanese investors have rushed back into the market. The total number of forex margin accounts in Japan is estimated to have increased 50% over the last year, with account balances rising by 30%. In 2008, Japanese retail investors already accounted for 20% of daily turnover in the Japanese Spot Forex market. When you consider these growth rates, this figure is probably even higher now.

There is evidence, however, that such investors are shifting their trading strategy. Prior to the credit crisis, the data shows that they “Increased their foreign currency net long positions when the investment currency depreciated and reduced these positions when the investment currency appreciated. This behaviour is consistent with realising returns by selling positions when the investment currency appreciates and adding to positions when the investing currency depreciates.” Now, however, they have taken to copying “professional” speculators, who tend to swing trade short-term changes in momentum.

As for which currencies represent the most popular targets for carry trades, investors typically buy those currencies that are less volatile and higher-yielding. “The favorite bet is for the Australian dollar to strengthen versus the yen. Wagers on the Aussie more than tripled to 64,293 contracts in the five weeks to April 27, while those on the kiwi — named after a flightless bird native to New Zealand and depicted on the one dollar coin — rose to 36,454.” The Euro is in a distant third.

Perhaps in response to this pickup in carry trade activity, the Bank of Japan is finally clamping down. Rather than raise interest rates - which could harm the prospects for economic recovery - it will require Japanese brokerages to lower margin rates by 2010, to 25 x collateral. Still, logic (and legislation) doesn’t rule, when it comes to forex. ” According to a Federal Reserve Bank paper, “The currencies of countries with low interest rates have tended to depreciate, or to not appreciate sufficiently to offset arbitrage opportunities.” For now at least, it likes like the carry trade is still safe.

Carry Trade Still Popular, but Doubt is Growing

2009-08-27T12:19:00.000-07:00

Carry Trade Still Popular, but Doubt is Growing

It’s safe to say that the inverse correlation observed between the Dollar (and also the Yen) and global equities are largely a product of the carry trade. “The U.S. stock market bottomed and the U.S. Dollar Index peaked almost simultaneously in March. While U.S. stocks are up more than 50% in that time, the Dollar Index (which measures the greenback’s value against the euro, the yen, the British pound, the Canadian dollar, the Swedish kroner and the Swiss franc) is down nearly 12%,” observed one analyst.

On one level, this represents a return to 2008, prior to the explosion of the credit crisis, when carry trading was THE dominant theme in forex markets. However, there is one important difference. While the Dollar and Yen were the funding currencies then and now (due to their low interest rates), there has been a slight shift in the currencies selected for the opposing/long end of the trade.

Traditionally, the most popular long currencies were those of industrialized countries, rich in commodities and backed by high interest rates and often rich in commodities. To be sure, these currencies have shined in recent months, certainly due in part to speculative (carry) trading. “Strategists at Wells Fargo Bank in New York ‘believe that the gains in the dollar-bloc currencies (Australia, New Zealand, Canada) have run ahead of the gains in commodity prices.’ ” The Bank of Canada also noticed that “At the time of its last statement, oil prices were about $75 a barrel, but now they are in the $60-to-$65 range. That suggests the currency’s appreciation has outpaced the demand for its commodity exports.”

But the run-ups in the Kiwi, Aussie, and Loonie have been overshadowed by even more rapid appreciation in emerging market currencies. This shift is largely a product of changes in interest rate differentials, which are now gapingly large between developed countries and developing countries. Compare the 2.75%+ spread between the US and Australia, with the 8.5% spread between the US and Brazil or 12.75% between the US and Russia. For investors once again becoming complacent about risk, the choice is a no-brainer.

Still, some analysts are nervous about this change in dynamic: “While the new carry trade may be less leveraged, it’s an inherently riskier bet. As such, it’s more vulnerable to the kind of swift unraveling of risk appetite observed across all nations and sectors in 2008, but which occurs with far more frequency in emerging markets.” Meanwhile, emerging market stocks have behaved volatility over the last few weeks (with Chinese stocks even entering bear market territory), and some investors are concerned that they may be temporarily peaking. There are also signs that bubbles may be forming in carry trade currencies, with bullish sentiment at high levels. Accordingly, one strategist suggests waiting out a 5% pullback in the Australian dollar, and a 10% pullback in the New Zealand dollar before going back in.

There is also the outside possibility that the Fed will raise interest rates, which would crimp the viability of the US Dollar as a funding currency. Granted, it seems unlikely that the Fed will tighten within the next six months, but investors with a longer time horizon could begin to adjust their positions now, rather than wait until the 11th hour, at which point everyone will be rushing for the exits.

The Key to Fundamental Trading

2009-08-24T14:46:00.000-07:00

The Key to Fundamental Trading

Knowing what the data means can help you make smarter trades, before and after the data is released. Below are some of the primary pieces of data that successful Forex traders follow.

What are the Key Indicators?

Traders can gauge the financial health of a given country (and its currency) through its economic data. But, just like a doctor monitoring a patient's vital signs, the information is not equal in terms of its impact. Here's a primer of the key economic indicators that often impact currency traders.

Economic indicators divide into leading and lagging indicators:

Leading indicators are economic factors that change before the economy starts to follow a particular trend. They're used to predict changes in the economy.

Lagging indicators are economic factors that change after the economy has already begun to follow a particular trend. They're used to confirm changes in the economy.

Major Economic Indicators

Gross Domestic Product (GDP)

The sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country's economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.

Industrial Production

A chain-weighted measure of the change in the production of the nation's factories, mines and utilities, industrial production also measures the country's industrial capacity and how fully it's being used (capacity utilization).

The manufacturing sector accounts for one-quarter of the major currencies' economies, so it's critical to watch the health of factories and whether their capacity is being maximized.

What is Forex?

2009-08-24T14:43:00.000-07:00

What is Forex?

FOREX - the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.

Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.

In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.

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 currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.

Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.

Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study.

Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.

This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).

Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.

The History of Currency Trading

2009-08-24T14:27:00.000-07:00

The History of Currency Trading

The Forex online market was established in 1971, though it was only possible through a combination of technological, communicational and political advances. Understanding them and how they impact the trading of foreign currencies is a crucial element in becoming a successful, smart, trader. It is important to know that should there be a major event with any of these factors, currencies will be affected - on either side of the profit line. The goal of every trader should be to understand the market, to know what all the statistics mean and how major news can swing a countries currency by making it stronger or diluting its value.

The idea of a foreign currency EXchange dates back to the Middle Ages when the first paper money was introduced and represented a transferable payments for merchants and traders - like an I.O.U.-a promissory note. National governments, provinces and municipalities began storing gold, silver and other items of value and issued promissory notes against a set value. The problem was that on any given day that value could change based solely on the decisions of the kings and governors.

Up until the end of World War I (WWI), the Forex markets were relatively inactive and remained stable. However, after WWI the volatility of the Forex market greatly increased and investor speculation grew. From the mid 1870s until shortly after WWI, the international currency systems ran off the principles of the gold exchange model. As a result of being supported by the hard value of gold, paper money, currencies as they became known as, experienced a healthy life under this gold standard.(The term commonly used to describe a value of currency in direct relationship to a the price of a fixed weight of gold). The gold standard helped put an end to the practice of monarchs and dictators of indiscriminately degrading money, which was and still is a major trigger of inflation.

However, as much of a step-up for currency stability as it was, the gold standard had many problems as the industrial revolution advanced. The primary problem was the patterns that would see the constant redistribution of wealth within the world's countries. The peaks and valleys that many of these countries experienced was due, in large part, to the economic instability caused by a lack of gold reserves and a devaluation of other commodities.

Recession was not kind to many of the early speculators; some believe that it was because of this high level of speculation and guesswork which ultimately brought about the the Great Depression. And as a result of what was a very difficult period, people began learning the lessons needed to progress. Policymakers and politicians realized the weight of the currency markets on world finance and in 1931 a period of redefining the Forex and monetary policy began.

The Forex Today

2009-08-24T14:15:00.000-07:00

The Forex Today
There have been many factors that have led to the current structure of the Forex market.

Since the early 1970s the Forex market has grown in size, structure, and changed the way it operates. These transformation resulted from changes in the global financial systems. A primary cause of the increase in foreign exchange trading was the rapid development of the Euro-Dollar market, where US dollars are deposited into central and local banks outside of the United States. Similarly, it is typical for countries within the European markets to have their assets deposited outside the currency of origin.

To contrast this concept, during the start of the Cold War in the mid 1950s, all the money made by Russia from the sale of oil (which came in the form of US Dollars) was deposited in banks that were outside of the US for fear that the US Government would freeze the funds. This helped bring about a large amount of dollars that were not in the control of the US authorities.

The US government tired to impose laws restricting the loaning of dollars internationally. The Euro markets were particularly attractive because they had far fewer regulations and offered a much higher yield. Towards the end of the 1980’s, US companies began borrowing offshore and this is the norm today. Investors and savers find the Euro markets a lucrative and safe area to put their excess liquidity. In turn, these deposits provide short-term loans and finances import and export activities.

London was the principal offshore market, as it remains even now. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds. This allowed them to maintain their leading position in global finance. London’s convenient geographical location allows it to operate during Asian, Pacific and American market hours as well.

As Forex trading has grown, several international cities have emerged as market leaders. Currently, London, England has the greatest share of transactions with over 32% of the total trade volume. Other leading trading centers listed in order of volume are New York, Tokyo, Zurich, Frankfurt, Hong Kong, Paris, and Sydney.

Currently, the Forex market has expanded from consisting of only banks to one where many other kinds of institutions participate. The evolution of the Forex - from a range of loosely connected national financial centers to a single integrated international market – brought about a system that offers means of trading to not only financial professionals but also individuals who began trading and investing, and one that also plays an important role in our economies - both individual and national.

Since the late 1970s the Forex has seen an influx of financial entities, such as banks, hedge funds, and broker trading houses, as well as individual traders enter the Forex arena. Today, instead of being controlled by national banks and governments, the main factor that drives today's Forex markets is supply and demand. The free-floating system is ideal for today's Forex markets as international trade and commerce are abundant in the 21st century. The tremendous growth and application of technology in the Forex market broke down all barriers between nations, as well as time zone barriers eventually resulting in a 24 hour market throughout the American, European, and Asian time zones. Through the popularization of the internet, the trading of Forex online has enabled the average investor to reach this vital and practical market.

Using the MACD

2009-08-24T14:06:00.000-07:00

Using the MACD

When you make a MACD Indicator part of your Forex strategy, you can see much more consistently profitable trading activity; and keep your losses to a minimum.

For those new to MACD, this stands for Moving Average Convergence Divergence and it can tell you which trades you should avoid, which currencies you should trade short on and most importantly, which you should trade on for the best profits.

When trading foreign currencies, its important to realize that the market can be quite volatile. This can mean a trade that might have shown signals of being profitable a few hours ago can turn suddenly into a downward spiral.

Like any kind of investment, being successful in Forex trading means using tools which help you predict the movements of the market and well thought out trading strategies which lead to increased profitability. Using a MACD indicator shows you the trends in currency prices in real time as well as showing you longer term trends, so you will be able to decide exactly when the ideal time is to make your trades.

How Do MACD Indicators Work?

The MACD is composed of a few different moving average indicators, each of which is pretty straightforward. One is the signal line (also known as the water line). This shows you the exponential moving average (EMA, for short) drawn from closing prices over the last nine days of trading in the currency market.

There are two other EMA`s which let you see the trends of any given currency. These are a 26 day EMA and a 12 day EMA. These longer term trends give you an accurate idea of how the currency has been performing; valuable information to assist you in making more profitable trades.

The MACD line of the currency you`re watching may fall below or above your EMA signal line. The position of this line relative to the MACD line tells you whether the currency is on its way up or down.

Using A MACD Indicator in Forex Trades

Learning to watch the MACD movements on each of the different charts can increase your probability of entering a profitable trade. You should be able to access a four hour chart and a one hour chart that should show you in which direction the trend is moving.

Once you`ve learned to watch both charts, you`ll be able to see at a glance which currencies are a good buy and which are dropping in value (or have peaked and are about to decline). These charts let you make your Forex trades based on solid, real time market information.

Watching the more recent MACD that shows you the hourly chart can be a great way to exercise caution when placing your trades. When the MACD indicator crosses above the water line you have the option of increasing your success rate by placing your forex trade long.

No kind of investment is free of risk and a MACD indicator will help you with your trades the most effectively when used along with other tools. However, even the MACD indicator on its own can help you to maximize your profits and minimize risk compared to trying to make your trades without any help.

If you want to be as successful as you possibly can as a Forex trader, then a MACD indicator is one tool which you can`t afford to be without. It`s a wise investment in your trading career.

Forex Rebates

2009-08-24T14:05:00.000-07:00

Forex Rebates

Forex rebates are a relatively new concept, but a great way for traders to maximize their Forex profits. There are a number of companies in the market today who cater expressly to provide rebates to individual traders. The explosion in the currency market over the past 5 years has been incredible. No longer is the currency market the preserve of the rich and well connected investor. Today, anyone with an internet connection and a laptop can partake in this activity.

Today there are literally hundreds of forex brokers offering their services to the investment community. One way they can promote their services is to recruit a number of agents, or introducing brokers, to help them sign up new clients. In return, these introducing brokers are paid a fee by the forex broker for each new client that signs up through the introducer. This fee will depend on how much trading the client does with the broker, in terms of how much volume of notional currency is traded.

Forex is trading lots. Each lot is a notional sum of $100,000. Typically, the introducer is paid a commission of around $10 for each lot which is traded by the new client. In an attempt to persuade traders to join the broker they are promoting, what some companies and organizations are now doing is to offer a rebate of part of this commission. This is usually around half - so that the trader will receive around $5 for each lot he or she trades. Over a period of weeks or month, this soon adds up to a substantial sum if the trader is trading regularly.

The Candlestick Pattern

2009-08-24T14:04:00.000-07:00

The Candlestick Pattern

s the candlestick pattern a profitable Forex trading strategy? Candlesticks patterns were first used in Japan five centuries ago in the Dojima rice exchange. Today, it has become a popular tool for foreign exchange traders to predict currency trends. The system provides data on past and present trading patterns that are used in forecasting movements of various currencies.

The Forex market is a good source of income for people who know how to accurately read currency trends. Because of numerous Forex software and programs that are readily available nowadays, more and more people are given the opportunity to engage in foreign exchange trading. One of tools that have helped people earn money in the currency market is the candlestick pattern.

Before employing candlestick pattern trading, aspiring traders must first know enough about it. There are many kinds involved here and choosing the right one needs some thought. But for the many that are already into candlestick trading, he 30-minute candlestick chart seems to be the best of the lot and they counsel that before engaging in a trade, one must see to it that the pattern has been completed. There is danger in going ahead without getting the final picture first.

There is what traders call the engulfing candlestick patterns. This pattern is considered more reliable than others and the most profitable to use. The term "engulfing" refers to a market situation where the current candle engulfs the previous one. The engulfing patterns consist of the bearish engulfing and bullish engulfing patterns. Both patterns can tell traders which direction a currency will most likely to go after the pattern is completed. The engulfing bullish patterns form when price levels of certain currencies are at their lowest points while bearish patterns will occur when the prices are at their peak.

How does one effectively use candlestick patterns to increase chances of earning? The engulfing patterns actually tell what currencies are on the downward or upward trend, which can provide a trader an accurate idea of when to trade. The best times are when there are strong indications that the trend is running its course. The trend may not be that strong but the candlestick chart must provide evidence that the trend is definitely coming to an end. In this case, the candle will have grown smaller.

What exactly do traders need to see in the candlestick pattern that will let them start trading? When traders see an up candle engulfed by a down candle immediately following it, it means that there is an upward trend and a short trade is advisable. The downward trend works under the same principle.

A profitable Forex trading strategy using candlestick patterns entails timing and analysis, but it can certainly make money for traders.

Tips for Successful Forex Trading

2009-08-24T14:02:00.000-07:00

Tips for Forex Trading

Forex trading can be a very profitable business in today's world, provided you know what you are doing. Like anything worthwhile, it involves some pain. You will almost certainly lose money in the early stages. In fact, you will continue to have losses even when you are an expert. A successful Forex trader is one for whom the total amount of profit eventually outweighs the amount of loss. At the end of the day, Forex trading is based on speculation, which always involves some amount of risk. The key is to ensure that you control those losses. Below, I have discussed 4 tips to become a successful Forex trader.

Having enough capital

Only a small percentage of Forex Traders are actually successful. The exact figure might be difficult to ascertain, but think along the lines of 1 in 10. The successful ones avoid some mistakes that other Forex traders make and try to follow some basic rules. One very important rule you need to remember is to have enough capital in your account when you start trading. Also, it would be wise not to invest money that you cannot afford to lose. There's no point risking your life savings, if you have them, in trading Forex. On a smaller scale, don't risk your rent or grocery money. Remember, at the start the chances of some losses are high. Take that into account when funding your account.

Choosing the appropriate currency pairs

Selecting the appropriate Currency Pair to trade is also crucial for a successful Forex trader. Some currency pairs are more volatile in certain conditions while others are stable. Select a pair that is in line with your trading strategy, long term or short term. If your strategy calls for a short-term investment, then you can try more volatile pairs. However, if you are in it for the long haul, or are uncomfortable with rapid changes in prices, then you can choose a pair that is relatively stable. You have to do some research on Currency pairs and their performances in various climates to help make this choice.

Having entry and exit strategies

Every Forex Trading Operation has basic components: the selected currency pair you wish to trade, the required period, an entry point, and exit point. Your Forex Plan should include sound entry and exit strategies in order to minimize the losses and maximize your return on investment. You could also learn to use stop loss and take profit orders placed to your broker as your exit points.

A stop loss is an excellent exit strategy in case the market moves against you. Stop loss orders are placed to the brokers by the Forex traders to withdraw from the market if the market moves against them and they stand to lose a specific amount of money. A stop loss order protects you from huge losses in case something goes wrong. Similarly, in case of a take profit, you will exit the market after making a certain amount of profit. Both of these involve you as a trader setting a target and sticking with it. Sometimes, when in an actual trade, it might be difficult for you to make the required exit from a trade, even when your target has been met. Emotions could come into play, or you might even suddenly have trouble accessing your Software. Pre-setting Stop losses and take Profit orders allow and even force you to keep to your plan.

Sticking to your own strategy

There are numerous articles, e-books, trading systems available in the market that will claim to make you rich, almost overnight. Most of them sound extremely convincing and will tell you that you can make a lot of money using their strategies without taking any risk at all. While a few of them may be genuinely good, most of these strategies will only confuse you initially. So, before you try any out on your Account, do the smart thing: test it on a demo account. Be sure of it. Then you can trade with it. Remember, there is no simple short-cut to becoming a successful Forex trader.

Forex Trading Basics

2009-08-24T13:59:00.000-07:00

Forex Trading Basics

The term "Forex" is short for Foreign Exchange. Each country in the world generally has its own currency. Some countries may share the same currency e.g. the Euro is shared by a number of countries in Europe such as Germany, France and Spain. These currencies have to be valued against each other via some mechanism so when goods or services are bought across borders, proper pricing can be done. This valuation is essentially the Exchange rate between currencies. Exchange rates of currency can vary from day to day. They depend on a wide variety of factors such as Interest rates, Geopolitical climate and many others. Forex trading is a platform through which currencies are bought and sold according to their current rates in order to make profit.

The way it works is simple: A Forex trader purchases some amount of a particular currency which they think will rise in value against the currency they are exchanging it with. After a certain period of time, assuming that the rate rises as expected, they sell or re-exchange the previously-bought currency, making a profit. The same thing can be done with selling. So, Forex Trading is based on speculation. The trader does some analysis of market conditions and, based on that, makes an informed "guess" what direction the Exchange rate will go. The difference between Currency Trading and traditional gambling is simply that, with Forex Trading, proper analysis gives you a lot more information so you are able to better determine market direction. If it feels like throwing dice, you are doing it wrong.

Providing a small example of Forex trading will probably help you to have a clearer idea of how this whole system works. Let's suppose that the Exchange Rate between the Euro and the Dollar is 1.2614 i.e. 1.2614 Dollars buys 1 Euro. Suppose then that, after your preliminary analysis, you conclude that the Euro is going to rise against Dollar. This basically means that, in a certain amount of time, you will need more dollars to buy the same amount of Euros than at the current rate. Please note that estimating this should be another major result of your analysis. It could be a few minutes, or it could be a few months. In this case we?ll assume it will be days. So, you buy ?10 at the rate mentioned above spending $12.614 in total.

After a few days, you find that the Euro has indeed risen up in value and that ?1 is now equivalent to US$1.30780. You immediately exchange the ?10 for $13.078 and earn a profit of $0.464. This amount may look very small, but imagine if you had invested $10,000 instead of $10, your profit would have been a substantial $464. This example neglects the charges and differences that exist between buy and sell prices. It?s just to illustrate the point. Now imagine this sort of transaction on a grand scale. I mean trillions of dollars traded every day, and you start to understand what the Forex Market is.

Forex trading started in 1970s. It was during this time that most world governments switched over to floating exchange rates for their currencies from fixed rates. Previously these governments would peg the exchange rate of a their currency against another one, such as the US Dollar. Many economists promoted floating exchange rates as a far healthier option for the economy of any country, as it ensured a relatively less deterioration of rates due to any kind of shock or the influence of a foreign business cycle.

At present, the forex market is one of the largest markets in the world with a turn-over of more than $3.2 trillion. There are millions of banks, governments, individual forex traders, corporations and other entities trading currencies around the clock. Because the Forex Market is international, someone somewhere is always trading currencies on the market.

There is always a demand for Forex trading. With the rising trend of globalization, people need foreign currencies now more than ever. The revolution in transportation and communication industry has made it possible for people and companies of different countries do business with each other. Taking this into consideration, we find that the Forex Markets offer ample opportunities for traders to profit from, provided they arm themselves with the appropriate information first.

Creating Synthetic Currency Crosses

2009-08-24T13:58:00.000-07:00

Creating Synthetic Currency Crosses

A currency cross is any currency pair which does not involve the US Dollar (USD) directly. Since USD is the world's reserve currency, it is involved in most currency exchange transactions as an intermediary, or "vehicle currency". This is the basis for synthetic currency crosses.

There are times when we want to trade a particular cross and our broker doesn't offer it in their tradeable instruments panel. We don't want to miss the trade, so what can we do? We can try to open an account at another broker that does offer it, but this can be a time consuming, risky and ultimately futile exercise. If you are comfortable with your current broker and don't want to risk your money in the unknown, or you want to take the trade now instead of waiting to open and fund a new account, or simply know that no one offers the same conditions as your current broker, then you are left with only one more choice, and that is to enter the exciting world of "Synthetic Crosses".

A bit of advice first: Please make sure that your broker offers sufficiently small deal size increments - appropriate for your account size. Ideally, for maximum accuracy, single unit deals are recommended, but if you have a larger account you can get by with micro lots. In general though, the smaller, the better. You can look through my Broker Reviews section to find yourself a suitable one (link can be found at the bottom of this article).

The next thing to figure out is which USD components make up the currency cross you are trying to create synthetically. For example, if you want to trade CHF/JPY, then you would simultaneously open trades in USD/CHF and USD/JPY.

Once you know the components, you then need to figure out whether to go long or short on each one. Remember that currency pairs behave like fractions in mathematics, so we easily see that if you want CHF on top, you will have to "flip" USD/CHF, meaning you have to short it. You will also notice that JPY is already at the bottom where it should be, so you go long USD/JPY.

The next thing to figure out, naturally, is how much of each component pair do you buy or sell? In order to do that, we have to look a bit at the way the pairs are structured. For the most part, an arbitrary pair X/Y is the exact opposite of the pair Y/X. If you go long one, it is the same as shorting the other, with only one difference. The difference stems from the way brokers calculate lot sizes. If you are long 10,000 units (1 mini lot) of X/Y, you are buying 10,000 units of X by borrowing the appropriate amount of Y on margin. If you are short 10,000 units of X/Y, you are still using 10,000 of X, but this time borrowing it, and selling it for the appropriate amount of Y according the the current market rate. The number of units always applies to the base currency, regardless of whether you are going short or long - if you are long, you are buying 10,000 units of the base currency, and if you are short, you are selling 10,000 of the base currency. So the difference between X/Y and Y/X is due to the fact that when you are trading X/Y you are always dealing in units of X, but when trading Y/X you are dealing in units of Y. This is a very important distinction, and making it now will help us to calculate synthetic pairs.

There are 3 types of synthetic crosses that we can build. Let X/Y be our cross:

Type1. X/Y with components X/USD and Y/USD. An example of this type would be EUR/GBP, with X=EUR and Y=GBP. By looking at the components, we know we have to long one and short the other. If we want to go long X/Y, then we have to go long X/USD and short Y/USD. If you want to go short X/Y, you reverse that so go short X/USD and long Y/USD. Since we now know that position sizes always deal with the base currency, we know that the trade sizes for long and short positions will be the same even for the components. So let's do the calculation:

Let S be the position size of the pair in parentheses, and P be the current market price of the pair in parentheses:

S(X/USD) = S(X/Y) --> The size of the X/USD component should be the same as the trade size you decided on for X/Y. This makes sense since in both instances we end up holding the same amount of X for longs, and selling the same amount of X for shorts.

S(Y/USD) = -P(X/Y) x S(X/Y) --> Simply take your desired position size for X/Y, multiply it by the current market price of X/Y and change its sign to indicate that the position is in the opposite direction of the X/USD component, that is, if one is long, the other is short.

Type 2. X/Y with components X/USD and USD/Y. An example of this type would be EUR/JPY, with X=EUR and Y=JPY. By looking at the components, we know that both trades will be in the same direction. If we want to go long X/Y, then we go long both X/USD and Y/USD.

Let S be the position size of the pair in parentheses, and P be the current market price of the pair in parentheses:

S(X/USD) = S(X/Y) --> Again, since we want to end up holding the currency X, we make sure that the amount of X/USD we buy is the same as the amount of X/Y we want to buy (for longs) or sell (for shorts) overall.

S(USD/Y) = P(X/USD) x S(X/Y) --> Our fact about long and shorts both being dealt in base currency sizes pays off again. The amount of USD/Y we deal is equal to the amount of X/Y we want to deal multiplied by the current market rate of X/USD. Please note that the sign remains the same as S(X/USD) since both trades will be in the same direction (either both long, or both short).

Type 3. X/Y with components USD/X and USD/Y. An example of this type of cross would be CHF/JPY with X=CHF and Y=JPY. By looking at the components, we know that we have to long one and short the other. This is the easiest type of synthetic cross to construct because, as you will see below, the trade sizes for both components are identical to one another (albeit in opposite directions).

Let S be the position size of the pair in parentheses, and P be the current market price of the pair in parentheses:

S(USD/X) = -S(X/Y) / P(USD/X) --> Since we have to invert this pair to get X on top, we short this one when we want to go long X/Y, and we long this one when we want to go short X/Y. The trade size is just your intended trade size for X/Y divided by the current marketk rate of USD/X

S(USD/Y) = S(X/Y) / P(USD/X) --> Both pairs have USD as the base currency, so the trade sizes will be the same - only the direction will be different. As a result, please note the absence of a negative sign in this equation.

Just to make sure this is not all too abstract, here is an example for each type of synthetic cross:

1. Long 10,000 units of EUR/GBP at price 0.8000 by using USD components EUR/USD and GBP/USD:

S(EUR/USD) = S(EUR/GBP) = 10,000 units

S(GBP/USD) = -P(EUR/GBP) x S(EUR/GBP) = -0.8000 x 10,000 = -8,000 units (negative means that a short position is taken in this pair)

2. Short 10,000 units (-10,000 units) of GBP/JPY at a market rate of 200.00 by using USD components GBP/USD and USD/JPY. This is a type 2 synthetic pair, so in this example we also need to know the price of GBP/USD at the time we enter the trade, so let's say it is 2.0000:

S(GBP/USD) = S(GBP/JPY) = -10,000 units (negative means short)

S(USD/JPY) = P(GBP/USD) x S(GBP/JPY) = 2.0000 x (-10,000) = -20,000 units (negative means short)

3. Long 10,000 units CHF/JPY at a market rate of 90.00 by using USD components USD/CHF and USD/JPY. This is a type 3 synthetic pair, so in this example we also need to know the price of USD/CHF at the time we enter the market so let's make it 1.1000:

S(USD/CHF) = -S(CHF/JPY) / P(USD/CHF) = -10,000 / 1.1000 = -9,090 units (negative means short)

S(USD/JPY) = S(CHF/JPY) / P(USD/CHF) = 10,000 / 1.1000 = 9,090 units (we already saw earlier that type for type 3 synthetic crosses -S(X/USD) = S(Y/USD) which checks out fine here)

I would like to add that for types 2 and 3, in theory, as soon as price moves away from your entry, the trade sizes should be recalculated and you should add to the positions which become misaligned, since the unit sizes depend on price. In practice, however, this is normally both unnecessary and impractical. In fact, even your broker doesn't do it when you trade their "natural crosses". This only becomes an issue for trades spanning thousands of pips, and can usually be done every 500 pips or so, depending on the pair.

Spreads

It should also be noted that spreads were not taken into account in this article. It is assumed that traders understand the idea of bid and ask prices. In any case, spreads are normally insignificant in longer term trading and I generally don't recommend trading crosses (synthetic or otherwise) in the short term. If you plan to do this, you would be well advised to check how much you are paying in spread for each USD component, taking into account the trade sizes you calculated using the above methods, and see if the spread is comparable to the spread other brokers charge for this cross.

Swap

Because brokers each have their own way of calculating swap, or overnight interest, also check how the swap you are receiving on your synthetic pairs compares to the swap other brokers pay for that same cross. This is important in carry trade strategies, many of which are best served by cross pairs.

Used Margin

The USD components of your synthetic cross actually cancel each other out - if you check, you will notice that you are always both short USD and long USD by the same amount, giving you no net exposure to USD. Most broker platforms are not smart enough to figure that out, so as a result, your "used margin" will in many cases be higher when trading synthetic crosses than when trading their natural counterparts. This should not make a difference to most traders, unless they are over-leveraged.

Arbitrage

It is possible at times to see a difference between the price offered on a natural cross and the price you could get by trading the same cross in synthetic form, opening up the possibility of arbitrage, particularly if the price feeds come from two different market makers. The situation is rare, the lucky trader who spots it must be quick (or better yet, use an automated system), and the opportunity must be big enough to cover the large spread on crosses. Needless to say, viable opportunities don't arise often. On top of that, if your broker finds out, they probably won't be too happy with you either. In any case, opportunities like this can be found from time to time, and they are worth a second look. Free, riskless pips will always put a smile on your face.

Trading Forex News

2009-08-24T13:54:00.000-07:00

Trading Forex News

One of the most popular Forex trading strategies is "trading the news". Quite simply put, this involves making a trade based on the latest news that most affects the future supply/demand equation for the traded currencies. This strategy is rather popular because it is based on easy to understand market forces, and is often rather predictable. What follows is the idea behind and a how-to for trading Forex News.

First off, I highly recommend focusing on news affecting the US Dollar. Having the world's reserve currency and largest economy, the US is followed closer in the financial news more than any other country by far. Employment data, trade balances, and fed rate changes all often lead to large moves in the Forex market. Remember, as with any Forex strategy, volatility = opportunity, as you have a spread to beat and want to see dramatic moves.

So what do you need to do to put this into action? First, find a website like Forex-info.com that has a daily global economic calendar that is easy to understand and presents you with all the information that you need. Second, be sure to read and understand the impact of each of the daily events. Then, watch to see if the actual result is less or more than the anticipated result. Lastly, trade accordingly!

In conclusion, trading Forex news is a simple strategy that can be utilized with information that is freely available to all. To be profitable, focus on the US Dollar (I find the Eur/USD pair ideal for employment numbers and the USD/JPY for trade balances), trade with the news, and you will outperform many people and robots that use complex systems and information.

Forex Education Helps You Swim

2009-08-24T13:52:00.000-07:00

Forex Education Helps You Swim

You can't just jump into the deep, vast ocean if you don't know how to swim. That is the best analogy for somebody who is too eager to dive into forex trading without much know-how about the business yet. Forex education is necessary for those who want to enter the forex trading scene and succeed.

The appeal of the forex trading business is that it is highly liquid. Its greatest advantage is the huge potential for profits. For people who want to earn big money and think that forex trading is an easy way - they have to think again. In order to become successful in this business, you need a solid forex education to back you up.

Reading a few websites about forex or watching the news as they deliver the forex-related information are not enough. You need to know the terminologies, the processes, the tools conditions and methodologies. Many of those who have been successful have spent a great deal of time studying the market over the years. They have undergone tutorial sessions on forex. They plan their investments based on trends they have established watching the market. The best traders have learned over time how to see disaster and how to respond accordingly. These learned investors know how to profit big time, and how to minimize losses.

Forex education is key in making the soundest of decisions when it comes to forex trading. The market is open 24 hours a day, 5 days a week so there really is a lot of room for making money and a bigger room for losing it - unless you're already a smart investor.

The first step is always to know about the ABCs and 123s. Forex education is the foundation for every transaction you will make. When you lose some, you gain some experience and additional knowledge. Stock this information for future reference, so you would know better next time the same blow comes your way.

Most sessions involved in forex education are programmed to provide beginners and even the more experienced ones with all the tools necessary in buying and selling currencies. Charts, trending, analysis, and interpretation of data are also critical in making it through a forex market day.

Aside from the training sessions, you have to continuously update yourself by digging deeper into what you hear from the news, and what you read from the papers and books about forex. If you read up you will understand what's happening and what the factors that affect the prices are. Economic issues are the main catalysts in forex trading but there are other issues like political events, countrywide sentiments, new laws, natural disasters, and cyclical process in the finance market that affect a countries currency.

A person with a firm foundation on forex education is the likely candidate to reap substantial benefits. But, aside from his intellectual and logical take on things, he should also be emotionally balanced in all his forex investments. He should be able to use his forex education while checking and balancing it with his emotions. A good combination will certainly make one very successful and rich forex investor.

What is a Forex Broker?

2009-08-24T13:51:00.000-07:00

What is a Forex Broker?

A Forex broker is any person or firm that charges a fee in exchange for executing trades for a trader. A Forex broker does not charge a commission for placing a buy or a sell order the way a real estate broker would charge a percentage fee of the total price of a sale. A Forex broker is paid according to the spread – or the difference between the trader’s bid for a currency, and the seller’s asking price for that currency. Usually this spread is less than 0.1% or ten pips. (Pips are the smallest movement a currency can make on the Forex. Pips are commonly called referred to as points.) The lower the spread, the less a trader pays a Forex broker for a trade.

The Forex market is global and does not have one central regulatory agency like the Security Exchange Commission. Each country is responsible for the actions of trades in it’s own country. A Forex broker in America must register with the Commodities Futures Trading Commission (CFTC). While traders are not regulated, Forex brokers are. A Forex broker must be registered as a Futures Commercial Merchant (FCM) before that Forex broker is allowed to accept a deposit for an account from a trader. Once registered, a Forex broker is given an identification number so that a trader can check the status of a Forex broker before hiring that Forex broker.

There are such people known as introducing brokers who may solicit traders for a registered Forex broker, but the introducing broker cannot accept a deposit for a trader’s account. It is a good idea for any trader hiring a Forex broker to check the status of the Forex broker with the authorities.

Forex Trading vs. Stocks

2009-08-24T13:42:00.000-07:00

Forex Trading vs. Stocks

Forex trading holds significant differences to stocks trading. Understanding these differences will aid a trader in deciding the right market to enter. Forex trading has several advantages over stocks trading and is ideal for the beginner and individual small investor.

1. Low Transaction Costs for Forex Trading.
There are no hidden fees for forex brokers as they are not paid by the traditional commission based fees. The fee paid to the forex broker is calculated directly from the trade in the form of the bid ask spread. In forex trading, the spread is the difference in how much you pay for a currency and how much you sell it for. This spread is commonly expressed in "pips" or points.

2. Forex Trading is a 24 Hour Market.
Forex trading can be done anytime of the day, the forex market is open for business twenty-four hours a day. This is considered a huge advantage for individual small investors who are just starting out forex trading in their spare time. This allows forex traders to juggle their schedule around their trading opportunities; they can schedule their forex trading when it is convenient for them.

For those of you who are night owls and prefer to trade at 1am, then forex trading is just right for you. Depending on where you stay, there are banks opposite the globe open for you to trade.

3. Fast Trade Execution and High Liquidity in Forex Trading
Trading forex means that you are trading in cash. No other form of investment has more liquidity than cash and as such, trades are executed almost instantly. There is no lag time in forex trading.

4. Having Leverage and Margin in Forex Trading
One of the significant advantages that forex traders have is the ability to trade on margin. This gives them a huge leverage in their trading and presents the potential for extraordinary profits with relative small investments. Let’s take for example; with a forex broker that allows a margin of 100:1, you can buy $100,000 in currency with only a small $1,000 deposit. A word of caution for the uninitiated, leverage can go both ways and may lead to large losses if you are not careful.

5. Forex Trading Requires Only a Small Sample to Study.
Stocks trading present thousands upon thousands of stocks to trade. Small and large companies, international companies, newly issued IPOs etc. It is highly impossible to follow them all.

Forex trading, on the other hand, presents only seven major currencies to follow so that you can devote more time to each of them. Many successful forex traders do not even trade in all seven major currencies; they just choose three or four and master them to achieve success in forex trading.

6. No Bear Markets in Forex Trading.
In forex trading, since you can trade either short or long, you will be able to make money whether the prices go up or down, that is if your predictions are accurate of course.

7. Forex Market is Not Easily Influenced.
The forex market is so amazingly huge that no one individual, bank, fund or government body can influence it for a long period of time. Forex trading is the opposite of stocks trading where one negative television appraisal of a company's stock could possibly send it into a tailspin.

Based on the above advantages, forex trading is a clear winner for the beginner and individual small investors. If you are deciding on a form of trading to enter and master, then forex trading is the choice for you.

Bretton Woods Agreement

2009-08-24T13:34:00.000-07:00

Bretton Woods Agreement

The Bretton Woods Agreement, was designed to bring stability to the monetary system and restrict speculation in the world currencies.

As an economy strengthened, imports would increase. This action depleted he reserves of gold required to cover the valuation of its money. This caused the money supply to constrict, interest rates would rise and economic activity could slow to the extent of recession - (a period defined by 3 straight fiscal quarters of gross domestic product losses - in which unemployment and low consumer spending are high). Eventually, the prices of goods had to define a bottom and become palatable to other countries. These countries would start buying the currency en masse, injecting the economy with significant amounts of gold, enough to lead to an increase in the money supply. This drove interest rates down and helped to create wealth within the economy.

This was a pattern that was relived over and again through history until the outbreak of World War I practically closed trading routes and the free exchange of gold and silver. This of course was followed by ‘The Great Depression’, which quite arguably was ended by World War II.

After the Second World War, the Bretton Woods Agreement was established., Participating countries agreed to try and maintain the value of their currency with a small margin against the US dollar, economically, the largest country, and a corresponding rate of gold. Governments were not allowed, under the agreement, to devalue their currency in order to bring on an advantage in trade. If absolutely necessary, they were allowed to play with their valuations as long as it did not cause more than a 10% change. Throughout the 1950s, the increase in global trade brought on massive capital transfers created by post-WWII construction. This caused foreign exchange rates under the Bretton Woods agreement to become unstable.

By 1971, the global situation had inevitably caused a move away from Bretton Woods. US President, Richard Nixon had taken the dollar off the gold standard in order to be able to print more money to fund the Vietnam War. This marked a change in government policy in which a debt/credit system was born. By 1973, the currencies of major industrialized nations became free floating, and in part became more subject to the prices set for them in the Forex market. Prices fluctuated each day, with trading volumes and price volatility increasing throughout the 1970s IT was these drastic changes that gave rise to new financial instruments, market liberalization and deregulation.

With the growth in the telecommunication and computer industries in the early 1980’s, the global financial markets surged and the world grew smaller. All markets became accessible to everyone, no matter what time zone, no matter what time of day.

Transactions in the Forex increased from about $68 billion per day in the early 1980s, to over $3 trillion a day in 2006.

Forex Market Overview

2009-08-24T06:19:00.000-07:00

Forex Market Overview

Introduction

The following facts and figures relate to the foreign exchange market. Much of the information is drawn from the 2007 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank for International Settlements (BIS) in April 2007. 54 central banks and monetary authorities participated in the survey, collecting information from approximately 1280 market participants.

Excerpt from the BIS:

"The 2007 survey shows an unprecedented rise in activity in traditional foreign exchange markets compared to 2004. Average daily turnover rose to $3.2 trillion in April 2007, an increase of 71% at current exchange rates and 65% at constant exchange rates...Against the background of low levels of financial market volatility and risk aversion, market participants point to a significant expansion in the activity of investor groups including hedge funds, which was partly facilitated by substantial growth in the use of prime brokerage, and retail investors...A marked increase in the levels of technical trading – most notably algorithmic trading – is also likely to have boosted turnover in the spot market...Transactions between reporting dealers and non-reporting financial institutions, such as hedge funds, mutual funds, pension funds and insurance companies, more than doubled between April 2004 and April 2007 and contributed more than half of the increase in aggregate turnover."

Structure

Decentralised 'interbank' market
Main participants: Central Banks, commercial and investment banks, hedge funds, corporations & private speculators
The free-floating currency system arose from the collapse of the Bretton Woods agreement in 1971
Online trading began in the mid to late 1990's

Trading Hours

24 hour market
Sunday 5pm EST through Friday 4pm EST.
Trading begins in the Asia-Pacific region followed by the Middle East, Europe, and America

Size

One of the largest financial markets in the world
$3.2 trillion average daily turnover, equivalent to:

More than 10 times the average daily turnover of global equity markets¹
More than 35 times the average daily turnover of the NYSE²
Nearly $500 a day for every man, woman, and child on earth³
An annual turnover more than 10 times world GDP⁴

The spot market accounts for just under one-third of daily turnover

1. About $280 billion - World Federation of Exchanges aggregate 2006
2. About $87 billion - World Federation of Exchanges 2006
3. Based on world population of 6.6 billion - US Census Bureau
4. About $48 trillion - World Bank 2006.

Major Markets

The US & UK markets account for just over 50% of turnover
Major markets: London, New York, Tokyo
Trading activity is heaviest when major markets overlap⁵
Nearly two-thirds of NY activity occurs in the morning hours while European markets are open⁶

5. The Foreign Exchange Market in the United States - NY Federal Reserve
6. The Foreign Exchange Market in the United States - NY Federal Reserve

Average Daily Turnover by Geographic Location

Concentration in the Banking Industry

12 banks account for 75% of turnover in the U.K.
10 banks account for 75% of turnover in the U.S.
3 banks account for 75% of turnover in Switzerland
9 banks account for 75% of turnover in Japan

Technical Analysis

Commonly used technical indicators:

Moving averages
RSI
Fibonacci retracements
Stochastics
MACD
Momentum
Bollinger bands
Pivot point
Elliott Wave

Currencies

The US dollar is involved in over 80% of all foreign exchange transactions, equivalent to over US$2.7 trillion per day

Currency Codes

USD = US Dollar
EUR = Euro
JPY = Japanese Yen
GBP = British Pound
CHF = Swiss Franc
CAD = Canadian Dollar (Sometimes referred to as the "Loonie")
AUD = Australian Dollar
NZD = New Zealand Dollar

Average Daily Turnover by Currency

N.B. Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%.

Currency Pairs

Majors: EUR/USD (Euro-Dollar), USD/JPY, GBP/USD - (commonly referred to as the "Cable"), USD/CHF
Dollar bloc: USD/CAD, AUD/USD, NZD/USD - (commonly referred to as the "Kiwi")
Major crosses: EUR/JPY, EUR/GBP, EUR/CHF